India’s Emerging Competitiveness - Casa Asia · India’s Average Annual Real GDP Growth 1900 –...
Transcript of India’s Emerging Competitiveness - Casa Asia · India’s Average Annual Real GDP Growth 1900 –...
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India’s EmergingCompetitiveness
Casa AsiaBarcelona December 13, 2005
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How I got my name?
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GURUGood at Understandingbut Relatively Useless
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To understand the future we must
first look at the past
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Story of three numbers
1 3.5 6
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India’s Average Annual Real GDP Growth
1900 – 1950 1950 – 1980 1980-2003Colonial Period Post Independence Reform Period
Period
1% 3.5% 6.0%
Sources: 1900-1990: Angus Maddison (1995), Monitoring the World Economy, 1990-2000: World Bank/IMF.
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Industrial revolution in the West took place at 3%
growth rate over 100 years
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At pre-1980 trend 2250At post-1980 trend 2066Gain of 184 years---Exclude Bihar, Orissa, 2040East U.P and M.P.(about 40% of country)Gain of 216 years
Source: J. Bradford Delong,“India since Independence: An Analytic Growth Narrative” in Dani Rodrik(ed), In Search of Prosperity: Analtytic Narratives on Economic Growth, Princeton University Press, Princeton, NJ, 2003, p.184
India’s per capita income will reach current U.S. per capita income by
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NEXT 10 YEARS
7% - business as usual8% - aggressive reforms
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The lesson : Even slowreforms add up over time
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1901 – 1950 1.01951 – 1980 2.21981 – 1990 2.11991 – 2000 1.82001 – 2010 1.5
Sources: 1900-1990: Angus Maddison (1995), Monitoring the World Economy, 1990-2000:Census of India (2001)
Population Growth (%)
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1950 17 1990 522000 652010 (proj) 80
Source: Census of India (2001)
Literacy (%)
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% MillionPeople
1980 8 65
2000 22 220
2010 (proj) 32 368
Source: The Consuming Class, National Council of Applied Economic Research, 2002
Middle Class
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1980 46% 2000 26%2010 (proj) 16%
1% of the people have been crossing poverty line each year for 20 years. Equals 175 million.
PEOPLE BELOW THE POVERTY LINE
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Colonial Post-Independence Reformperiod period Period
1901 – 1950 1951-1980 1981-1990 1991-2000
GDP Growth 1.0 3.5 5.6 6.2
Population Growth 1.0 2.2 2.1 1.8
Per capita Growth 0 1.3 3.5 4.4
Sources: 1900-1990: Angus Maddison (1995), Monitoring the World Economy, 1990-2000: World Bank/IMF.
100 Year Trend
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Colonial Post-Independence Reform Future period period Period 2000-2010
1901 – 1950 1951-1980 1981-1990 1991-2000
GDP Growth 1.0 3.5 5.6 6.2 7
Population Growth 1.0 2.2 2.1 1.8 1.5
Per capita Growth 0 1.3 3.5 4.4 5.5
Sources: 1900-1990: Angus Maddison (1995), Monitoring the World Economy, 1990-2000: World Bank/IMF.
FUTURE
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Why will growth accelerate?
Demographics
• Lag effect of macro reforms
• Growth is “infectious”
• Divorce of politics and economics
• Mental Revolution
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Demographic trend points to sharp increases in input factors
54%46%
25+ yrs
0-25 yrs
Demographic Split
420800
0200400600800
1,0001,2001,4001,600
2005 2025
1.5 bn
1.1 bn
Labor Force
Labor Force will double in the next 20 years
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Demographic trend points to sharp increases in input factorsAge Dependency
72%
45%<50 %62%
0%
20%
40%
60%
80%
1980's 2002 2025 China 2002
17%
42%35+%
24%
0%
10%
20%
30%
40%
50%
1980's 2002 2025 China 2002
Savings Rate
Higher savings and investment rate will translate into higher GDP growth
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Lag Effect of Macro ReformsChina GDP growth
8+%
10%
6.0%
7.0%
8.0%
9.0%
10.0%
11.0%
1979-1988 1989-2004
First 10 Years Next 15 Years
China’s growth accelerated a decade after liberalization in 1978
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Lag Effect of Indian Macro ReformsTrickle Down Effect
Bombay Club
Slow growth to create “Level playing field”
Perceptible Change in the
Micro-economy
• Backlash from the “vested interests”
• Restructuring to improve efficiency
• Rising aspirations
• Global mindset
• Benchmarking with global peers
5
0
10
15
Yrs
Macro reforms have now filtered down in the Micro-economy
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Divorce of Politics and Economics
• Focus on Infrastructure
Congress BJP
• National Highway Program
• Power for all by 2012
• Airport privatization
• National Highway Program
• Power for all by 2012
• Airport privatization
• Increased Trade • Lower tariff barriers
• Focus on manufacturing
• Lower tariff barriers
• Focus on manufacturing
• Bottlenecks • Partial privatization
• No progress on labor reforms
• Partial privatization
• No progress on labor reforms
Electorate demands economic progress - micro reforms are irreversible
• Capital Efficiency • Consolidation in banking sector
• FM cares about Sensex
• Consolidation in banking sector
• FM cares about Sensex
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Mental Revolution
India Unbound story Cable TV revolutionBanianisation of societyHinglish
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Millions1980 1 1990 52004 75
(growing at 2 MM + per month)2005 100
Source: Department of Telecom, Government of India (2004)
Telephone Lines
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The coming power revolution
(A hope or an investment tip?)
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Second Green Revolution
• technologically led, based on GM seeds
• labor intensive • needs reforms
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Potential Stumbling Blocks
•Fiscal Deficit
•Infrastructure
•Bad Governance
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India continues to run “huge” Fiscal Deficits
9.0%9.5% 9.9% 9.6% 9.4%9.5%
0%
2%
4%
6%
8%
10%
12%
1999 2000 2001 2002 2003 2004
Fiscal Deficit as % of GDP
No improvement in fiscal situation
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Negligible Infrastructure Spend Compared to ChinaInfrastructure Investments ($ bn)
China spends 8 times more than India on infrastructure
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Bad governance given the corrupt political class
•India
– 1 in 4 Members of Parliament (MP’s) is a criminal
•China
– 75% of the politburo are technocrats
•30
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%----------
1980 82000 222010 32---2020 50 West of the
Kanpur-Chennai line2040 50 East of the
Kanpur Chennai line
RISE OF THE MIDDLE CLASS
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Not get worked up about inequality
–US South–Italy/Spain–Internal migration: safety valve
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THE POINT IS THAT WE HAVE TIGERS IN
OUR MIDST
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WHEN MIDDLE CLASSCROSSES 50%, POLITICS WILL ALSO CHANGE
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WHY IS THIS HAPPENING?
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2 MORE REASONS
• Liberal Revolution > Convergence
• Rise of knowledge economy (IT)
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India and China have grown twice the world
rate for 25 years
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By 2015China > U.S.India > Japan
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Reasons for Success
China’s is state induced.India’s is market led.
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CHINA• One pointed reformer• Infrastructure miracle• Wealth creators are
- FDI- SOEs
• Manufacturing driven
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INDIA
• Gradual reform• Wealth creators are
entrepreneurs• Services driven
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Rise of globally competitiveIndian companies:
Reliance, Jet Airways, Infosys, Wipro,Ranbaxy, Bharat Forge, Tata Motors,
Hindalco, HDFC Bank
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India has law, China has order
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Corporate Governance
- High in India- Low in China
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By 2010 India will have world’s largest number
of English speakers
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India’s demographic advantage means that its high growth will
continue longer term while China will slow
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Soft Underbelly
India’s: Infrastructure Fiscal deficit
China’s: Financial sectorDissent
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Given India’s
• Rule of law• Democracy• Market driven success• English language• Corporate Governance
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Conclusion
China is faster and ahead, but longer term India may be
a surer bet
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The Wise Elephant