India: The Next Asian Economic Giant - …eneken.ieej.or.jp/data/6681.pdf · India: The Next Asian...

India: The Next Asian Economic Giant

Arvind Panagariya

NITI Aayog

Government of India

IEEJ：May 2016 © IEEJ2016

POST INDEPENDENCE ECONOMIC HISTORY OF INDIA


Slow Growth has been Behind Slow Transform of India

Period GDP

Per-capita

GDP

1951-88 3.8 1.6

1988-2003 5.9 3.8

2003-012 8.3 6.7

2012-14 4.6 3.1

3


0

100

200

300

400

500

600

700 1

95

0-5

1

19

53

-54

19

56

-57

19

59

-60

19

62

-63

19

65

-66

19

68

-69

19

71

-72

19

74

-75

19

77

-78

19

80

-81

19

83

-84

19

86

-87

19

89

-90

19

92

-93

19

95

-96

19

98

-99

20

01

-02

20

04

-05

20

07

-08

20

10

-11

20

13

-14

Index of real per-capita GDP (1950-51 = 100)

Index of per-capita GDP

1980-81 = 151 1990-91 = 206

2000-01 = 295

2013-14 = 598


Where We Stand Currently

2015-16 (Adv. Est.) Real Q1 (April-June) 7.6 Q2 (July-Sept) 7.7 Q3 (Oct-Dec) 7.3 Q4 (Jan-March) 7.8

Year Real 2012-13 5.1 2013-14 6.9 2014-15 7.2 2015-16* 7.6

*Advance Estimate

Annual growth in real GDP 2003-04 to 2011-12: 8.3%


India’s Modernization Challenge

• After 65 plus years of development effort

– Low per-capita income ($1500 per annum in 2015)

– High extreme poverty (22% in 2011-12)

– Manufacturing stuck at 15% of the GDP

– Low urbanization (31% in 2011)

– Workers predominantly in informal employment

• 50% in agriculture

• Another 40% or more in the unorganized sector

6


INDIA’S VAST GROWTH POTENTIAL


523 618

722 834

948

1239 1226 1366

1710

1873

0 200 400 600 800

1000 1200 1400 1600 1800 2000

2002

-03

2003

-04

2004

-05

2005

-06

2006

-07

2007

-08

2008

-09

2009

-10

2010-1

1

2011-1

2

GDP at market prices in current dollars

($Billion): Annual Growth: 15.6%


India can be the Third Largest Economy in Fifteen Years

• Annual Growth in Nominal Dollars from 2003-04 to 2011-12: 15.6%

• With the GDP deflator 2% in USA, annual growth in India in real dollars during 2003-4 to 2011-12: 13.6%

• The GDP in 2015-16 in current dollars: $2 trillion • Conservatively assuming annual real growth of

10%, in 15 years, the GDP will be: $8.4 trillion. • Therefore, becoming the World’s third largest

economy in 15 years is within India’s grasp.

9


What If Growth Stagnates at 5%

• At 5%, we will rise from $2 trillion in 2015 to just $4.15 trillion in fifteen years.

• This will leave India fourth or fifth globally, behind USA, China, Japan and possibly Germany

• The difference between a $4.15 trillion versus $8.4 trillion economy will be – Domestically, significantly poorer progress in cutting

poverty and improving education and health outcomes

– Internationally, much diminished relative to China


Why India has High Potential

• High Savings Rate

• A vibrant Entrepreneurial Class

• An Open Economy

• A Low Per-capita Income with Vast Scope for Catching up


Slow Transition from Agiculture to Industry and Services

• According to data for 2011-12, the share of agriculture in employment is 49% while that in the GDP is 15%.

• The best agriculture has done over a ten-year period is 4.7% during the 1980s.

• But industry and services grow 8-10% or faster.

• So the share of agriculture in the GDP will continue to decline

• IMPLICATION: We MUST create good jobs in industry and services in much larger numbers so that farmers wishing to migrate out of agriculture may find employment at decent wages.


Why the Focus on Labor-intensive Manufacturing is Important

• India has 500 million workers with another 10-12 million joining the workforce each year

• Except construction and retail, services will not create good jobs for low-skilled workers

• There is no known path to rapid transformation that does not go through labor-intensive manufacturing.

• Faster growth of manufactures helps create jobs in services as well.


Acceleration in Manufacturing Also Accelerates Services Growth

Country and period Industry Services

South Korea

1954-62 11.6 4.4

1963-72 17.3 10.0

Taiwan

1951-53 to 1961-63 11.5 7.6

1961-63 to 1971-73 15.3 10.3

India

1991-92 to 2002-03 5.6 7.1

2003-04 to 2010-11 8.0 9.7


WHY HAS MANUFACTURING NOT DONE WELL IN INDIA?


Substantial Presence of Large-Scale Firms is the Key to the Success in Manufacturing

• Per-unit costs decline with scale

• Large firms must sell in the world market

• Fierce competition in world markets forces these firms to rapidly adopt cost-saving technologies and management practices

• Small and medium firms also become more efficient as they become ancillaries to large firms or compete against them.


Apparel: Workers are in Small Firms in India, in Large Firms in China

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

0-50 51-200 201-2000 >2000

Pro

po

rtio

n o

f w

ork

forc

e

Firm size in number of workers

China India


Export Performance in Apparel: India and China Perform Very Differently (1992-2014)

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

180.0

200.0 1

99

2

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

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20

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20

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20

14

$B

illio

n

Clothing Exports ($Billion)

Clothing and accessories-SITC 84 (China) Clothing and accessories-SITC 84 (India)


Make no Mistake, On Average, Indian Firms are Small


Fewer Large Firms Translate in Low Productivity in Small and Medium Firms


The Overall Impact of Relatively Few Large Firms

• Low overall productivity because too many workers are stuck in low-productivity, low-wage micro and small firms

• In 2010-11, firms smaller than 20 worker

– employed 73% of manufacturing workforce in India

– But they produced only 12% of manufacturing output


THE PATH TO TRANSFORMATION STILL GOES THROUGH EXPORT-LED MANUFACTURING


Focus on Labor-intensive Manufacturing

• India has 470 million workers with another 10-12 million joining the workforce each year

• Except construction and retail, services will not create good jobs for low-skilled workers

• There is no known path to transformation in to to three decades that does not go through labor-intensive manufacturing


Export Orientation or Import Substitution?

• Cost competitiveness requires the presence of large firms. • Large firms require large markets to sell their product. Large

markets are outside, not at home

– Total world merchandise exports: $18 trillion. – India’s domestic goods market: less than $1 trillion.

– India’s domestic market in electronic goods: $65 billion – Global market: $2000 billion

• Inevitable conclusions:

– Import substitution will not go far – We must go for the LARGE world markets.


Even India’s 8.3% Growth from 2003-04 to 2011-12 Came with Rapidly Expanding Exports

0

50

100

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19

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14

Exports by India: 1990 to 2014 ($Billion)

Exports by India ($Billion)

$301 billion

$50 billion


But Can We Rely on Robust Export Growth in a Stagnant World Economy?

• Yes. Thus, consider that – Between 1995 and 2013, the OECD countries grew

only 1.4% annually and yet China expanded its exports from $150 billion to 2.2 trillion (share in world exports rose from 2.9% to 11.7%).

– World merchandise exports today (2014) are $18 trillion. We can grow by expanding our share from 1.7% today to 6% in 10 years.

– Real wages in China are rising 10% per year since 2007 (Rs. 5 lakh annually currently). So China will vacate space in the world market in low-skill products.


Rising Wages in Manufacturing in China (Renminbi)

Source: Albert Park, Hong Kong University of Science and Technology [Annual Wages in 2014: Rs. 5 lakh. In surveys, Chinese firms point to labor costs as the most important barrier to their growth.


But What About Robots and 3D Technologies Taking Over Manufacturing?

• Commercial viability of these technologies remains far off.

• In industries with job potential such as apparel, footwear, assembly activities and food processing, even scientific feasibility is some distance away.

• If the threat from robots were imminent, China today would be preparing for complete collapse. That it is not should tell us something.

• Rather than freeze out of these fears, we need to get going.

• This approach will also better prepare us for the age of robots should it become a reality.


A POSSIBLE STRATEGY


What India Must Do

• Taking the context of the Sagarmala initiative, a geographically focused, port-led development strategy must be pursued

• We must create Coastal Economic Zones that offer an ecosystem that is friendly to large, employment-intensive firms and sectors

• In CEZs, we must create infrastructure that allows goods to move in and out of the country rapidly

• We must build external trade alliances that ensure open markets abroad for our goods


At the Heart of the Strategy

• A handful of Coastal Economic Zones that

- Encompass production clusters and urban centers

- Are connected to selected deep draft ports on India’s east and west coasts via a network of highly efficient logistics and distribution systems

- Have a world class regulatory framework governing business, urban and industrial development

- Are gradually connected to the hinterland through an ever expanding multi-modal transportation network


Contact :[email protected]

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