INDIAN ECONOMY :

GROWTH TRAJECTORY,
OUTLOOK
and
CHALLENGES
by

Bkpandey
Saturday, January 5, 2019
 Overview
• India in the world
• India’s growth story
• Reforms
• Challenges
What is the India
story?
 37 years of High Growth(1980-2017)
(%) Average annual GDP growth
10
6.5
8
6.0
6
3.5
4
2 1.0

0
1900-1950 1950-1980 1980-2002 2002-2015
Reformulating India’s Economic Strategy
• Reform: a flurry of reforms: GST, DEMONITISATION,DIGITAL INDIA
• Perform: Make in India?
• Transform
India is the 3rd largest Economy
in PPP terms but 7th in terms of official
exchange rate
• After U.S.A and China
• India per capita income in rupees is Rs. 1 lac
• Delhi income per capita is Rs.3 lac per annum, Rs,25000/month
• 2.45 lac people are millionaire in US Dollar
• 92% of population have less than $ 10,000 wealth
World GDP SHIFTS----
• Since 1AD until today the world's changed quite a lot. But until
1700AD the balance of wealth hadn't. For the past two centuries the
share of the world's GDP has shifted to the west to Europe through
imperialism, and technological innovation. With the rise of China
that's changing again (the Maddison Project )
• The balance has changed across the whole world. There's lots to note
here: the steep decline of India in comparison to China in the 19th
century, and the emergence of European nations and America as the
wealth generators of the world.
• The rise in the share of wealth by the US and Europe is of similar
proportion to the decline in wealth of India and China
GDP of the largest Economies(2017).
GDP CURRENT PRICES $ Trillion GDP ON PPP Basis

• USA 19.42 CHINA 23.19

• CHINA 11. 8 USA 19.42
• JAPAN 4.84 INDIA 9.7
• GERMNAY 3.42 Japan 4.9
• France 2.7 France
• UK 2.6 Russia 3.5
• India 2. 5 Brazil 3.4
Share in world GDP
• India’s share in world GDP around 3.5%
• CHINA’S share has gone up from 2 % in 1980 to 16% in 2015
• thirty years ago the United States accounted for roughly one-third of
global output. Today the number is closer to 18%
• Emerging economies 60% as compared to 40% post war
India in transition

• India is presently in a state of transition — economically,

demographically, and epidemiologically — in terms of health.
• While the last decade has seen remarkable economic development
particularly in terms of gross domestic product (GDP) growth rate,
unfortunately this progress is accompanied by growing disparities ...
• There is strong evidence to suggest that this income inequality or
disparity between the different socioeconomic classes is associated
with worse health outcomes.
 India and China in world
• Angus Maddison, the famed British economic historian is best known for his
estimates of world gross domestic product (GDP) that go back all the way to the
year 1 AD. In recent times, his charts have been used to tell the fascinating story
of how the share of India and China in world GDP used to be very high till about
1600 AD, but started declining thereafter as they missed the industrial
revolution.
• With their current rapid growth, their share in the world economy is now rising
once again.
• In 1000 AD, according to Maddison’s calculations, China and India together
contributed 50.5% of world GDP .A hundred years later, China’s GDP had fallen
but India’s went up to 24.4% of world output. By 1820, however, India’s share
had fallen to 16.1%. By 1870, it went down to 12.2%.
• International Monetary Fund (IMF) projections indicate that India’s share of
world GDP around 6.1% in 2016.
Indian Income Inequality 1922-2014: From
British Raj To Billionaire Raj.
• Thomas Piketty and Lucas Chancel, the superstar French economist has shown that income inequality in
India is now at its highest level since income tax was first levied in 1922.
• The inequality has been rising steadily since Rajiv Gandhi became prime minister.
• The top of the Indian income pyramid, though absolute incomes have gone up across deciles since 1980
while the poverty ratio has plummeted. However, the uneven distribution of higher growth needs more
public attention.
• Second, income inequality is not just about the share of national income going to the top 1%. There are
deeper distributional issues. A comparison with China tells us a lot. Chancel and Piketty show that the
share of national income captured by the bottom half in both India and China after 1980 has been
broadly similar. The big difference between the two countries is in the fact that the middle 40% in India
got 23% of the increase in national income since 1980 while the same group in China got 43%—a
massive gap of 20 percentage points. This difference of 20 percentage points was largely captured by
the top 1% in India.
• The Indian top 1% has done extremely well, the Chinese middle has benefited far more than the Indian
middle, and the bottom half in both countries has had broadly similar experiences.
 Per Capital Income Gains
US$ ppp

1861

1980

7000
2015

Source: World Bank

India’s per capita income vis-a-vis world
• India was 126 th in terms of per capita income in the world, at
exchange rate, $1861 among 164 countries .
In terms of purchasing power parity (PPP), its rank being 106th, the
country's per capita income $ 7170 in 2017
• USA - $59500 -13th
• Qatar- $124930-ist
• Macao- $114430-2nd
• Luxemburg no 3 with over $109190
 India’s Growth Story
• India was a “mixed economy” with large private sector, so essentially
capitalist market economy
• India broke from “Hindu” rate of 3 per cent in the 1980s, to annual rates
of 5-6 per cent, until recently average growth rate was 8-9 per cent
• Move has been mainly from agriculture to services in share of output,
with no substantial increase in manufacturing, and the structure of
employment has not changed much. Share of the primary sector in GDP
fell from 60 per cent to 17 per cent in four decades, but share in
employment still more than 50 per cent.
Evolution of Indian Economy 1950-80
• State control of “commanding heights” of the economy.
• Import substitution industrialization approach.
• Inward looking policies
 Imperative for reforms(1991)
• Slowing economic growth.
• Policies enacted by competitor nations (i.e. China).
• Desire to bolster manufacturing sectors as primary response to
persistent trade deficit and looming “demographic dividend.”
 1990-2000s
• Greater embrace of economic and trade liberalization.
• Economy grew 40% faster per year next two decades
Understanding India’s economic success

 Remarkable --every government has reformed (slowly)

since 1991( Congress, NDA, UPA1, UPA2, NDA)
 Even slow reforms add up
 65 countries have done the same reforms – why did India
become the second fastest in the world?
 Unappreciated fact – rule of law
 Key reforms undertaken
• Opened economy to trade and investment
• Dismantled controls
• Lowered tariffs
• Dropped tax rates
• Break public sector monopolies
 Population growth is slowing
(%)
2.5 2.2
2.1
2.0 1.8
1.5
1.5
1.0
1.0

0.5

0
1901-1950 1951-1980 1981-1990 1991-2000 2001-2010

Sources: 1900-1990: Angus Maddison (1995), Monitoring the World Economy, 1990-2000:Census of India (2001)
mixed blessing of Demographic dividend
• Higher proportion of young in the population
• India has added 20 million youth to its workforce during 2000-15
• 80 million young from work force dropped in China in the same period
• India’s tertiary enrolment ration is 27% as compared to 43% of China
• In 2016 China had 4.7 million STEM as compared to 2.6 million of India
• The unprecedented demographic changes underway are likely to contribute
to a substantially increased labor force. However, it will benefit the country
only if the population is healthy and educated
 Literacy is rising
(%)
100
80
80
65
60 52

40
17
20

0
1950 1990 2000 2011 )

Source: Census of India (2011)

 When middle class is 50% then the politics also change

(m) 22% 32%

8%
400
400
300

200 220

100
65
0
1980 2000 2015

Source: The Consuming Class, National Council of Applied Economic Research,

 Poverty is declining
(%)
50 1% of the people have
46 been crossing poverty
40
line each year for 25
30 years
26 Equals ~ 200m
20
16
10

0
1980 2000 2015
Drivers of growth
India East and S.E. Asia
• Domestic • Exports
• Services • Manufacturing
• Consumption • Investment
• trade
 Implications of India model
‘Domestically led’ means:
• Insulation from global downturns
• Less volatility
• We came out of the global crisis
faster
 Implication of India model

‘Services led’ raises

uncomfortable questions:
■ Have we skipped the industrial
revolution?
■ How do we take people from farms to
cities?
■ Will MAKE IN INDIA be our tipping
point?
Rise of globally competitive Indian companies
 India’s competitiveness
• India has jumped 16 places in the World Economic Forum’s Global
Competitiveness Report 2015-16 - a result of the positive way in
which the current government is viewed by investors.

• The rankings show India ranked 55 out of 140 countries - an

improvement over last year’s 71 out of 144

• In Ease of doing Business India is 100, china is 78

 India’s Companies in the World
• only 8 Indian Companies in top 100 top world companies

• 40 Chinese companies in top 100 top world companies

INDIA AND CHINA GROWTH
• India’s success is market-led whereas China’s is state induced

• But Chinese Pvt sector has shown great strides as compared to India
India and china: level of debt

• 12% bad loans in Indian banks (v~20% in China)

• 80% credit goes to private sector (v~10% in China)
 Public space is a problem

We have
• Dynamic democracy with
honest elections
• Free, lively media and press
But we also have
Poor governance!
 Governance Failures

 1 out of 4 school teachers absent in

government schools
 2 out of 5 doctors absent in primary health
centers
 Water Scarcity
 Land titles
 Misallocation
• Welfare spending in India suffers from misallocation
• The districts with the most poor are the ones that suffer
from the greatest shortfall in social programs. The districts
accounting for the poorest 40% receive 29% of the total funding.
Current Problems
• About 40% of the corporate debt finance are under stress
• Agriculture loan waiver schemes
• Centre is consolidating and States are profligating
• distribution of income
• Delivery of Health and Education services
Fiscal democracy?
• Political Democracy but Fiscal Democracy?
• India has 7 taxpayers for every 100 voters
Divergence within india
 Big Time Spatial dispersion in income is still rising in India in
the last decade (2004-14) unlike the rest of the world and
even China. That is, despite more porous borders within
India than between countries internationally, the forces of
“convergence” have been elusive.
Indians on the Move

• New estimates based on railway passenger traffic data reveal

annual work-related migration of about 9 million people, almost
double what the 2011 Census suggests.
Growth, but our institutions are under strain

• Bureaucracy
• Judiciary
• Police
• What about Defense services?
Recent Reforms during NDA
• Transparency in Auctioning public Assets
• Bankruptcy and Insolvency code
• JAM Architecture to improve delivery of Government services
• GST
• Demonetization
 Demonetization
• Short term cost
• Cost to Informal sector
• Estimation of cost is difficult
• Cash Shortage
 Indian economy today?
• Headline Inflation- 4 to 6% but rising again
• Core Inflation is also under control
• But crude prices are rising
• Monsoon Normal
• Growth has slowed down but Green shoots seen
• Sharp decline in credit growth to industry
• Twin Balance Sheet Problem
• Exports not Picking up
 Some persistent challenges?
• Fiscal consolidation is under strain
• FISCAL DEFICIT 3.5% of GDP
• REVENUE DEFICIT is 2.6@ OF GDP
• Public Investment has declined
 Where are we going?

• BEST case post recovery is 7.5 % – 8.5 % GDP growth

• Democracy will not permit more than 8% despite Modi
• 1.4% population growth
• Demographic dividend – growth will go on but India may not catch up with
China
• WILL INDIA BECOME AN ECONOMIC
SUPERPOWER ?
• As a countermove, Initiative like ACT EAST as
compared to China BELT and Road backed by
US$269 BILLION
• DOES IT MATTER &
• WHAT MIGHT PREVENT IT?
• Whether ELIMINATION OF POVERTY AND
BECOMING RICH ARE MORE IMPORTANT
CHALLENGE THAN BECOMING SUPER
POWER?
What could stop the show?
- Infrastructure Deficit
-Fiscal Deficit
- Governance Deficit

None of these stopped the show in the past 25 years

 INDIA IS A POULATION SUPER POWER
• BY 2050 INDIA WILL BE MOST POULOUS COUNTRY
• If India grew at 5% rates it would be the poorest of the BRIC and G6
countries in 2050, but equivalent to a low-end high income country like
Spain today
• If India grows at historical growth rates (6.5%) for the next 50 years,
India would have in 2050 a GDP Per capita of of US $ 4564 (constant
1995 US$) equivalent to a lower-middle-income country like Brazil today.
• If India reverts to the “Hindu growth rate” (3.5%), its 2050 GDP p.c. will
be US$ 1723, equivalent to Iran today.
 RISK TO GROWTH
• But economic growth can slow down as well as speed up. Countries can
catch up, but also be left behind.
• Argentina:
 1889 GDP pc = 91% of US GDP pc
 1999 GDP pc = 33% of US GDP pc
• What are the factors which might slow down growth in India?
• Draught/monsoon failure/NPA/Fall in investment/
Why is China ahead of India?
• One answer is that India has paid inadequate attention to the lessons
of Asian economic development, which gives a crucial role to the
rapid expansion of human capability as a part of pursuing fast
economic growth.
• A critical part of that strategy has been the use of public revenue,
itself expanded by economic growth, to remove huge deficiencies in
social, educational and health services, and to meet the growing
demands of social and physical infrastructure, while making public
services more accountable and efficiently organized(Amartya Sen)
 Challenges

• JOBLOSS GROWTH
• COPING WITH URBANISATION CHAALENGES
• REGIONAL INEQUALITY
• GOVERNANCE ISSUE
• SECURITY CONCERN
• HEALTH THREAT
• WATER SCARCITY
• Formalization of economy
 Education System
 Is reasonably good for the top 20%
 But it is abysmal for the rest
 1 in 4 teachers is absent in government
primary schools
• Hence, 54% of children in urban India are
in private schools
Aspirational Vision for India’s Economy
• Increase average annual labor productivity growth rate to 6 percent.
• Grow real Indian per-capita GDP by 300% over coming decade,
pushing per-capita income to @$5,000.
• Become first-ranked developing country in World Bank’s Ease of
Doing Business Index.
• Run a balanced current account.
• Successfully leverage the demographic dividend
Global supply chain
• India’s share in global supply chain is low(2%) as compared to china
25%
• I phone components from 200 industrial supplier around the world
are assembled in a factory in shenzen
INDIAS JOURNEY
• India is certainly heading in the right direction, but into unchartered
territory. Its voyage will be one of the great voyages of the 21st
Century
The Wise Elephant