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« Evolution of the Indian Economy, 23 February 2006 »
THE EVOLUTION OF THE INDIAN ECONOMY
•
Economic Performance (1990-2005)
•
A Specific Pattern of Development
•
Is the Growth Model Sustainable? Current Policy Issues
•
Long-Term Prospects- Potential Growth
« Evolution of the Indian Economy, 23 February 2006 »
Economic Performance (1990-2005): The Other Giant Catching-up
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One of the most dynamic economy in the world
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International trade: behind China in trade of goods, but a major exporter of services
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Still very poor: a slow convergence of income with industrialised economies
4 -1 -6 14
India: Economic Growth from 1985 to 2005 (annual growth rate, in %) GDP Agriculture Industry Services -Still vunerable to agricutural fluctuations -Recent rise in trend
9
Contribution to World GDP and to Global Growth 1995 to 2004 (in %)
35 30 31 27 25 20 15 Contribution to world GDP growth 1995-2004 Share in world GDP in 2004
India: 3% of World GDP grow th (7th) 2% of World GDP (12th)
16 11 9 10 5 5 4 5 4 4 3 7 3 2 0
Et at s U ni s C hi na Ja pa n Fr an ce UK G er m an y In di a
India and China: Share in World Trade of Goods and Services (in % of world trade)
7,0 6,0 5,0 4,0 China's exports of goods China's exports of services India exports of services India's exports of goods 6,1%
-India lags behind China in goods exports - Strong performance in services exports
3,0 2,6% 2,0 1,0 1,3% 0,9% 0,0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002
30
Level of Income Compared to Rich Countries Rich countries=100
Other developing economies India China 25 20 15 10 5 0 80 83 86 89 92 95 98 20 01
17 % 10% -India and China: among the rare developing countries w hich are catching up.
-Indian per capita income still far behind China
« Evolution of the Indian Economy», 23 February 2006 »
A Specific Pattern of Development
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A services-led economy
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A narrow manufacturing sector
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A slow opening-up to international trade and investment
-1 -6 9 4 14
India: Economic Growth from 1985 to 2005 (annual growth rate, in %) GDP Agriculture Industry Services
40% 30% 20% 10% 0% 100% 90% 80% 70% 60% 50%
India: A Services-Led Economy : Structure of GDP (in %)
43 16 10 31 1993 Services 51 Manufacturing industry Mines, Construction, Utilities Agriculture 17 10 22 2002
Services: skill-intensive activities are the most dynamic Annual growth rates in the 1990s (%)
20
Business services Communication Banking Hotels & restaurants Community services total Trade Other services other transport Insurance Public adlinisatration Peseonnal services Real estate Railways
0 2 4 4 5 5 6 7 7 7 7 8 8 9 6 8 10 12 13 14 14 16 18 20
Structure of Industrial Production, in 1993 and 2003 (in % of total) Chemicals
21
Machinery & Transport equipment Mining, Power
18 17 12
Food Textile & Clothing Metal and metal products
10 10 2003 1993
Chemical and Machinery drive industrial growth
6
Construction material Wood and paper
4 3
Others
0 5 10 15 20 25
Openess to FDI: India Compared to Selected Asian Economies, 2004
FDI Inflows in % of Gross Capital Formation 16 14 12 10 8 6 4 2 0 8 C hi na 15 3 Ta iw an 13 6 9 4 8 FDI stocks as % of GDP 4 P ak is ta n S ou th -K or ea B an gl ad es h 6 In di
3
a
6
India and China: Openess to Foreign Trade Exports in % of GDP, 1980-2003
35 30 25 20 15 10 China India 5 0 19 80 19 82 19 84 19 86 19 88 19 90 19 92 19 94 19 96 19 98 20 00 20 02 29% 11%
India much less open: -Time lag?
-Narrow manufacturing sector -Geographic environment
India: Direction of Foreign Trade Share of Major zones (%)
100% 80% 60% 40%
17 29 19 Indian Exports 18 29 24 21 23 19 NAFTA 12 Indian Imports 10 7 22 33 34 EU-15 23 Asia 16 21 48
20%
35 29 36 Others 38 37
0% 1990 1995 2003 1990 1995 2003
-Geography of trade is relatively balanced -India is not part of a regional integration process -Trade w ith Europe is slow ing dow n
« Evolution of the Indian Economy, 23 February 2006 »
Is the Growth Model Sustainable ?
Strengths
:
Growth of skill-intensive activities (both domestic and international): -IT services - Pharmacy & biothechnology Human capital: tertiary education
India: a world leader in exports of IT services (Share in world exports, in percent)
25 20
20
2000 2001 2002 2003
16
15 10
11 9 8
5 0
Ireland India UK Germany USA Israël 5
Product Composition of High-Tech Exports Radio, TV, telecom.eq.
10% Precision instruments 8% Other HT 8% HT goods account for 4% of Indian exports, Concentated in chemicals (pharmaceutical ) Office machinery 6% Chemicals 68%
« Evolution of the Indian Economy, 23 February 2006 »
Is the Growth Model Sustainable ?
Can India skip the stage of industrialisation
?
The limits of specialisation in skill-intensive activities: Cannot be the engine of the economy Have a small direct impact on employment Tends to increases divergence between States May have adverse effects on other sectors
« Evolution of the Indian Economy, 23 February 2006 »
Current policy issues:
Employment: jobless growth since the 1990s Infrastructure is a major bottleneck Poverty and inequality Public deficit and debt : limited funds to finance social expenses and infrastructure
100% 90% 80% 70%
Employment by sectors, 1990-2005, in %
21 13 Services 28
Share of services in employment (28%) smaller than in GDP (51%)
60% Industry & bat.
19 50% 40% Agriculture 67 30% 52 20% 10% 0% 1990 2005
Urban Employment in the Organised Sector has Stagnated since 1990s
100 90 80 70 60 50 40 30 20 10 0 66 34 1994 69
Unorganised sector %
31 2000
Organised sector %
Deprived Aspirers Middle Class Rich All Distribution of income in 2001 Number of households in 2001 Household Income US$ per year, in 2001 % 71.9
21.9
5.7
0.4
100.0
<2 000 2000-4000 4 000-21 000 >21 000 Expected Distribution in 2010 % 51 34 13 2 100
« Evolution of the Indian Economy, 23 February 2006 »
Long-term Prospects: Growth Potential
Demographic trends: a window of opportunity -Strong increase of the working age population -Dependency ratio falling Actual growth will depend on the level of investment and savings
India and China: Projections of Population, 2000-2050 (thousands)
1 800 000 1 600 000 1 400 000 1 200 000 1 000 000 800 000 600 000 400 000 China India ²& 200 000 0 2 00 0 2 00 5 2 01 0 2 01 5 2 02 0 2 02 5 2 03 0 2 03 5 2 04 0 2 04 5 2 05 0 India's population overtakes China's around 2035
India and China: Working Age Population, 2000-2050 (15-64
)
(in millions)
change in size India (left scale) 90 China size at beginning of period, India China 1 200 70 1 000 50 800 30 600 10 -10 2000-05 2005-10 2010-15 2015-20 2020-25 2025-30 2030-35 2035-40 2040-45 2045-50 400 200 -30 -50 0
India and China Projections of Dependency Ratio, 2000-2050
Population <14 and >65/population >15 and <64 0.70
0.65
0.60
0.55
0.50
0.45
0.40
0.35
0.30
China India 20 00 20 05 20 10 20 15 20 20 20 25 20 30 20 35 20 40 20 45 20 50 In India, dependency ratio falls sharply from now to 2030
Evolution of Investment rate, 1981-2004 Gross Capital Formation/GDP, %
30 28 26 24 22 20 18 16 14 12 10 21 21 1919 20 21 20 21 2222 25 21 2221 25 25 2424 23 24 22 25 27 29 19 81 19 83 19 85 19 87 19 89 19 91 19 93 19 95 19 97 19 99 20 01 20 03
« Evolution of the Indian Economy, 23 February 2006 »
Long-term Prospects- Growth Potential
• Scenarios:
– Recent studies have raised potential growth to 7-8%, based on higher investment and strong institutions.
– Potential may not be realised: a return to a lower growth path
A Catching-up Scenario for India and China 2000-2050 (GDP in bn USD)
50000 45000 40000 35000 30000 25000 20000 15000 10000 5000 0 2000 Source: Goldman Sachs 2010 2020 2030 2040 China US India 2050 Japan
I ndia could overtake Japan around 2035
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Income Gap will Remain Large (GDP Per Capita in current dollars)
40000 30000 20000 10000 0 90000 80000 70000 60000 50000 2000 US Japan China India 2010 2020 2030 2040 2050