Indian Economy: An overview - 08

Some General Facts

India is the worlds second most populous country of over 1 billion people.

Urban population 28% of total. (China 39%)

More than half of its population is 25 years of age. Demographic dividend. Measured in USD exchange rate terms, 12th largest in the world, with a GDP of $1 trillion (2008) PCI $4542 at PPP and $1089 in nominal terms (2007) National savings (24% of GDP) almost half that of Chinas 45% . World Bank classifies India as a low income economy

 Labour force participation rate 71% in 2003. (China 87%)

Rural workers constitute about 60% of the workforce. Urban informal sector the growing sector represents the residual. Unemployment rate is 7.3%. Organized sector employs 7% of workforce (two thirds of which are in public sector), and produces 40% of GDP. Rest in informal sector -with predominance of women. Despite a decline, poverty is a serious problem. 27% of Indians are poor.(2004-5). 70% of Indians(800million), lived on less than 20 rupees( slightly less than C50 cents) per day with most working in informal sector with no social security. (2007 Report on National Commission for Enterprises in the unorganized sector
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Why India?
GDP growth rate 9% ( 2007-2008) Services are a growing sector and play an important role in Indian economy. India is an imp. back office destination for global outsourcing of customer services and technical support. Major exporter of highly skilled workers in financial, software, software eng. Potentials are in , manufacturing, pharmaceuticals, biotechnology, nanotechnology, telecommunication, shipbuilding, aviation, tourism and retailing.

Composition of Indias GDP

(at Factor Cost by Economic Activity at 1999-2000 prices, in%)

1999-0 2000-01 2007-08 (RE)

1)Agriculture etc 2)Industry 2.1 Manufacturing 2.2 Construction 3) Services 3.1 Trade, hotel, Restaurants 3.2 Transport, storage $ communica. 3.2 Finance, insurance, etc 3.3 Community, social and per. service
* Inclusive of 3.2. Source : EPW 14TH June , 2008
Source: EPW June 14, 2008

24.99 25.31 14.78 05.71 49.69 14.22 07.46 13.07 14.92

23.89 25.80 15.30 05.81 50.30 14.34 07.96 13.04 14.98

17.75 26.63 15.36 07.26 55.62 27.55*

14.68 13.39

India- Structural Transformation-?

Economic policy: Approach i) Since independence (1947) till almost late eighties followed a socialist inspired approach- strict govt. control over -private sector participation, foreign trade and FDI (Approach-import substituting rather than export promoting) . ii) Indias low average growth rate ( 3%) from 1947-80 was referred as Hindu rate of growth, because of the unfavorable comparison with the other Asia countries, especially the East Asian Tigers.

 A period of import tariff, export taxes, quantitative restrictions , approvals needed for 60% of new FDI in the industrial sector. FDI averaged only $200M between 1985-1991. In 2004, net FDI inflow was about 7-8 USD bn. ( China, 52 USD bn) A large percentage of the capital flows consisted of foreign aid, commercial borrowing and deposits of non resident Indians. Largely and intentionally isolated from world markets.
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 Late eighties: the govt. led by Rajiv Gandhi eased restrictions on capacity expansion for incumbents, removed price control and reduced corporate taxes.
Phase of high growth with high fiscal deficit and worsening current account Collapse of soviet union a major trading partner, first Gulf war causing spike in oil prices led to major balance of payment crisis with the prospects of defaulting on its loan. Prime Minister Narasimha Rao with Finance Minister Manmohan Singh initiated the economic liberalization of 1991. Reforms did away with license Raj in investment, industrial and import licensing-ended many public monopolies, introduced automatic approvals of FDI in many sectors.
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Agriculture
India ranks second world wide in farm output. In 2007, accounted for 16.6% in GDP employing 60% of the total workforce. After having growth rate of 2% for many yearsnow the growth rate is about 4.5%. Two thirds of Indias workforce still earn their livelihood directly or indirectly through agriculture. High level of disguised unemployment. Despite improvements, average yield in India ranges from 30-50% of the highest average yield in the world.
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Industry
India ranks 14th in the world in factory output. Industry accounts for 27.6% of the GDP and employs 17% of the work force. Manufacturing growth rate 8.4%. One third of industrial labour force is engaged in simple household manufacturing only. Economic reforms led to more private sector participation, an expansion in the production of consumer goods and both domestic and foreign competition.
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Services
India is fifteenth in services output. The growth rate which was 4.5% in 1951-80 increased to 7.5% in 1991-2000. Recent growth rate 10.7%. Its share in GDP was 15% in 1950 which is now about 55.6%. Fastest growing services are business services, information technology enabled services, business process outsourcing contributing about one third of total output of services in 2000. Indias IT industry an important contributor to BOP, accounts for only about 1% of total GDP and 1/50th of the total services

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Foreign Trade & FDI

Almost stagnant export for the first 15 years after independence. Dominated by products like tea, jute and cotton manufacturers having generally inelastic demand. Imports mainly were machinery, equipment and raw material.

Since liberalization ex-im have become much broad based.

Indias exports are consistently rising, covering about 80% of its imports.

Merchandise trade of India about 28% of GDP. in 2004 (China 70%.)

Exports of goods as % of GDP of India 12%. (China 36%). (2004)
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 Though net importer, since 1996-7, overall BOP has been positive largely on account of increased FDI and deposits from NRIs. Its major trading partners are the U.S.A., UK, China, Germany, Japan and UAE. Indias major exports are textile goods, gems and jewellery, engineering goods, chemicals and leather manufacturers. Indias major imports are crude oil, petroleum products, machinery, gems, fertilizer and chemicals. The top five countries in FDI inflows (2000-2007) are Mauritius (44%),United States(9.4%), UK( 8%), Netherlands(6%)and Singapore(5%).

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Trade Openness: India (% of GDP)

Year 1990-91 1993-94 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 Export Import Exim

6.08 8.12 9.00 8.72 8.58 7.93 9.09 10.70 10.1 11.3 11.6 12.7

7.86 8.52 10.38 10.20 10.17 10.12 12.25 12.13 11.89 13.18 14.25 17.25

15.62 15.63 18.50 18.62 17.63 19.90 21.35 22.51 21.66 24.49 25.65 29.97

Source: Calculated from Govt. of India, Economic Survey

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Situating India in World Merchandise Exports and Imports

Year World (b$) 58 11783 Canada 5.5 3.3

Exports (% share) India China N.America 2.2 1.0 0.9 8.2 28.1 14.2

Asia 14.0 27.8

1948 2006

Imports(% share) 1948 2006 62 12113 4.4 3.0 2.3 1.4 0.6 6.5 18.5 21.0 13.9 25.0

Source: WTO, World Trade Statistics, 2007 15

India-China Trade & FDI Partners

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Source: Source: Reserve Bank of India

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Source: CEIC Source: CEIC

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Percentage Share(2006) and growth rate (1996-2006) : Trade in Commercial Services of India and few selected countries and regions
Countries EX 100 %Share IM 100 Growth rate (%) EX 7.2 IM 7.4

World

North America Canada

Asia China India

18.85 2.35
25.36 3.72 3.01

15.19 2.71
25.05 3.79 2.41

5.3 6.7
8.0 14.7 21.5

7.3 6.8
6.5 14.8 26.9

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Is development inclusive?

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Labour Market
Growing employment is accompanied by poor quality of

labor with proportion of regular wage earner employees only about 15%. Economic growth could be made more inclusive by achieving faster growth in regular employment, as opposed to casual and self-employment. Although regular employment has risen, its growth has been almost exclusively in the smaller, least productive enterprises.
About 87% of manufacturing employment taking place in

micro enterprises(<10 persons) producing just a third of manufacturing output.

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 Employment in firms with more than ten employees accounts for only around 3.75 per cent of total employment (one quarter of regular employment) and has been falling. Indeed, India has a much smaller proportion of employment in enterprises with ten or more employees than any OECD country.
In non-agriculture sector growth in employment is in informal

sector.

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Sex Ratio in Population with Rural-Urban break up

Year
1901

1911 1921 1931 1941 1951 1961 1971 1981 1991 2001

Sex Ratio Rural Urban Total 979 910 972 975 872 964 970 846 955 966 838 950 965 831 945 965 860 946 963 845 941 949 858 930 951 879 934 938 894 927 946 901 933

Source : Office of the Registrar General, India

Sex Ratio 1901-91 (Total, Rural and Urban) from Brief Analysis of PCA paper-2 of 1992 1961 Population from PCA 1961 1971 Population from Social and Cultural Tables 1981 figures from Series Part-II A(I), General Population Tables Census of India 1981. Figures of 1991 (including interpolated data for JK-1991 based on 2001 census) and 2001 from PCA census of India -2001

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Trends in Gender Disparity in Literacy Rate

Male Female Male/Female Literacy rate disparity Slightly more than half of total women are literate. Male-Female LR disparity is on decline.

Year

1961 1971 1981 1991 2001

40.4 39.5 56.3 63.8 75.8

15.3 18.4 29.7 39.4 54.1

0.45 0.38 0.35 0.28 0.21

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Labor Force Participation Rate by Age: 2000-2004

Age Male Female Rural female L/F participation rate higher to their urban counterpart mainly due to Agriculture.

15-29 Rural Urban

30-44 Rural Urban

75.10 67.30 98.7 98.4

30.9 17.9 46.6 26.6

Source : NSSO, 61ST Round

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Industrial Distribution of Workforce by Gender: 2004-2005

Industry division Agriculture and allied activities Mining & Quarrying Manufacturing Electricity,gas and water supply Construction Trade , hotels and restaurants Transport, Storage & communication Finance, insurance, real estate and business services Social, community and personal services

Rural Male

Rural Female

Urban Male

Urban Female

All

66.5 0.6 7.9 0.2 6.8 8.3 3.8 0.7 5.2

83.2 0.3 8.4 0.0 1.5 2.5 0.2 0.1 3.8

6.1 0.9 23.5 0.8 9.2 28.0 10.7 5.9 14.9

18.1 0.2 28.2 0.2 3.8 12.2 1.4 3.2 32.7

56.4 0.6 12.2 0.3 5.7 9.9 4.1 1.7 9.1

Source: National Sample Survey Organization : 61st Round (July 2004 June 2005) 29

Share of women employment out of total employment in organized sector in India (Figures in thousand) Year % of women in Public sector % of women in Private sector % of women in Total

1995 2000 2001 2002 2003 2004

13.4 14.8 14.9 15.4 15.6 15.9

20.2 23.9 24.2 24.3 24.5 24.8

15.4 17.6 17.8 18.1 18.4 18.7

Source : Quarterly Employment Review, Directorate General of Employment & Training, Ministry of Labor
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Unemployment rate by Age and Sector for India

15-29 Femal e 3.7 Male 5.1 30-44 Femal e 0.4 Male 0.6 45-59 Femal e 0.2 Male 0.1 60 & above Femal e 0.0 Male 0.2 Total Fmale 1.5 Male 2.1

RURAL July 1999 June 2000 July 2004 June 2005 URBAN July 1999 June 2000 July 2004 June 2005

7.0

5.2

1.8

0.6

0.5

0.3

0.5

0.2

3.1

2.1

16.6

11.5

2.8

1.4

0.5

0.4

0.0

0.0

7.1

4.8

19.9

10.0

5.1

1.2

0.8

1.0

0.0

0.3

9.1

4.4

Source : National Sample Survey Organization: 55th and 61st rounds

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 women wage lower than men by 33-40 points. Women-men wage differential is 0.75:1. The gender based wage differential though has narrowed down with increase in education level. It is still high. Urban wage differential persists but narrower than in rural area.

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The Working Poor by Gender and Activity Status: 1999-2005 (in%)

Pop. Seg. 1999-2000 2004-05

S.E
Male

RWS

CL

Total

S.E RWS CL

Total

43 20.1

8 11

49 37.7

66,441 24

47 18.7

45

66,943 21.6

9.7 35.3

Female

Total

43 3.5 53 36,721 51 5 44 37,544 23.5 13.6 42.2 29.7 21.1 14.2 37 25.3 43 6.5 50 103162 48 7 45 104487 21.2 11.4 39.3 25.7 19.6 10.5 35.9 22.8

Figures in italics are proportion of workers in that population segment and activity status. Source: EPW, 28 July 2007
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HUMAN DEVELOPMENT INDICATORS

( Indias position among 177 countries)
Particulars HDI Life expectancy at birth( yrs) Adult literacy rate (%) Rank 128 125 114 Value 0.62 63.9 61.0

Combined(priter)enrolment ratio
GDI as % of HDI

122

63.8

138

97.0

Adult F.literacy rate

Combined(pri-ter) enrolment Ratio( F. as % of male)
Source: Human Development Report-2007

134
159

65.2
87.7

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India-China Human Development Scenario-2003

Particulars i) LF participation rate (%) ii) Female LFP rate iii)Average Life Expectancy (years) iv)Infant mortality (per 1000 live births) v)Adult Literacy (%ages 15 and above) vi)Tertiary enrolment rate(%) vii)Mobile phones per000 people viii)PC per000 people viii) Internet uses per000 people ix) Gini Coefficient
Source: World Development Indicators- 2004, 2005

India 71 45 63 63 68 11 25 07 17 33

China 87 79 71 30 95 13 215 28 63 44.7

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GLOBAL COMPETITIVENESS RANKING 2007-8: India and China (Rank out of 131 countries)
Pillars GCI 1 2 3 4 5 6 7 8 9 10 11 12 Components India Global Competitiveness Index 48 Basic requirements 74 Institutions 46 Infrastructure 67 Macroeconomic stability 108 Health and primary education 101 Efficiency Enhancer 31 Higher education and training 55 Goods market efficiency 36 Labour market efficiency 96 Financial market sophistication 37 Technological readiness 62 Market Size 3 Innovation and Sophistication factors 26 Business sophistication 26 Innovation 28 China 34 44 77 52 07 61 45 78 58 55 118 73 2 50 57 38

Source: Global Competitiveness Report 2007

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Major Areas of Reforms Needed

Labour market: Stringent labour laws should be relaxed Business environment: Lowering the barriers to entrepreneurship Ending reservation of products fro SSI Need for Bankruptcy law Dispersion of tariff rates Easing of Service sector FDI restrictions More privatization of public sector enterprises. Financial sector: More liberalization Privatization of public sector banks Infrastructure : Electricity reforms to be speeded up transport: More private sector involvement Public Finances: Better targeting of subsidies, GST Education: Higher public expenditure on primary and education, Addressing financing of higher edu.
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In Conclusion
India and China non comparable: India-Democracy (messy) Highly diverse social structure

Reforms reactionary in nature- a late starter

Less integrated to Global market (including East Asia) Dissimilar trade pattern Lagging behind in FDI and infrastructure Weak link between economic development and social welfare at regional level compared to China.
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Two divergent development Paths: India Increasingly building ground up Service sector led growth Private sector led growth (early nineties) China Top down approach Manufacturing sector and foreign trade State led modernization (late 1970s) Investment driven. Cheap- assembly line workers Factory of the world
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i) ii) iii)

iv)
iv) vi)

Consumption driven

Knowledge based sector-labour Worlds back office

 Yet-India can learn from China in: Social and Physical Infrastructure Improving manufacturing sectors productivity

India- A country with Potentials for sustaining development!!

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