8% Growth: How do we put the economy back on track?

Posted in Finance Articles, Total Reads: 2132 , Published on 23 April 2013
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In a recent interview with Headlines Today, eminent industrialist and Chairman of the Godrej group Mr. Adi Godrej expressed his confidence that the Indian economy would bounce back from a sub 6% growth rate during the last three quarters to 8-9% in 2013-14.

So what does it take to drive India back to 8% growth levels? Will the recent bout of reforms provide the necessary catalyst to sustain current positive investor sentiment and ensure strong growth in the post-crisis global economy?

Growth Economy

(image:freedigitalphotos.net)

Firstly, it is important to understand that over the last six decades, India has progressed from being a slow-growing agricultural economy to a fast growing service driven economy. The sectoral breakup in 1952 was agricultural and allied – 55%, manufacturing - 15% and service sector at 40%. By 2011, it changed dramatically to agriculture and allied contributing just 17% while manufacturing and services accounted for 28% and 55% respectively.

The Indian economy has made considerable progress in exports of services, particularly in high-skill areas like software. India has certain distinct features which sets it apart from China and other such emerging economies:

  • Human Capital: The total population of India is over 1.1 billion. By age demographics, 54 percent of India's population is under the age of 25. This means that close to 550 million people will be part of the Indian workforce in the next 25 years. Not just that, the entire university education in India is in English which ensures that the average Indian professional is proficient in both speaking and reading English.
  • Location: India is well located in terms of time zones, with an overlap of a few hours with London, while being able to communicate with all of Asia and Europe throughout the trading day. This makes it the perfect outsourcing hub, not just for IT but even for financial and other allied services.
  • Democracy and Rule-of-law: Being the largest democracy in the world, India has strong foundations of freedom of speech and rule of law. Democracy has taken a new shape altogether nowadays and people are becoming more and more aware about their rights and fighting for it.
  • Strong securities market: India has world class exchanges which rank 3rd and 5th in the world by number of transactions. It can therefore rely on a fairly well developed and sophisticated financial market that can channel financial resources to good use.

However, in spite of these advantages, over forty per cent of India’s population still lives below the international poverty line of US$1.25 per day according to the World Bank. In addition to poverty, the key risks in the short term relate to political instability impacting the reforms process, the high current account and fiscal deficits and their consequential impact on the rupee. As India gets into election mode next year, the worries of an uncertain election outcome might become an overhang on the economy.

In the the World Economic Forum’s Global Competitiveness Report 2012-2013 we rank a dismal 59th in global competitiveness. The main reason for this is the lack of adequate infrastructure. Although India has invested heavily on infrastructure especially after 2000, there is a large gap between demand and supply. The total length of road networks in India has increased 8 times over the past four decades, but the number of vehicles in the country grew by 200 times over the same period. Existing railways in the trunk routes between Delhi and Kolkata and between Delhi and Mumbai are highly saturated.

Another recent example is that of the major power outage that affected 700 million people in July 2012, when three regional power grids collapsed due to excessive demand. However these are far from isolated incidents.  The quality of India’s electricity supply ranks 110 out of 144 countries, putting it behind Mali and just ahead of Ethiopia in the World Economic Forum’s Global Competitiveness Report 2012-2013.  Lack of reliable power has greatly hindered India’s ability to develop a manufacturing sector that could compete on level terms with China.  Such infrastructure issues have also deterred much-needed foreign direct investment (FDI) and slowed down economic growth and development.

The government has set a target of $1 trillion in infrastructure investment in the five years from 2012, with $274 billion to be spent on power generation and $75 billion to $90 billion on road construction. However, the economy is already struggling with a fiscal deficit of 5.8% and despite the recent hike in prices of fuels and fertilizers, the government’s subsidy bill is expected to remain inflated.

Global Competitive Index

Fig 2: Ranks according to quality of infrastructure – Global Competitiveness Index

However, all is not lost. India’s relatively high levels of economic growth have transformed its relationship with the outside world. Its rising middle class, already estimated at more than 200 mn, has become a focal point for a global economy weighed down by sovereign debt and investor unease. In fact, Japan, the largest donor of official development aid to India, has played a major role in the country's infrastructure development because much of the aid money has come in the form of soft loans for infrastructure projects. These infrastructure projects also provide opportunities for investments by Japanese firms since it has become increasingly evident that the government, by itself, will not be able to build infrastructure. India can avail of public-private partnerships, and financing models such as viability gap funding, and use its foreign reserves as a sovereign wealth fund, to buttress the availability of capital for infrastructure.

Among other measures, India’s infrastructure development plans call for:

  • $42 billion in road-related infrastructure, including doubling the size of the country’s 70,000 kilometer highway network;
  • $67 billion in rail-related infrastructure to expand routes to ports and the country’s vast interior and improve shipping capabilities, among other objectives; and
  • Upgrading infrastructure in Delhi and other cities to support the nation’s rapid urbanization.

Infrastructure projects in India need to be evaluated and made to adhere to feasibility and performance criteria that strike a sustainable balance between economic growth, protection of the natural environment and the well-being of the people and communities who come before them. It is essential that private sector companies look to the existing infrastructure challenges as opportunities rather than obstacles. Both governments and companies should recognize their social obligation to look out for the welfare of local communities and environments while pursuing broader development goals.

To help resolve financing issues, India needs to develop its capital markets. Critical to the availability of finance is the need for a vibrant and liquid corporate bond market. Financial sector reforms such as deregulation of pension and insurance markets, and especially allowing more foreign participation in the banking sector, will be important in this regard. It therefore, again emphasizes the need to move to models of public-private partnerships. However, the government on its part must also push the reforms agenda with direct cash transfers, implementation of Goods and Services Tax (GST) and an aggressive disinvestment policy.

With some aspects of its socialist roots such as reservation still in place, India has yet to fully realize the competitive advantage that would enable the country to sustain an improved position in the global economic setup. According to the Minister of State for Commerce and Industry Ms. D Purandeswari, ‘we need to place a lot more emphasis on growth of our country and the leadership at various levels’. This can be made possible if the laws and regulations are tight enough but at the same time conducive to new inflow of investments. The key is to open up the economy and make India an economic powerhouse.

References:

Article has been authored by Mugdha Phatak and Vernon Fernandes from SIMSREE, Mumbai.



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