Inclusive Business Market Study for India and Sri Lanka (Draft Report)

7/31/2019 Inclusive Business Market Study for India and Sri Lanka (Draft Report)

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INCLUSIVE BUSINESS MARKET STUDY

FOR INDIA AND SRI LANKA

DRAFT REPORT

JULY 31,2012


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ADB Inclusive Business Market Study for India and Sri Lanka

Draft Report

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List of abbreviations used

ADB Asian Development Bank

BOP Base of the pyramid

BMGF Bill & Melinda Gates Foundation

DFI Development finance institution

DFID Department for International Development

ESG Environmental, Social and Governance (criteria for investment)

FDI Foreign direct investment

FMO Netherlands Development Finance Company

GDP Gross domestic product

GDP (PPP) Gross domestic product at purchasing power parity

HDI Human development index

IB Inclusive business

IFC International Finance Corporation

IPO Initial public offering

IRR Internal rate of return

JICA Japan International Cooperation Agency

KfW Kreditanstalt fr Wiederaufbau, a German government-owned development bank

LIS Low-income statesLP Limited partner

MPI Multidimensional poverty index

NORFUND Norwegian Governments Investment Fund for Developing Countries

NSDC National Skill Development Corporation

PE Private equity

R & D Research and development

SIDA Swedish International Development Cooperation Agency

SIDBI Small Industries Development Bank of India

SME Small and medium enterprises

Swedfund Swedish Governments Investment Fund for Developing Countries

TA Technical assistance

VC Venture capital


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Table of Contents

1. Context and methodology ............................................................................................................... 4

2. Recommendations ........................................................................................................................... 5

2.1 Relevance ............................................................................................................................ 5

2.2 Strategy ............................................................................................................................... 7

2.3 Fund Operationalisation .................................................................................................... 10

3. Macroeconomic assessment of India ............................................................................................ 11

3.1 Overview of performance on economic and social indicators .......................................... 11

3.2 Key trends shaping the economy ...................................................................................... 15

3.3 Size of the market at the base of the pyramid .................................................................. 19

3.4 Climate for enterprise and investment ............................................................................. 20

4. Macroeconomic assessment of Sri Lanka ...................................................................................... 22

4.1. Overview of performance on economic and social indicators .......................................... 22

4.2. Key trends shaping the economy ...................................................................................... 25

4.3. Size of the market at the base of the pyramid .................................................................. 28

4.4. Climate for enterprise and investment ............................................................................. 29

5. Inclusive business mapping ............................................................................................................ 30

5.1 Overview of our methodology .......................................................................................... 30

5.2 Analysis of findings ............................................................................................................ 32

5.3 Funding needs of Inclusive Businesses .............................................................................. 44

5.4 Implications for ADB .......................................................................................................... 48

6. PE markets assessment .................................................................................................................. 49



7. Donor mapping .............................................................................................................................. 59



Bibliography ........................................................................................................................................... 64

Endnotes ................................................................................................................................................ 66


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List of Figures

Figure 1: Framework to organize insights collected in the study ........................................................... 4

Figure 2: Total and equity-only FDI inflows into India .......................................................................... 11

Figure 3: Gross domestic product (GDP) at PPP ................................................................................... 11

Figure 4: Historic and planned sector growth rates ............................................................................. 12

Figure 5: Contribution of sectors to GDP and labour force employment ............................................. 12

Figure 6: Percentage of India's population in 9 poorest states ............................................................ 14

Figure 7: Projections for India's working age population ..................................................................... 16

Figure 8: Distribution of urban and rural population ........................................................................... 16

Figure 9: Increase in the number of urban towns ................................................................................ 17

Figure 10: Annual household consumer expenditure in India (1987-2010) ......................................... 18

Figure 11: Market size of India's BOP ................................................................................................... 19

Figure 12: India's credit ratings by various rating agencies .................................................................. 21

Figure 13: Gross domestic product of South and Southeast Asian countries ...................................... 22

Figure 14: Weighted contribution to GDP growth rate by sectors ....................................................... 23

Figure 15: Composition of FDI inflows .................................................................................................. 24

Figure 16: Age profile of Sri Lankas population ................................................................................... 25

Figure 17: Unemployment in Sri Lanka by education level and age group .......................................... 26

Figure 18: Segmentation of market at the base of the pyramid .......................................................... 28

Figure 19: Distribution of survey respondents ..................................................................................... 30

Figure 20: Primary BOP engagement mode of survey respondents ..................................................... 32

Figure 21: Additional BOP modes of engagement ................................................................................ 33

Figure 22: Consumer model strategies ................................................................................................. 33

Figure 23: Distributor model strategies ................................................................................................ 34

Figure 24: Supplier model strategies .................................................................................................... 35

Figure 25: Employee model strategies.................................................................................................. 35

Figure 26: Benefits to company of being inclusive ............................................................................... 36Figure 27: Benefits to the BOP of inclusive businesses ........................................................................ 37

Figure 28: Level of social impact measurement ................................................................................... 38

Figure 29: Geographical spread of IB operations ................................................................................. 39

Figure 30: Perceptions of operating in low-income states ................................................................... 40

Figure 31: Critical growth factors .......................................................................................................... 40

Figure 32: Key risk factors ..................................................................................................................... 41

Figure 33: Equity received to date ........................................................................................................ 44

Figure 34: Debt received to date .......................................................................................................... 44

Figure 35: Credit guarantees raised to date ......................................................................................... 45

Figure 36: Required investment size, by sector .................................................................................... 45

Figure 37: Investment size by geography and mode of engagement ................................................... 46Figure 38: Ideal grant-funded investments .......................................................................................... 46

Figure 39: Composition of Dalberg's sample of 21 fund managers ...................................................... 49

Figure 40: Market capitalization of countries in South and Southeast Asia ......................................... 50

Figure 41: Number and volume of PE (non real estate) investments in India ...................................... 50

Figure 42: Responses to the question: "What is your general outlook for India's economy?" ............ 51

Figure 43: Sector prioritization analysis ................................................................................................ 54

Figure 44: Illustrative approaches of major investors deploying equity/debt to IBs in India............... 60

Figure 45: Exposure of major investors deploying equity/debt to priority sectors in South Asia ........ 61
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1.CONTEXT AND METHODOLOGYIn May 2012, the ADB commissioned Dalberg Global Development Advisors to undertake a study on

the Inclusive Business1 Market in India and Sri Lanka as part of a larger project titled Promoting

Inclusive Growth through Business Development at the Base of the Pyramid.

The objective of the market study was to assess the feasibility of setting up an inclusive business

private equity fund in India and Sri Lanka. Dalbergs analysis focused on answering the following key

questions:

(1) Relevance. Is PE funding relevant for the growth of IBs in India and Sri Lanka?(2) Strategy.What should ADBs investment strategy be?(3) Operationalisation.How should ADBs fund be operationalised?

These key areas of analysis - relevance, strategy and operationalisation were then broken down

into sub-questions as described in the table below:

Figure 1: Framework to organize insights collected in the study

The approach Dalberg used to answer the above questions had four distinct parts:

A. Assessment of macroeconomic and microeconomic conditions in India and Sri LankaB. Mapping of inclusive businesses operating in India and Sri Lanka through an online survey of

130 businesses, and interviews with 20 potential investees for ADBC. Assessment of strength of capital markets in both countries through interviews with 21 fund

managers with exposure to inclusive businesses

D. Mapping of potential co-investors (donors) in ADBs fund through interviews with 11agencies including family foundations, banks, DFI-funded investors and bilateral aid agencies

The detailed methodology adopted within each of these work streams is described in the relevant

sections of the report.

Key questions addressed in our study

Relevance

a. Are macroeconomic conditions conducive for IB growth?

b. Are macroeconomic and business conditions favorable for VC/PE investment?

c. Is there demand from inclusive businesses to seek out VC/PE investment?

Strategy

a. What size of enterprise and investment should the fund target?

b. Which sectors should the fund prioritize?

c. Should geography be a factor, and if so, where should the fund focus?

d. Which financial instruments should the fund deploy?

e. Should mode of engagement be an investment criterion?

f. Which company-specific parameters should influence investment decisions?

Operationalisation

a. How should ADB engage existing PE funds investing in IBs?

b. Who should ADB target to raise funds from?

c. What are some other key considerations to set the IB fund up for success?


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2.RECOMMENDATIONSBased on findings across multiple work streams, we believe that ADB should adopt a three-pronged

strategy to supporting the development of IBs in India and Sri Lanka

1. Invest in an existing PE fund to provide equity support in the $1-$10 million range to early andearly growth stage, small and medium-sized inclusive businesses (IBs) The fund should adopt a sector-agnostic approach with a light preference for education,

health, water and tourism sectors

The fund should adopt a geography agnostic approach but may consider investing part ofits funds in existing low-income state focused funds

Mode of engagement with BOP should not be a major criterion for investment; focusshould be on innovative high-growth models that are not capital-intensive and more

service-oriented

The fund management team should have experience in sourcing, managing and exitinginvestments of under $5 million, the likely size of majority of deals

The funds allocation for Sri Lanka should be limited with the expectations of securing notmore than 1-2 deals per year2. Set up a credit guarantee scheme (separate from the PE fund) to support IBs in gaining access

to debt, a major area of need in both India and Sri Lanka

3. Set up a technical assistance (TA) facility to provide grant support to investees of the fund foractivities that are non-revenue generating and support the creation of public goods

In Sri Lanka, the TA facility should also focus on promoting inclusive business practicesamong the wider business community

The following sections of this chapter present our findings and recommendations in detail, organized

by the 3 broad questions outlined in Chapter 1 Relevance, Strategy, and Operationalisation.

2.1 RELEVANCEPE funding is relevant for growth of small and medium IBs in both India and Sri Lanka; diverse

conditions warrant a differentiated approach to investment in both countries.

In order to answer this question, Dalbergs team looked at both demand and supply factors. On the

demand-side, we examined whether macroeconomic conditions support the growth of IBs and

whether IBs look to PE firms to support their growth. On the supply-side, we looked at whether

macroeconomic conditions and capital markets support PE investment.

In India, the growth of private business is supported by the countrys positive long -term economic

prospects driven by favourable demographics and consumption growth. The segment of the private

sector expected to grow the fastest is the collection of approximately 12 million small and medium

enterprises (SMEs) that employ over 30 million people. Within this large set, there are thousands of

inclusive businesses that engage members of Indias vast BOP population (>1 billion) and need

growth financing in the range of $1-10 million. Impact investors are particularly optimistic about the

growth of enterprises that provide access to basic services like energy, water, education and health

as Indias massive BOP population suffers deprivation across multiple development parameters2.

For the VC/PE community (supply-side), Indias most attractive features are the size of its stock

market, IPO issuing activity and expected economic growth. PE market statistics show that the

number of deals is increasing, indicative of more opportunities for PE investment. While an unclear


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regulatory environment and inadequate infrastructure do pose challenges to doing business in the

country, we feel that these will dissipate over a 10 year period.

In Sri Lanka, conditions warrant a different, more measured approach. Sri Lankas economy has

grown at over 8% since 2009, when its 26-year long civil war ended. The government has initiated a

number of measures to stimulate the growth of businesses in sectors like tourism where the target is

to attract 1.5 million tourists by 2016 from 850,000 in 2011. The results of these efforts are

beginning to show from 2011 to 2012 the country jumped 9 places in the Doing Business Rankings

and is ranked 89th of 183 countries which is second best, behind Maldives, in the South Asia region.

Fund managers (there are 2 active fund managers at present) expect investment opportunities to

emerge in the SME sector, especially in services and manufacturing companies catering to the needs

of larger firms in inherently inclusive sectors like tourism, agri-business and renewable energy. These

businesses are expected to engage hundreds of BOP members as employees and suppliers

addressing Sri Lankas problems of a high youth unemployment rate (20%). Consumer -oriented IBs

are less relevant in Sri Lanka due to the relatively small BOP population (


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2.2 STRATEGYOur findings in response to this question are divided into five parts:

a) Target size of investment and investeeb)

Sector focus

c) Geography focusd) Mode of engagement and other criteria for investmente) Instruments to deploy and expected returns

a) Target size of investment and investeeADB should target inclusive SMEs seeking equity infusions in the $1-10 million range with the

expectation that most deals will be below $5 million; financing needs of large IBs are being

adequately met by the market.

Stakeholders across various categories IBs, fund managers and donors have echoed the view that

ADBs fund should focus on supporting the growth of small and medium-scale IBs that roughlycorrespond to the Indian governments small and medium industry classification, i.e. firms with less

than $2 million invested in plant and machinery. These firms have limited access to external sources

of finance as banks practice collateral-based lending and very few equity investors provide support

in the $1-$10 million range, required for early growth financing.

Larger firms, on the other hand, have several alternate financing options, including commercial PE

(there are over 300 PE funds in India, majority of whom invest upwards of $10 million per deal);

commercial bank loans, corporate debt and the stock market.

While USD $1-10 million is seen as a relevant range for ADBs fund, investors expect a higher

proportion of deals to be below $5 million given the nascent stage of development of most IBs inIndia and Sri Lanka today. This has several implications for the way ADBs fund must be managed.

Smaller deals are often sourced through a proprietary route by experienced, well-networked fund

managers. The leadership of these smaller companies (often lead by a single entrepreneur) tends to

demand greater involvement from the fund managers team and require more assistance across

multiple areas including but not limited to finance, human resources, marketing and corporate

governance. ADB should factor these realities into the fund design and any future due diligence of

fund managers.

b) Sector focusADB should adopt a sector agnostic approach, but prioritize 4-5 sectors that deliver strong social

and financial returns; preferred sectors should be education, healthcare, water and tourism.

Though the overall market for PE deals in India is substantial (460 deals in 2011), very few sectors,

barring large infrastructure, real estate, finance and telecom, see sufficient annual deal flow to

warrant exclusive focus. Highly inclusive sectors like agriculture saw fewer than 4 deals per year

between 2005 and 20103. The relative lack of depth in any specific sector has resulted in very few

sector-specific PE funds - over 80% of the 300+ PE funds active in India today are sector-agnostic.

Given the newness of the asset class in Sri Lanka, adopting a sector-agnostic approach is perceived

by many as the only feasible approach.

Acknowledging the constraints imposed by the stage of PE market development, we recommend

that ADB adopt sector-agnostic approach with a light focus on 4-5 sectors that deliver high financial

and social returns, in addition to being relatively asset-light and free of risks such as over-regulation


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and ESG concerns. Based on Dalbergs analysis of these factors and risks, inclusive businesses in

education, healthcare, water and tourism appear to be the most attractive.

c) Geography focusADB should adopt a geography-agnostic approach and may consider investing part of its fund in

existing low-income states (LIS) focused funds.

Low deal flow is a key reason cited by many impact-oriented investors as the key reason for

maintaining a pan-India investment approach instead of focusing exclusively on Indias low-income

states in the north and east. Indias high and growing incidence of urban poverty (298 million BOP

live in urban areas that typically fall in high-income states) and the pan-India growth plans of

majority (over 75%) of IBs that responded to our survey, are additional arguments in favour of a

geography-agnostic approach. There are, at present, only two funds in India which invest exclusively

in low-income states. Both were launched in 2012 with support from DFIs and DFI-funded investors

like DFID, CDC and IFC and their performance is yet to be assessed.

In Sri Lanka too, investors are wary of exclusively focusing on post-conflict provinces in the north &north-east and under-developed eastern and southern provinces. The higher operational costs

(personnel and time) of sourcing deals from these regions were also cited as a disincentive.

While uncertainty concerning deal quality and deal flow can be mitigated with an agnostic approach,

the argument still remains that under-developed regions deserve special attention. Several donors

and fund managers believe this can be achieved through appropriately designed monetary

incentives for fund managers e.g. increase in fees and carry for deals executed in low-income

states/post-conflict regions. Another, more straightforward approach to achieving focus and one

that we endorse, is for the ADB to consider investing a part of its fund with existing low-income

states-focused SME funds to complement and leverage the efforts of other DFIs.

d) Mode of engagement with the BOP and other criteriaMode of engagement with BOP should not be a major criterion for investment; focus should be on

innovative high-growth models that are not capital-intensive and more service-oriented.

The ADB should invest in innovative businesses that engage the BOP in a variety of ways. We find

that successful IBs tend to utilize more than one mode of engagement, sometimes even three or

four. In the Indian context, all modes of engagement are relevant and have high potential for social

impact and financial returns. The relatively small size of the BOP in Sri Lanka and high level of human

development, reduce the relevance of pursuing consumer-oriented models in Sri Lanka.

Across the board, stakeholders have mentioned that mode of engagement should not be used as a

criterion for investment. The more important questions to ask are whether the business model is acapital-intensive one, as is the case with most real estate and microfinance firms; whether the model

is service-oriented; and, how, if at all, technology is leveraged by the model. These factors are seen

to play a greater role in determining the scalability and long-term impact of an IB business model

than the mode by which they engage with BOP.

e) Instrument and returns expectationsADB should observe financial discipline across all instruments that it deploys; reasonable net

financial return expectations provide an opportunity to service the large need for non-equity

instruments.

In our assessment, ADBs expectation of net financial returns in the range of 10-12% can be met by

observing discipline across the instruments deployed by the fund. This implies that expected returns


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on equity and debt should be no less than market rate (typically in excess of 20% for equity and 14%

for debt, gross).

A strategy that is focused solely on equity will not address the large underserved need for debt for

working capital, which is currently a critical barrier to growth of inclusive businesses, largely for want

of collateral/security. ADBs reasonable overall returns expectations and impact-orientation provide

an important opportunity to address this issue by allocating a portion of funds to stimulate greater

lending to IBs. This could be achieved through a credit guarantee scheme, targeted at IBs/existing

investees that are keen to access debt from the commercial banking sector. Such an intervention

would also be very timely. A number of PE funds are currently contemplating launching Non-Banking

Finance Companies to provide debt to businesses

A technical assistance (TA) or grant facility, comprising roughly 5% of the total fund, is another

important mechanism to supporting the growth of high potential IBs. TA is seen as most relevant for

non-revenue generating activities such as R&D, ESG4improvement and the creation of public goods

such as training and awareness generation.


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2.3 FUND OPERATIONALISATIONADB should partner with a few select existing IB-focused funds managed by experienced fund

managers and aim to secure preferential rights.

India has several funds targeting IBs, many of which have fund managers with deep experience ininvesting for both impact and financial returns. Feedback from fund managers suggests that

obligations with existing funds and challenges in raising capital for a new fund in the current

environment (albeit with ADBs sponsor capital) may prevent experienced managers from

responding to an invitation to set up a new fund.

This feedback was corroborated by feedback from other donors and investors, majority of whom

have taken a fund-of-funds approach. CDC and IFC, two of the largest DFI-supported PE investors,

have only recently invested in impact-oriented SME funds5 where managers are still in the process of

fund raising, a clear opportunity for ADB to collaborate. These funds are an attractive investment

option for ADB as their managers have completed the due diligence process, have local networks

and experience, critical elements for an IB-focused fund.

We recommend, therefore, that ADB invest into IBs in India through one or two established funds

managed by experienced teams. This approach, coupled with preferential rights such as co-

investment rights, right to offer debt, position on the funds advisory board, lower management

fees, etc., could help ADB achieve the same outcomes as setting up a new fund without the risks

associated with engaging less experienced fund managers.

This approach is even more relevant for Sri Lanka where deal sourcing is largely non-intermediated

and most under-the-radar opportunities can be accessed only by experienced fund managers.


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3.MACROECONOMIC ASSESSMENT OF INDIAA number of secondary data sources were used to conduct an assessment of macroeconomic

conditions in India. These sources include government census reports, economic publications and

surveys, data published by international organizations such as the ADB, UN, World Bank and CIA, and

other key BOP-focused reports including TheNext 4 Billion.

3.1 OVERVIEW OF PERFORMANCE ON ECONOMIC AND SOCIAL INDICATORSPost-liberalization in 1991, Indias growth has been led by strong FDI inflows across sectors

pointing to multiple areas of opportunity; gross fixed capital formation remains high at 35% of

GDP, indicating strong prospects for future growth.

The impact of the economic reforms of 1991 and the resulting attractiveness of the Indian economy

as an investment destination can be gauged by the level of

foreign direct investment (FDI) that India has attracted. In

1991, FDI inflows amounted to $73.5 million and by 2010;this figure had increased to $24.1 billion after reaching a peak

of $43.4 billion in 20086. India currently ranks 4

thin the

number of FDI projects, behind US, China and UK, and 3 rd in

terms of FDI value, behind China and Brazil7.

Foreign investment has been directed across various sectors,

indicating multiple areas of growth and opportunity. The

services sector, including both financial services and non-

financial services like business process outsourcing, has

received the highest FDI inflow, of $31.97 billion over the last

12 years. Capital-intensive services like telecommunications, housing & real estate and construction

continue to receive significant amounts of FDI,

underscoring the high growth prospects of these

industries.

Overall investment, largely gross fixed capital formation,

has grown exponentially in India since 2001, when it

represented 23% of GDP. In 2011, this figure stood at 34%.

A good indicator of a countrys future growth prospects,

Indias gross fixed capital formation is expected to continue

to be around 35% of GDP in the near future8.

A booming services sector has led Indias growth storyover the last decade, but a languishing agriculture sector

has limited the inclusiveness of this growth.

Over the last decade, Indias GDP has been growing at an

average of around 8% per annum, making it one of the fastest growing major economies in the

world. At a total size of $1.45 trillion, the Indian economy is the 11th

largest by nominal GDP and at a

total size of $4.82 trillion (PPP), the 3rd largest by Purchasing Power Parity (PPP) behind the US and

China. Multiple forecasts predict this trend continuing to accelerate, and by 2020 Indias GDP in PPP

terms is expected to rise to $8.01 trillion9.

While Indias economy as a whole has been growingly rapidly, the key economic sectors of

agriculture, industry and services have been growing unevenly. Data from past five-year plans, 9 th

Plan (1997-2002), 10th Plan (2002-2007) and 11th Plan (2007-2012) point to the fact that the

Figure 2: Total and equity-only FDI inflows

into India

SOURCE: Department of Industrial policy and promotion

2012

40

2000

30

20

10

2008

0

2004

Equity

Total

$ billions

Figure 3: Gross domestic product (GDP) at

PPP

SOURCE: World Bank data

$ trillions

Brazil

Japan

India

China

US

2020E 2030E2010F2000F

40

60

0

20

2040E 2050E


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agriculture and allied services sector, which employs over 50% of the countrys population, has

grown significantly slower (less than 3.5% annually) than the services sector (approx. 7.5% annually).

This has significantly limited the inclusiveness of Indias growth.

Figure 4: Historic and planned sector growth rates

The sections below describe the trends and issues across these key sectors:

AGRICULTURE AND ALLIED SERVICES

The agricultural sector, comprising of activities such as

crop farming, horticulture, animal husbandry and

fisheries, provides livelihood to roughly half of Indias

population, and is a high-impact sector in the context of

inclusive growth. Its contribution to Indias GDP, however,

has reduced from 29.3% in 1990-91 to 18% in 2011-

201210. In the most recent 11th plan period (2007-12),

agriculture grew by only 3.2%, as compared to the target

of 4%. Furthermore, within that period, the sector

stagnated at 0.1% growth for two consecutive yearsbetween 2008 and 2010.

Under-investment in critical infrastructure, inefficient

land-use patterns and seasonal uncertainties are to be

blamed for the sectors poor performance. In the 12 th 5-year plan (2012-2017), the government

plans to achieve growth rates over 4% by focusing on non-farm activities, such as post-harvest

operations, rural supply chain management, and warehousing, which can all contribute significantly

towards the expansion of employment and income opportunities.

INDUSTRY

Though industry has grown faster than agriculture (a 7.4% growth rate11 during the recent plan

period), growth has still been below expectations (10-11%). Within that period, the growth of the

% growth rates

9th plan

(97-02)

10th plan

(02-07)

11th plan

(07-12)

12th plan

(12-17)

Low Growth

Estimate *

High Growth

Estimate*

Agriculture, Forestry and Fishing 2.5 2.3 3.2 4.0 4.2

Industry 4.3 9.4 7.4 9.6 10.9

Mining & quarrying 4.0 6.0 4.7 8.0 8.5

Manufacturing 3.3 9.3 7.7 9.8 11.5

Elect., gas & water 4.8 6.8 6.4 8.5 9.0

Construction 7.1 11.8 7.8 10.0 11.0

Services 7.9 9.3 10.0 10.0 10.0

Trade, hotels & restaurants 7.5 9.6 7.0 11.0 11.2

Transport, storage, and communication 8.9 13.8 12.5 11.0 11.2

Banking and financial services 8.0 9.9 10.7 10.0 10.5

Community, social & personal services 7.7 5.3 9.4 8.0 8.0

GDP 5.5 7.8 8.2 9.0 9.5

* Low growth target - 9% target ; high growth target -9.5%

Note: Classification of sub-sectors into industry & services is done according to planning commission of Indias method

SOURCE: Faster, Sustainable and More Inclusive Growth An Approach to the Twelfth Five Year Plan 2012-2017; Planning Commission-2011,

Government of India

Figure 5: Contribution of sectors to GDP

and labour force employment

SOURCE: CIA Factbook

26%

14%

Services

Industry

Agriculture

Labour force

by sector

(2009)

488 million

Sectoral

contribution

to GDP

(2011)

$ 1.8 trillion

18%

56%

52%

34%


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sector, which includes mining and quarrying, manufacturing and energy, dropped from 12.2% in

2006-2007 to 3.9% in 2011-2012. Furthermore, its contribution to Indias GDP decreased from 28.7%

to 26%12. In addition to contributing heavily to overall GDP growth, a growing industrial sector is

essential for absorbing surplus labour from the agricultural sector.

Growth in industry has been impeded by challenges in land acquisition and poor energy and water

infrastructure. In more recent times (2011-12), the high interest rates imposed by the central bank

to combat inflation have been blamed for the slow growth of industrial output, as measured by

Indias Index of Industrial Production.

SERVICES

The services sector in India has grown sharply over the past decade and continues to do so. Services

comprise of financial services, information technology and information technology-enabled services

(IT and ITES), tourism and hospitality, health, education and construction. Combined contribution of

all service-oriented industries to Indias GDP has grown from 54% in 2006-07 to 59% in 2011-12. The

services sector is currently growing at a healthy 10% annually.

This growth in the service sector has been led primarily by private enterprises, aided by Indias large

pool of workers, both skilled and unskilled. The sectors activities have resulted in massive job

creation, and it has become a catalyst of urbanization and urban migration. The construction

industry alone provides direct/ indirect employment to 35 million people and is expected to employ

92 million people by 2022.

Indias limited inclusiveness of growth is reflected in its significant economic inequality and poor

performance on human development indicators.

Despite emerging as one of the worlds largest economies, Indias per capita income still places it in

the low-middle income bracket, as per World Banks definition of country lending groups. At $3,694

(PPP), Indias per-capita income places it at the 129 th place in the world; just below Iraq13.

In 2004-05, the average per capita income of Indias bottom quintile by income was $176 (INR 9,305)

but $1,997 (INR 105,845) for the top quintile, an eleven-fold difference in income levels. As per the

India Human Development Survey 2010, consumption-based inequality measured by the Gini

coefficient stood at 0.38, which is considered to be moderately unequal by world standards and is

slightly below most low-middle income developing countries, where the consumption-based Gini

coefficient ranges from 0.40 to 0.50.

At 0.52, Indias income-based Gini coefficient is much higher than that commonly observed in

emerging economies, reflecting its significant levels of inequality14

. On a per person basis, therefore,

India may be considered a lower-middle income economy with huge disparities in levels of income.

Indias progress with regard to human and social development has not been as robust as its

economic growth. High GDP growth rates have not translated to a proportional reduction in poverty,

improvement in health outcomes, access to education and skill development, and an overall

improvement in quality of life. While India has the 3 rd highest GDP (PPP) in the world, it was ranked

134th out of 187 countries on the UNDP Human Development Index in 2011.

Though there is no commonly accepted measure of poverty in India, the Tendulkar Committee, the

most recent official endeavour to estimate poverty, placed the percentage of people living below the

poverty line at 29.8% of the population (355 million people) in 2009-2010, down from 37.2% in

2004-2005. The same committee placed the urban poverty line at $0.54 (INR 28.65) per day and the

rural poverty line at $0.42 (INR 22.42) per day. However, the committees methodology has comeunder criticism for placing the poverty line too low, and is currently under review.


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In addition to income-based poverty, most Indian

citizens lack access to basic services of a reasonable

quality. There is less than 1 hospital bed per 1000

people in India while the world average is 3 beds per

1000 people. There are over 40 children per classroom

in India while the world average is just under 2415

.

Taking access parameters into consideration, the

Oxford Poverty and Human Development Initiative-

developers of the Multi-Dimensional Poverty Index

estimated that in 2011, 53.7% of the population was

living below the poverty line.

There are more poor (as per MPI) in eight Indian states

than in the 26 poorest African countries combined.

421 million people in the Indian States of Bihar,

Chhattisgarh, Jharkhand, Madhya Pradesh, Orissa,

Rajasthan, Uttar Pradesh, and West Bengal live inmulti-dimensional poverty.

Figure 6: Percentage of India's population in 9

poorest states

NOTE: UP - Uttar Pradesh; RA Rajasthan; MP Madhya Pradesh; CH

Chhattisgarh; OR Orissa; JH Jharkhand; BI Bihar; AS

Assam; WB West Bengal

SOURCE: Oxford Multidimensional Poverty Index 2011 ; India Census

Data 2011

% share of total population

0.301 0.400

0.201 0.300

0.101 0.200

0.001 0.100

0.401 0.500

RA

(6%)

MP (6%)

UP

(16%) BI (8)%

OR (8%)

WB (8%)

JH (3%)

CH (2%)

AS (3%)


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3.2 KEY TRENDS SHAPING THE ECONOMYIndia could take advantage of its favourable age demographics and develop a competitive

advantage in possessing 25% of the worlds workforce; demographics in low-income states are

particularly well positioned to drive growth.

OECD estimates that in 2020, India will have a population of 1.3 billion people16

, surpassing China to

become the most populous nation in the world. Against the backdrop of new economic

opportunities, Indias teeming millions, once seen as a major burden, are being seen as assets to

propel the country onto a higher growth trajectory.

According to the IMF, a substantial proportion of growth that India experienced since the 1980s can

be attributed to the countrys age structure and age demographics17. Currently 54% of Indias 1.2

billion people are under the age of 25 and 63.5% of Indias population, roughly around 760 million

people, falls in the working-age bracket of 15 to 59 years18. Further, 300 million people will enter the

labour market by 2025, providing 25% of the worlds workers19. The continuing demographic

dividend is estimated to add roughly 2 percentage points to Indias per capita GDP growth every

year.

There are multiple implications of millions of young people entering the workforce. According to

David Bloom - the demographer who first coined the term demographic dividend - young,

unencumbered workers are seen to spur entrepreneurship and innovation, enabling significant gains

in productivity, savings, and capital inflows.

Additionally, India will be experiencing an increase in the number of working age people just when

other large countries see the average age of their populations decline, opening up opportunities for

the export of workers from India to the rest of the world. In 2020, the average age in India will be

only 29 years, compared with 37 in China and the United States, 45 in Western Europe, and 48 in

Japan20

.

Demographics are also believed to have played a role in influencing the growth rates of Indian

states. Authors of the IMF working paper feel that some of Indias economically strong states have

already reaped a demographic dividend over the last couple of decades. Per their analysis, the states

of Karnataka, Tamil Nadu and Gujarat can attribute between 2.4 and 3 percent of their annual per

capital GDP growth rate in the 1980s to a favourable age distribution.

According to the authors, the 9 economically weaker states21 in the country, home to more than half

the population, may have just entered the sweet spot in terms of the age structure of their

populations to start experiencing a demographic dividend. Bihar, a traditionally low-growth state,

has been the fastest growing state for the last two years with its GDP expanding by 14.8% and 13.1%

in 2010-11 and 2011-12 respectively. A percentage of this growth could be attributed to favourabledemographics.

The value of Indias demographic dividend will depend in great measure on whether the public and

private sector have the political will and foresight not only to create jobs but also to train the new

workforce, encourage global trade, improve a failing education system, provide better housing, lure

capital to support innovation, and implement policies that engender confidence in the economy.


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Figure 7: Projections for India's working age population

An increasing proportion of Indias labour force comprises casual labour, driven by the large shift

in employment patterns from farm-based to non-farm based temporary or contractual jobs.

In 2010-11, 36% of Indias population was either employed or available for employment. With 790

million people in the working age population, Indias labour force is roughly 430 million strong. 40

million people, 9.4% of the labour force, are unemployed.

The National Sample Survey Offices statistics released in 2011 indicate that there has been a shift in

employment pattern across the country with the number of casual workers increasing by 21.9

million and the number of regular workers reducing by half from 2004-05 to 2009-10. Based on

other macro-economic data it appears that there is a structural shift taking place with people from

the rural sector taking up temporary and contract jobs in labour-intensive industries likeconstruction, manufacturing and the rapidly growing services industry that can absorb low-skilled

labour quickly.

Despite the shift, the agriculture & allied services industry continues to be the largest employer in

the country employing 46% of total employment. Over 50% of all people employed in rural areas

work in agriculture or allied industries. The other significant employment industries in rural areas are

construction, manufacturing and wholesale and retail trade. Together with agriculture, these

industries employ over 77% of the rural labour making them high-impact sectors with respect to

employment.

In urban areas, manufacturing, wholesale & retail and

community services stand out as industries employing the

highest percentage of the labour force.

In terms of size of the enterprises, 66% of the employed

people work in enterprises that have less than 10 employees.

A further 3% work in enterprises with between 10 and 19

employees and only 7%22 in firms with over 20 employees23.

Rapid migration away from rural areas has led to

widespread, unplanned urbanization; there is a large

opportunity to tackle the resulting urban poverty.

Urbanization in India is fuelled by migration of the rural

Population in billions by age group

SOURCE: United Nations Population Divisions

2040

18%

62%65%

16%

1.7

20%

2050

1.7

20%

2030

1.5

12%

65%

23%

2020

1.4

10%

64%

27%

2010

1.2

8%

62%

31%

2001

1.1

7%

58%

35%60+15-59

0-14 years

Figure 8: Distribution of urban and rural

population

Billions

SOURCE: Census of India, Dalberg research and analysis

26%

2021

1.4

65%

35%

2011

1.2

70%

30%

2001

1.0

Rural

Urban

72%

28%

1991

0.8

74%


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population to existing urban areas and by growth of new urban areas. In 2001, 285 million people

lived in designated urban areas. This increased to 380 million in 2011 and as per the Government of

Indias projections; over 600 million people will live in urban areas by 2030.

Between 2001 and 2011, India witnessed a 54% increase in the number of urban towns from 5,161

in 2001 to 7,935 in 2011. Most of this increase, 2,532 towns, is on account of growth of census

towns, rather than statutory towns, which saw an addition of only 242 between 2011 and 201124

.

Statutory towns are towns that have statutory governing structures like municipalities or town

corporations. Census town do not have urban governing structures and are largely rural or semi-

urban areas that turn urban on account of densification of their population. Census towns have poor

civic urban infrastructure like roads, water, sanitation, etc.

With the share of urban population increasing at a rapid pace,

instances of urban poverty have also increased. As per the

available data on urban poverty, roughly 80 million in urban

India live below the national poverty line25. As urbanization

increases across the country, more and more migrants settle

in unauthorized tenements often categorized as slums giventhe lack of legally available affordable housing. Per the 2011

census, 93 million people currently live in slums, a figure that

is expected to grow 105 million by 201726.

As per Planning Commission recommendations, the

government will need to attract private investment in all

areas of urban infrastructure like drinking water supply,

sewage treatment, urban roads, urban transport, power, as

well as large infrastructure projects. The committee on Indian

Urban Infrastructure and Services, appointed by the Ministry

of Urban Development, estimates that $0.7 trillion (INR 39.2trillion) will be required over the next 20 years to meet the requirements of the projected urban

population.

With increase in per capita income, consumption expenditure across the country has also increased.

As per the National Sample Survey Offices (NSSO) 2011 report on household consumer expenditure

in India, the Monthly Per Capita Consumption Expenditure (MPCE) (Mixed Reference Period) has

increased substantially in both rural and urban areas. The average MPCE was estimated to be $18

(INR 953) in rural India and $35 (INR 1,856) in urban India in 2009-10, up from $11 (INR 579) and $21

(INR 1,104) in 2004-05, an increase of 65% and 68% respectively.

With rising incomes, the composition of consumption expenditure is also changing. As per the NSSO

report27, in 1999-2000 food constituted 59.4% of total expenditure in rural areas and 48.1% in urban

areas. In the decade since, expenditure on food as a percentage of total spending in rural areas had

declined to 53.6% in rural areas and 40.7% in urban areas. This shift in spending on necessities like

food and clothing to discretionary items that improve the overall quality of life like healthcare,

education, personal products and entertainment, will continue to grow. The McKinsey Global

Institute estimates that discretionary spending will rise from 52% of household expenditure in 2005

to 70% in 202528.

Figure 9: Increase in the number of urban

towns

2011

7.9

+54%

+10%

Census

Town

Statutory

Town

3.9

4.0

2001

5.2

1.4

3.8

1991

4.7

1.7

3.0

SOURCE: Census of India, Dalberg research and analysis

000s


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Figure 10: Annual household consumer expenditure in India (1987-2010)

SOURCE: Key Indicator of household consumer expenditure in India 2009 -2010, NSSO; October 2011

Percentage of total expenditure

7% 7%7%

10% 9%

8% 6% 8%6%

54%

31%

2004-05

25%

1993-94

56%

5%

29%

1999-00

60%64%

23%

1987-88 2009-10

64%

21%

Food

Fuel & light

Clothing, Bedding& footwear

Other discretionary goods

and services


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3.3 SIZE OF THE MARKET AT THE BASE OF THE PYRAMID87% of Indias population qualify as Base-of-Pyramid living under $4 a day; this segment spends

$667 billion (PPP) on goods and services every year.

The Next 4 Billion report

29

defines the BOP population as those earning $3,000 (2002 PPP terms) orless annually. Collectively, this represented 4 billion people globally at the time with 924 million

living in India (95% of Indias population).

ADB classifies the BOP as those earning $3-4 PPP or less per day 30. As per Dalbergs estimates based

on NSSO data, 1.04 billion people, or 87% of Indias population, would form the BOP population.

Approximately 90% of the rural population, or 743 million people and 80% of the urban population,

or 299 million people can be classified as BOP population. In other words, 71% of Indias BOP

population lives in rural areas. Dalberg estimates the total market for BOP as consumers is estimated

to be $667 billion in PPP terms, approximately 62% of which would constitute the rural BOP market.

As per this data, 61% of consumption expenditure for rural BOPs is towards food while urban BOPs

spend 53% towards food.

Figure 11: Market size of India's BOP

As per the World Resource Institutes The Next 4 Billion report, the BOP market in India was

estimated to be USD $1.2 trillion in 2005. Of this, the BOP500, BOP1000 and BOP1500 segments,collectively classified as those earning less than USD $4 PPP per day in 2005, presented a USD $692

billion (PPP) consumer market opportunity. On an average, these three segments spent

approximately 73.5% of their household expenditure on food and 12.1% on energy, the two highest

expenditure heads in terms of percentage of household expenditure.

$ billions (2005 PPP)

509

45

84

692

Transp-

ortation

2

Other

5

EnergyFoodTotal

market

size

Houshold

goods

1810

EducationHealthcare ICT

12

Housing

7

NOTE: BOP taken as a sum of BOP500, BOP 1000 and BOP1500 segments that spend less than USD 4 PP P per day (2005)

SOURCE: World Resources Institute, Next 4 Billion Report


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3.4 CLIMATE FOR ENTERPRISE AND INVESTMENTPoor enabling institutions and weak law enforcement make starting and running a business in

India a struggle; investor protection and strength of the financial markets are strong positives.

In the Doing Business report (2011) published by the IFC and World Bank, Indias rank was 132 of183 countries in terms of overall ease of doing business. In terms of ease of starting a new business,

India ranked 166th. In terms of the ease of getting a construction permit India was 179 th, or the

fourth last in the world and in terms of enforcement of contracts, India stood 182nd of 183 countries.

These challenges are being cited as some the reasons for Indias GDP slowing down to 6.5% in 2011-

2012.

Indias rank in the Global Competitiveness Index 31(GCI) has fallen from 43 in 2006-2007 to 56 in

2011-2012 among 142 countries covered in the index. Further, India ranks a poor 91 st in basic

requirements that include institutions (69th), infrastructure (89th), macro-economic environment

(105th) and health & primary education (101st). Corruption and complicated regulatory framework, in

which India ranked 99th

and 96th

respectively, remain high areas of concern in Indias ability to

provide a conducive business environment. High inflation, high fiscal and current account deficits

add to the poor macro-economic rank of 105.

For businesses and investors, the large market size, where India ranks 3rd

of 142 countries, seems to

be the biggest draw. Its rank of 36 in the strength of investor protection is also encouraging for

investors. Also, its fairly sophisticated financial market (21st rank) and innovative businesses (38th)

have the ability to deploy and utilize finances well and add to its strengths in overall

competitiveness.

Despite a negative short-term outlook indicated by Indias poor current credit rating, long term

outlook for economic growth and attractiveness for investment look positive.

The economic reforms triggered the opening-up of the economy and the consequent high-growth

rates, and Indias economy has several underlying factors that make it an attractive investment

destination in the long-term. A large working-age population, projected to remain at over 62% of the

population32, joining the workforce has the potential to deliver demographic dividends for the next

few decades. Strong private final consumption expenditure (PFCE) at 56% of the GDP33 and high

domestic savings of 33% of the GDP34

further underscore the long-term growth prospects of the

country.

While long-term trends look positive, the short-term economic outlook looks tepid at best. A low

quarterly growth rate of 5.3% in the last quarter of the financial year 2011-201235 pulled annual GDP

growth rate down to 6.5% as opposed to the earlier projection of 6.9%. The GDP growth rate

between January and March 2012 was the worst last quarter growth rate in nine years. To add tothis, the fiscal deficit is at 5.9% and inflation is close to 10%, which restricts the options available to

the government to correct the situation by way of a fiscal stimulus and monetary measures. Policy

paralyses, lack of reforms, administrative obstacles and instances of large-scale corruption in the

government have been largely responsible in slowing down the economy. Recommendations by the

government like implementing retrospective tax laws are likely to dampen the short-term

investment climate further. These factors have raised concerns about Indias abil ity sustain the high

growth rates it has experienced in recent years. The silver lining is the recognition by businesses, as

cited in various reports and interviews, that the slowdown is largely the result of inaction on the

governments part rather than any serious structural issues with the economy36.

In terms of credit ratings, while there are strong reasons for the bearish sentiment in the short-term,the long-term view is bullish. In near term, while the economy as a whole is expected to experience


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slow growth some sectors are expected to perform well, explaining the investment grade rating

given by most credit rating agencies.

Figure 12: India's credit ratings by various rating agencies

Rating Agency Rating Outlook Date

Standard & Poor BBB- Negative 25-Apr-12

Fitch BBB- Negative 18-Jun-12

Moodys Baa3 Stable 05-Aug-11

Dagong BBB Stable 11-Jul-11

NOTE:

(1) For S&P, Fitch & Dagong, a bondis considered investment gradeif its credit ratingsis BBB-or higher.

Bond ratedBB+ Sometimesalsorefereedto as junk bonds.

(2) For Moodys a bond is considered investment grade if its credit rating is Baa3 or higher. Bonds ratedBa1and beloware consideredto be speculativegrade,sometimes also referredto as junk "bonds.

SOURCE:Websites of Standard & Poor,Fitch, Moodys & Dagong


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4.MACROECONOMIC ASSESSMENT OF SRI LANKATo develop a holistic perspective on the macroeconomic assessment of Sri Lanka, we used a number

of sources of data. These sources include Central Bank of Sri Lanka reports and publications, data

published by international organizations such as the IMF, UN, World Bank and CIA, and other key

reports including TheNext 4 Billion.

4.1. OVERVIEW OF PERFORMANCE ON ECONOMIC AND SOCIAL INDICATORSSri Lankas 26 year old civil war and recently the global recession have stunted growth, but

post-conflict regions are now being developed amidst strong prospects for economic growth.

Since the beginning of reforms in 1977, the Sri Lankan economy has diversified from its dependence

on commodities like tea and rubber, to services like banking and telecom. Sri Lankas potential for

growth was not fully realized because of a civil war between the original inhabitants, the Sinhalese,

and the immigrants from colonial times, the Tamils, that lasted for 26 years from 1983 to 2009.

Poor economic growth persisted in the country even after the end of the war in 2009 because of the

global recession, which resulted in low exports. The resulting balance of payments crisis prompted

the IMF to step in with a Stand-By-Arrangement (2009-12) to stabilize the situation. In June 2012,

the IMF, at the conclusion of their staff mission to Sri Lanka, stated tha t Sri Lankas macroeconomic

health had improved. The current account deficit had been curbed, credit growth had been

moderated and reserves had been restored to stable levels.37 The Sri Lankan economy is expected to

benefit from increased exports as the global economy recovers.

The peaceful environment has also brought

about other favourable changes that have the

potential to spur growth. Military expenditure

is expected to reduce, giving the governmentmore flexibility in managing the budget.38 The

lifting of unfavourable travel advisories and

insurance, issued due to risk of war, will

facilitate growth of tourism and trade.39

In the two years since the war ended, the

government has spent large sums of money to

resettle Internally Displaced People (IDP) and

to de-mine prior conflict areas. The

government is also focusing on providing

sustainable livelihood opportunities to IDPs,which could result in the inclusion of IDPs in

the labour force.

Additionally, multiple infrastructure projects in conflict affected provinces and across the country

are likely to be completed by 2013. Between 2009 and 2011, $1.2 billion was spent on infrastructure

projects in northern areas alone.

Sri Lankas GDP is forecast to double to $189.4 billion (PPP), in the 8 years following the end of the

war in 2009.40 The economy grew 8% in 2010 and 8.3% in 2011.41 As of 2011, GDP stood at $116.3

billion (PPP) which is small in absolute terms relative to the size of other countries in developing Asia

such as Vietnam, Bangladesh and Pakistan (see figure below). However, it is one of the highest in the

region on a per capita basis. GDP per capita reached $5,600 (PPP), after showing strong growth in

Figure 13: Gross domestic product of South and Southeast

Asian countries

$ billions (PPP)

Data is not available for Afghanistan before 2002 and for Myanmar before 1998

SOURCE: International Monetary Fund, World Economic Outlook Database,

September 2011

100

0

2016E2010200419981992

Vietnam

Sri Lanka

Myanmar

Bangladesh

Afghanistan

500

400

300

200


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23

the post-war years, rising 8.4% in 2010 and 9.7% in 2011. This figure is expected to continue with an

increase to $9,000 (PPP) in 2017.

The short-term outlook for GDP growth is moderate, given the uncertainties of the global economy.

Strong growth of 8% was expected at the start of this year, but the IMF has revised its forecast to

6.75% GDP growth for 2012. 42 The lower forecast is partly due to the impact of the recession and

Euro Zone crisis on Sri Lankas trading partners, which will impact the countrys exports. The

consequent widening of the trade deficit is expected to put further strain on Sri Lankas balance of

payments situation. To avoid this, Sri Lanka might have to go in for a tighter fiscal and monetary

policy, which may further slow down output and GDP growth.

Sri Lankas services sector is the engine of the countrys growth; construction and hospitality

industries have grown significantly in the recent past.

The contribution of agriculture, industry and services to Sri Lankas GDP stood at 11%, 60% and 29%

respectively in 201143.

Agriculture has seen the slowest growth of all three sectors, with a compounded annual growth rateof around 3.5% over the past decade. Tea, rubber, coconut and paddy are the main crops of Sri

Lanka. Along with fishing, they form the bulk (approximately 45%) of agricultural output. Fishing has

seen strong growth of 12.2% in 2010 and 15.5% in 2012. Output for other crops in 2011 was

adversely affected on account of heavy

flooding. 44 Currently, about a third of the

population is dependent on agriculture and

allied industries.

Industry (i.e., manufacturing, mining, etc.) has

been the fastest growing sector since 2004,

with a compounded annual growth rate of

7.5%. The growth of the industrial sector has

been broad- based, with construction (14.2%),

mining (18.5%) and textiles (10.8%) achieving

double-digit growth in 2011.45 46 With reforms

and liberalisation after the war, building

capacity is the prime focus of the sector as a

whole. Much of the multilateral grants and

loans that Sri Lanka has received have gone

towards building infrastructure that is expected to help industries.

The services sector has had the largest contribution to growth in GDP over the past 5 years, making

it the engine of the economy (see figure above).In 2011, Sri Lanka experienced strong double-digitgrowth in multiple service sectors including wholesale and retail trade (10.3%), transportation and

communication (11.9%), and hotels and restaurants (26.4%).

The global recession has affected Sri Lankas economy deeply, indicated by low FDI inflows; recent

increase in net inflows has raised hopes.

Sri Lanka has been facing a balance of payments crisis which is the chief threat to its economic

stability and ties in with other aspects of the economy such as the fiscal deficit and exchange rate

depreciation. The crisis became unmanageable in 2009, when the IMF had to step in with a $2.6

billion Stand-By-Arrangement in order to stabilize the situation. The IMF attributed the crisis to the

reliance on short term financing of high budget deficits from international markets which were badly

hit due to the economic slowdown that year.

Figure 14: Weighted contribution to GDP growth rate by

sectors

SOURCE: Central Bank of Sri Lanka Annual Report -2011

3.5%

62%

32%

6% 6.0%

6.8%

2011

8.0%

61%

36%

2%

2010

8.3%

60%

30%

10%

2009

56%

34%

11%

2008

56%

28%

15%

2007

Services

Industry

Agriculture


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In June 2012, a press release issued

by an IMF mission stated that

macroeconomic indicators such as

the current account deficit, credit

growth and level of reserves had

shown improvements. The areasthat were still under pressure were

identified to be government

revenue collections and interest

expenditures.

Net foreign direct investments have

been increasing steadily since the

end of the war in 2009 but total

inflows have been erratic. For

instance, total inflows declined in 2009 and 2010 but recovered in 2011 to reach $1.06 billion. 47 The

poor performance in 2009 and 2010 must be referenced against global FDI flows, which declined

sharply in 2008 and 2009.48 Reflective of the recovery in global FDI flows, inflows into Sri Lanka in the

first quarter of 2012 exceeded inflows in 2011 in the same period.49

In last 2 years the sectors that attracted the most FDI were infrastructure and tourism. Infrastructure

projects were the main recipients of FDI in 2010, attracting nearly 60% of total inflows. 50 Tourism

accounted for 20% of total inflows in 2011.

Although total inflows seem to have recovered from a downturn in 2009 and 2010, the equity

component of inflows has decreased significantly from around 30% of total inflows in 2007 to single

digit levels between 2009 and 2011. However, based on strong prospects for economic growth in the

future, Sri Lanka will likely attract increasing amounts of foreign investment.

Sri Lanka has performed strongly on human development indices for its income levels; standards

in education and water and sanitation are high, while malnutrition is a major concern.

The country has made progress in poverty reduction, while education and sanitation parameters are

also above world averages. Nutrition remains an area of concern, especially given the high food

expenditure ratio. Sri Lanka has also nearly completed the process of resettling people displaced due

to the war.51

Sri Lanka boasts of an unusually high Human Development Index of 0.691.52

For instance, Turkey has

a similar HDI (.699) despite having more than double the GNI per capita (PPP) of Sri Lanka. Sri

Lankas Inequality-Adjusted HDI was .57- a discount of 16.2%.The reduced value incorporates the

effects of inequality on various sub-dimensions such as education and health.

Sri Lankas Multi dimensional Poverty Index score is 0.021, which is not only much lower than most

countries in South Asia, but also lower than countries like Turkey, China and Philippines.53 The

proportion of poor to total population by the MPI methodology is 5.3%, which is significantly lower

than the proportion of poor estimated by other poverty measures such as the National Poverty Line

(22.7%) and the World Banks $1.25 Poverty Line (14%).54

HEALTH AND NUTRITION

Sri Lanka has been able to achieve relatively good healthcare standards for its population. The

number of hospital beds per 1000 people was 3.1 in 2004, in line with the world average of 3.

Almost all births (99%) were attended to by skilled health staff. 55

Figure 15: Composition of FDI inflows

$ millions

SOURCE: Central Bank of Sri Lanka Annual Report s-2006 to 2011

1,200

800

400

0

20112010200920082007

Equity

Reinvestment of retained

earnings by existing

companies

Foreign loans

Intra-company borrowing

Loans and advances


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Malnutrition figures however, have not progressed at the same pace, and are a cause of concern. At

21.6% the prevalence of malnutrition, measured as weight for age for children under the age of 5, is

roughly the same as the average for developing Sub Saharan Africa56 and much larger compared to

Turkeys 3.5%.

EDUCATIONEducational standards in Sri Lanka are also relatively good. The student teacher ratio of 19 compares

favourably with a world average of 23.57 More than 95% of the teachers are either trained or

graduates themselves. There is gender parity in the number of children in schools. World Bank data

shows that in 2006, 99% of all children who join school reach the final primary grade, indicating a

low drop-out rate in primary education.

WATER AND SANITATION

91% of Sri Lankans had access to improved drinking water sources in 2010 compared to 80% in 2000.

There has been an impressive jump, from 77% to 90%, in rural areas. The figure in urban areas is a

near universal, 99%. The figures are now above the world average of 88%.58

In the same period,access to improved sanitation facilities increased from 82% to 92%, keeping Sri Lanka mil

Documents

Inclusive Business Market Study for India and Sri Lanka (Draft Report)