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S L RAO At University of Wisconsin, Madison September 2010

INDIA as a Superpower? 1. Indian Polity and Economy 2. Energy & Climate Change 3. Reforms Needed. S L RAO At University of Wisconsin, Madison September 2010. First Lecture. Indian Polity and Economy. Indian Polity: Features.

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S L RAO At University of Wisconsin, Madison September 2010

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  1. INDIA as a Superpower? 1. Indian Polity and Economy 2. Energy & Climate Change 3. Reforms Needed S L RAO At University of Wisconsin, Madison September 2010

  2. First Lecture Indian Polity and Economy

  3. Indian Polity: Features • Democracy-15 Lok Sabha Elections since 1952; Electorate rose:670 mn in 2004;714 mn in 2009; using 1 mn electronic voting machines; • Declared expenditure over $ 300 mn • Many peaceful changes of governments at Centre and states • Obedience to judiciary • Military under civil authority • Built on inherited British civil services • Diversity-Multi ethnic/linguistic/cultural • Vast variation in size of States • Right to Information • Vibrant free Media

  4. Indian Polity- Threats • Neighbors-China (1 War+Live Disputed Border) • Nuclear Pakistan as surrogate of China • Afghanistan could give China a South Asian arc of influence • Nepal, Sri Lanka, Burma, Bangladesh • Significant Cross-border Terrorism • Caste and Community disharmonies; pressure for affirmative action; also for women • Demand for smaller states: 2001-U.P.166 mn; Goa >1 mn • Tribals-8.2%=.84 mn; worst off economically; most resource rich lands; neglect and exploitation; violent “maoist” movement led by urban educated, controls “Red Corridor”-40% of land area, 92000 sq km, • Militant trade unionism not a threat since 1980’s

  5. Overview-Economy • Patchy growth till 1980’s, since then good, but setbacks every 3-4 years. • Fundamentals-Inflation a frequent worry; • More FII than FDI though FDI has picked up; volatile foreign funds • High interest rates; • Real’ economy growing slower than services; • Poor infrastructure, • Subsidies, • Poor social security; • Administrative incapability to spend efficiently on programmes, • Red tape, • High deficits

  6. Overview-Economy • Resilient economy despite sanctions of 1990’s & global meltdown of 2008. because : • Vast domestic market, Rising consumption gives buoyancy; • Huge potential market of the Poor, • Young and ambitious population, • Technological and managerial capability • Energy-Large part of population not served by commercial energy; • Major fuel is and will be Coal; running short and needs for imports • India’s exemplary energy efficiency and emissions record

  7. Economy: Features • 1999 00 01 02 03 04 05 06 07 08 09 2010 • GDP growth: 6.5 6.1, 4.4, 5.8, 4.0: 8.5, 7.5, 9.5, 9.7; 7.2% 7.4% 8.5%? • Industrial production negative growth in 2009, now in double digits. • High and Rising Savings rate (almost 40%) but high government deficits • Rise in Capital formation Public sector, also Private Sector • Deepening Export, growing again; China replacing USA as largest trading partner • Inflation at single digit for a decade; 7.7% last year, 4.2 in Dec 2005; despite fuel, power, light & lubricants at 7.1; from 03-04-8.1, 03-04-9.8); Rising in 2007-08, Nov 2008- 7.8%; 2009-10 and now food products at around 20%, extended to manufactures; Will lead to tighter liquidity and higher interest rates; Can affect growth • Not an Export driven Economy; export growth; 01-02-22.1, 02-03-15.0, 03-04-21.4, 04-05-27.6, 08-09 and 09-10 drop of 20%; now double digit growth • Foreign Exchange reserves over $280 billion; NRIs, ECBs, FIIs, less FDI, trade deficits • Rapid growth of I.T. and B.P.O. 200708 $52 billion (growth of 28%), $40.4 b from exports, $11.6 domestic. Of exports, IT grew by 28% to 23.1 b and BPO exports went up by 30% to $10.9 b; 2008-09 (est): $62-64 billion; 2010 (est) : 110 billion; shifting to high value added • Resilience: Survived face-off with USA and sanctions after nuclear explosions; 2008 recession and fall in exports

  8. Trend Growth: Economic Growth by Decades Agriculture investment to resume after decades of sparseness, could grow faster than the expected 3.4% Manufacturing more improvement due rapidly growing domestic market, exports Constraint-energy and wage price inflation Infrastructure investments major drivers-Power, Roads & Bridges, telecommunications, Ports, Airports. The trends of the 2000s will continue – but growth will be much faster

  9. Sector-wise GDP Growth Rates (in %) Note: 1) QE- Quick Estimates, RE – Revised estimates, AE – Advance Estimates 2) * Growth rates based on 2004-05 base year constant prices, rest are at 1999-00 base year constant prices Source: CSO

  10. Annual Growth Rate of Industrial Production Source: CSO & Handbook of Statistics on Indian Economy, RBI online

  11. Sector-Wise Gross Domestic Savings Source: Handbook of Statistics on Indian Economy, RBI

  12. Sector-wise Capital Formation Source: Handbook of Statistics on Indian Economy, RBI

  13. Deepening of External Sector Source: RBI Online

  14. Source: CSO Overall Performance of Indian Economy

  15. Annual and month-wise rate of Inflation for major heads in India Source: Computed from data available at Office of Economic Advisor, Ministry of Commerce and Industry, Government of India.

  16. Rapid growth of I.T. and B.P.O. (% to GDP) Source: Handbook of Statistics on Indian Economy, RBI online

  17. India’s Trade Scenario Source: Handbook of Statistics on Indian Economy, RBI (http://www.rbi.org.in)

  18. Indian Trade Scenario (Goods & Services) Source: RBI Online

  19. Expectations • GDP growthforecasts; 2009-10- 7.4%; 8.5% in 2010 and 8.5 thereafter • BOP current a/c deficit widening again; also Trade deficit doubled despite fall in crude prices; 2009 due Oil imports bills, now export & foreign investment on rise • Labour Force : 381.94 (1993); 406.05 (1999); 469.05(2004) • Employed: 302.75 397 457.82 & 529.87 (2009), of which - in 2004 and 2009 in mns- • Agriculture, forestry & fishing 267.57 to 296.62; • Mining & quarrying 2.74 and 3.19; Construction 25.61 & 38.35; • Manufacturing 53.5 & 61.9; hotels & restaurant, Tpt, storage & comm 64.49 & 79.56;

  20. Expectations • Elect. Gas & water supply 1.37 &1.5; Community, social & personal services 35.67&38.81 • Trade, Financing, insurance, real estate & business services 6.86 & 9.94; • Corporate performance under pressure but margins ok: FY 99 4.08%; Rising from FY 03 5.32, then 7.48, 9,24, 8,73, 9.84, 10.01 (FY 08), 8.54; • Rising crude and gas costs hurt economy; but falling prices coincided with recession; India with large gas discoveries • Energy Inputs: Emphasis on local and cheaper: local coal, local gas, hydro, nuclear, renewables, • Climate Change and New Coal Technologies, ownership and investment issues • Squeeze on India-imperative of economic growth imperative despite rising energy costs and pressure to reduce emissions which will reduce growth

  21. OPPORTUNITY: Expected Investments in Infrastructure 1/3 private (Rs billion)

  22. Household Consumption - Growth Source: Expenditure Spectrum of India, 2009-10, Indicus Analytics

  23. Household Consumption- Diversification 1. Overall household budget-about 2 times higher than now in real terms. 2. Share of food and related products falls from 40% to 34% (absolute amounts about x1.8 times). 3. Transport, Education, Health and Recreation among most rapidly growing consumer spending Per capita income growth 8% pa – households will earn about double that they do now

  24. Agriculture, Infrastructure • Agriculture investment will finally resume after many decades of relative sparseness, but this sector could well grow much faster than the expected 3.4% • Manufacturing opportunities would improve on account of rapidly growing domestic market as well as international markets – however energy and wage price inflation will play a role. • Investments in Power, Roads & Bridges, communications will be the driving force of growth in the country in the 2010s – Investments A large road network is going to be operational, ports are rapidly improving, air transport infrastructure is being overhauled, and a strong ecosystem has been created for the telecom sector

  25. The Indian Consumer: What will Indians eat in 10 years? Source: Expenditure Spectrum of India, 2009-10, Indicus Analytics

  26. The Indian Consumer: What will Indians eat in 10 years? Lifestyle changes will show up in a major way in our eating habits. That is the next tipping point – cooking at home will continue, and we will not do away with kitchens as in Thailand Processed foods & eating out will be a rapidly growing component of household budgets

  27. How will they spend on services? Source: Expenditure Spectrum of India, 2009-10, Indicus Analytics Recreation and communication will drive household expenditures the most. The Indian household will move more and more towards lifestyle enhancing expenditures - and another tipping point will be reached in terms of the expenditures on tertiary education and health Health care expenditures will grow rapidly, and so will those for education

  28. Poverty Estimates using the India Labour Report 2008 300 million people are estimated to be living under extreme poverty (< $ 1 per day). And this figure has been more or less stagnant over the last 4 decades. If the current trends continue as many as 260 million persons would remain under extreme poverty even by the end of the decade. Expect that social safety nets would remain critical for India

  29. Urbanization Source: Indicus estimates using Registrar General of India data • About 32% of India’s 1176.7 million people reside in Indian cities currently. This 2. Will increase to about 35.4% of the population of 1326.2 million by 2019. • 3. Most of this new urban population will comprise of recent migrants • 4. Impact: Urban services, sanitation, water, transport, housing An additional 100 million will move into cities

  30. Demographic Dividend • 2004-Population =1080 million of which • Age between 15 and 64=672 million • Below 15 and over 64, non-working or dependent population=408 million • Plus 60 population in millions-2001-6.3%=65 mn; 2016-8.9%=113 mn • Dependency ratio of 0.6; 2030-0.4 • 2020 Average Age: India-29; China-37; Japan-48: youngest working age population in world • Less children=more women at work; more saving; greater growth

  31. Demographic Dividend-Implications • The transition to low fertility leads to a period during which the population of working age increases faster than the consuming population. This “first demographic dividend” boosts per capita income. Transitory because, the population of working age ceases to increase. • To realize it, need for investments in skills and education. Also, • income per consumer drops, a cause of concern. • Lower mortality produces longer lives. As people live longer, they need to accumulate more wealth to defray consumption in old age. The higher the proportion of older persons, the higher wealth per capita. With more wealth per worker, productivity and asset income increase, leading to a long-lasting “second demographic dividend. • To realize the second dividend, wealth must be accumulated as savings or assets. To the extent that older persons depend on family transfers or public pensions, the second dividend is reduced.

  32. India’s Potential • Fast growing market for all types of goods and services • Fast growing economy • English \s a third language • India Accounts for 10 % of World Trade • India as a Source of Global Innovations New Businesses, New Forms of Organization, New Technologies. • Well-developed software of industry: market research, advertising, design, etc • Entrepreneurial society

  33. India’s Potential 8. Bottom of the Pyramid as a • Source of Product Innovations for the World • Potential for leadership in low cost Health care, Education, renewable Energy, energy conservation, Transportation, Sustainable Development for all) • New Markets 9. A Flowering of Art, Literature, Films and Science (10 Nobel Prize Winners of Indian origin, apart from Booker, Pullitzer, etc) 10. A New Moral Voice for People Around the World India as a country where Universality and Inclusiveness is widely practiced. India becomes the most Benchmarked country for its capacity to accept and benefit from its diversity

  34. Education-Investment Opportunity • India has 3rd rd largest education system globally • Spends over $ 13 bn overseas on education • Network of over 1 mn schools and 18000 higher education institutions • Variety of institutions • Plan to grow this by 3 to 5 times • Spends are at 3.7% of GDP • Not even 1% of the $30 bn that government spends on education is on capex • Sample studies show that 44% of students also enrolled in private schools • $ 80 bn investment opportunity. Laws are changing.

  35. India- A Fast Growing Economy with Greater Potential • Mobile Users - 56.89 million (March 2005), 362.2 million (Jan 2009); 101.1 Million new mobile users in last 10 months; growth continues • Internet connectivity in 2010 -200 million; still growing • 5.25 mn broadband connections (Dec 2008); growing • 5.4 million PC’s sold in 2006; slowing down • Cars: expected rise was from1 million to 2 million by 2010; Now waiting lists for cars and 2 wheelers despite rise in production; NANO and other cheap cars will add to volume • 2010-over 94 mn cable & satellite households • Advertising industry at Rs4000 crores=$800 million • Presently, Retailing slow down; Special Economic Zones, even Media • 2006-220 malls; 2010-over 600 were expected

  36. Indian Economy; Need for Reform 1. Rising deficits-Growth enables rising expenditures; Need for more efficient spending; improve tax revenues 2. Balancing Growth with inflation control; need for liquidity and lower interest rates; reduce volatile foreign fund inflows; production, productivity, efficiency, will allow both growth and inflation control 3. Relative decline in “Rich” economies makes India an attractive investment target; India can tighten rules to reduce volatile Foreign Exchange Flows and add to Reserves 4. Participatory Notes and round-tripping of Indian funds - Exemption from short-term capital gains tax; Mauritius as largest foreign investor; Very volatile FII funds-stock market like yo-yo as funds ebbed and flowed

  37. Indian Economy; Need for Reform • Faster growth of commercial energy to combat power shortages; 500 million not connected; limitations on domestic fuel resources; need to acquire overseas; requires more security expenditures • Need for Blue Water Navy, credible deterrents against predatory neighbors • NOT AN ECONOMIC SUPERPOWER BUT A VERY IMPORTANT ECONOMY • Thank you

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