Transcript Recent economic slowdown and reasons thereof

Analyzing the Indian Economic
Slowdown
Part II
- A presentation to NMCCA
Vikram M Sampat
Reliance Industries Ltd.
August 19, 2012
Navi Mumbai
Areas needing improvement…..
 Fiscal discipline
 Investment & Capital Formation
 Inflation management
– Agriculture
– Energy
– Infrastructure
 Earning the Demographic Dividend
– Education
– Urbanization
– Importance of industrial sector
 Current account deficit
Need for improvement
 Despite all the advantages, high
growth is not an entitlement, it
has to be earned
 Needs concerted effort from
– Business
– Policymakers
– Government
– Technology & research
 India has structural issues in
some key areas
 Focus efforts in key areas to put
GDP back on growth track
 Capitalize on the Advantages
Fiscal Discipline
 India has slipped in fiscal
management
 Overall deficit (incl. states)
estimated @ 10% of GDP
 Public finance – A key concern
Crowding out of Private Investment
 Significant impact on private
investment
 “Popular” spending stoke inflation
– NREGA scheme, a case in point –
payments delinked from value added
– Increasing impact on inflation (as
opposed to growth)
 Need to transparently measure
effectiveness of public spending
 India is paying a very high price for fiscal profligacy
Capital Formation
 Capital formation – key to
developing country GDP growth
 Lower investment will depress
short and longer term.
 ICOR for India is ~ 4
 Stoke inflation
 Focus on restoring high rate of capital formation
Investments & capital stock
 Support sharp demand growth due to accelerating 
PCI
 Need supply growth through capital stock addition 
 India – one of lowest capital stock/GDP ratios in Asia
 Need to boost investments
Low investments leading to lower growth
and inflation
Infrastructure, energy and food are areas
of particular worry
Gross Capital Formation
 Capital formation has
improved for India
 However, more investments
are required in infrastructure,
energy and manufacturing
 Crowding out of private
investment by Govt. spending
 Focus on food, energy and infrastructure
Inflation Management
 Persistent, high inflation
eats into growth
 Dual impact of
inadequate capacity and
rising per capita incomes
 Further fuelled by
weakening currency and
rising cost of imports
 Food and fuel – largest
contributors
 Inflation management essential to revive growth
Wage inflation
 Growing rural incomes
(NREGA)
 NREGA - socially important
but with low productivity
leading to inflationary
pressures
 Higher wage inflation
 NREGA – Focus on productivity
Food inflation
 Agriculture output has
not kept pace with
income growth
 Changing food
patterns – move to
protein rich items
 Focus on food production
Agriculture
 Over 55% population employed in
agriculture: but slow growth
 Declining share in GDP
 Several areas of improvement
– Productivity
– Scientific crop management
– Water management
– Distribution: reduce wastage
 Focus on food production growth to manage inflation
Agriculture – Need for Reform
 Agriculture
Year
1970-71
1976-77
1980-81
1985-86
1990-91
1995-96
 Small land holdings
Number of
holdings
(in million)
71.0
81.6
88.9
97.2
106.6
115.6
Area Average area
operated
per holding
(in million (in hectares)
hectares)
162.1
163.3
163.8
164.6
165.5
163.4
Source: Agriculture Census India, A.K. Ojha
2.28
2.00
1.84
1.69
1.55
1.41
 Disguised
unemployment
 Lack of technical
expertise, knowledge &
technology (India
spends only 0.3% of
agro GDP in R&D)
 Supply chain issues:
− Improper storage
facilities leading to
high wastage
− Large number of
middle men leading
to high cost
 Reform agriculture with multi pronged benefits
Energy Management
 Energy is second most
important inflation factor
after food
 India – a growing energy
consumer
 India deficient in petroleum
resources
 Energy imports @ $155 bn
contribute 32% to all imports
and 85% of total current
account deficit
 Failed to tap large coal
resources due to inefficiency
– Eg China: coal or US: shale
 Fuel subsidies – a large
drain on fiscal balance and
unsustainable
 Energy policy - found wanting
Energy Scenario
 Need proactive energy policy to meet India’s growing demand
Infrastructure
 Infrastructure bottlenecks throttle
business
 Investments have stagnated
 Infrastructure investments –
hitherto in public domain
 Need to resort to PPP in
aggressive fashion
 Policy for effective private participation in infrastructure
Inflation …. Summary
 Need to manage inflation
to boost growth
 Monetary policy has little
impact in view of major
supply side constraints
and demand pressures
 Need to pursue prudent,
growth oriented policies in
agriculture and energy
 Improve infrastructure
bottlenecks
 Inflation management through sound economic management
Earning the Demographic Dividend
 Demographic dividend not an entitlement..... needs to be earned
– ~600 mn Indians below the age of 25
– India entering a phase of lower dependency ratio
 Urgent need to empower the youth
– …. Educate for employability
– …. Foster environment for job creation in economy
– …. Create urban infrastructure to ensure better standard of living
 GDP growth
– A resultant of more people earning
– Earn the fruits of demography
 Focus on education, employment and urban infrastructure
Education… Focus areas
 Low reach (11% GER in higher education)
 Quality (Top 20% Institutes – world class, next 20% passable, next
60% lamentable) Need for knowledge economy education
 Growing demand (9% demand growth v/s 3.6% supply growth)
 Archaic Regulation (University Affiliations)
– Syllabus
– Fees
– Public v/s private (education 3% of GDP, higher education 0.7% GDP,
cannot meet the demand)
– Return on investment (India spends $406/student v/s $2728 – China,
$3986 – Brazil & $11790 – Malaysia)
 Political will and incentive (Voters need to make politicians feel
accountable)
 Significant issues in primary and secondary education also
 Mindset change an imperative for reform
Importance of Industry Sector
 India has a lower share of
industry in GDP among peers
 Compared to peers, industry
also employs lesser people
 Lower share for industry
– Forces labour to remain
agricultural
– Caps services growth
– Lower opportunity for
unskilled and manual labour
– Hampers overall economic
development
– Impact on exports and
competitiveness
 Industry sector - a key growth and employment driver
Urbanisation
 Cities are major source of
economic activity
Urbanisation
 At 32% urban population,
India lags behind in
urbanization (world average
is 50%)
 India is slow in developing
new cities
 This compromises quality of
life in existing cities –
particularly for rural migrants
 Limits migration
opportunities
 High urban cost of living
 Major urbanization drive – need of the hour
Urbanisation
 Urbanization – India at cross roads
Current Account Deficit
 India – consistent current account deficit
 Indian reserves - built based on capital flows
 85% of deficit is petroleum exports
 With high energy imports, industrial exports growth – an imperative
 Concerted effort by industry /regulation to drive export
competitiveness
Summary
 Indian growth has improved since 1988 post liberalization
 2003-08, a golden period helped by favourable conditions
 Indian economy has all the ingredients for sustained growth period
 However, need to address structural issues and weaknesses
 People and industry need to get their act together
 Create pressure on political system and government to provide
policy framework supporting high growth
 India – poised for takeoff; but we have work to do!!
Conclusions