EVOLUTION OF THE INDIAN ECONOMY

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EVOLUTION OF THE INDIAN ECONOMY

Tata Services Limited Department of Economics
Statistics October 29, 2007
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GDP GROWTH IN INDIA
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GDP GROWTH DECLINING VOLATILITY
Coefficient of Variation Standard Deviation /
Average Growth Rate

• Does it mean steady demand growth?
• A steady build up in investor confidence?

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POVERTY LEVELS ARE DECLINING
End period measure

• At a growth rate of 4.5 it will take 16 years to
  double per capita income
• At 7 it will take 10 years to double per capita
  income
• The cake has to grow in order to bring down
  poverty levels
• Equity is embedded in growth

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INCOME INEQUALITY

• Need for inclusive growth
• Need for access to education
• Need for employment generation, entrepreneurship
  development, microfinance, etc.

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MACROECONOMIC FUNDAMENTALS A SNAPSHOP
of GDP
2005-06
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TREND GROWTH IN GDP

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TREND GROWTH IN GDP(CONCLD)

• Post-reforms GDP growth is higher than
  pre-reforms
• The growth process during the pre-reform period
  led to serious macro-economic imbalance.
• Huge Fiscal Deficit, growth propelled by large
  borrowings
• Huge interest rate burden
• Post-reforms the inflation rate has come down
• Post-reform GDP growth has become less volatile

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SECTORAL SHARE IN GDP
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SERVICE SECTOR GROWTH ()
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GDP GROWTH AND INVESTMENT

• Required Investment Rate GDP growth
  Incremental capital output ratio (ICOR)
• Required Foreign Capital Investment Rate
  Savings Rate

Current Investment Rate 33.8 Current Savings
Rate 32.4
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SAVINGS RATE
(as of GDP at current market prices)
According to Economic Survey 2006-07, the private
corporate sector has financed a large part of its
investment in the on-going capex cycle from
retained earnings or savings
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INVESTMENT RATE
(as of GDP at current market prices)
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MACRO TRENDS

• What is remarkable is that India has grown
  against all odds
• Asian financial crisis
• International sanctions
• Border conflict
• Major earthquakes
• One of the worst droughts in 4 decades
• Terrorist assaults

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INDIA VIS-À-VIS OTHER EMERGING ECONOMIES
Source IMF World Outlook, April 2007
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GROWTH IN KEY SECTORS

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INVESTMENT IN INFRASTRUCTURE

• Partial use of Foreign Exchange Reserves
  inherent problem?

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INDIAS EXTERNAL SECTOR
US Billion
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PROGRESSIVE DECLINE IN PEAK CUSTOMS DUTY IN INDIA
()
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GROWTH OF EXPORTS FROM INDIA

• Growth in exports in 2006-07
• Passenger Cars 13.4
• Two wheelers 20.6
• Three wheelers 87.2

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INDIAS KEY EXPORTS IMPORTS
Main Export Destinations US 14.94 China 6.56
UAE 9.51 UK 4.4 Main Import Sources US 6.6
Germany 6.7 China 9.1 Saudi Arabia 7
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COMPETITIVENESS, EXPORTS GROWTH RELATED ISSUES

• Indian export growth in post-reform period higher
  than pre-reform period

Source Veeramani, C (2007) Sources of Indias
Export Growth EPW June 23, 2007
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COMPETITIVENESS, EXPORTS GROWTH RELATED ISSUES

• Competitiveness played a critical role in
  post-reform period
• This was not spurred by undervalued currency, in
  fact REER went up between 2002 and 2005
• Intra industry trade has improved, linkage
  between intra industry trade, supply chain
  restructuring and FTA/RTA

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INDIAN ECONOMIC REFORMS PRODUVTIVITYA REVIEW

• Pre-reforms Era (Before 1992)
• Fragmented capacities based on licensing
• Input constraint, especially imported inputs
• Excess man-power in firms
• Over capitalization due to tax incentives e.g.
  Investment Allowance
• Restricted competition
• Adverse impact on productivity

• Post-reforms Era (After 1992)
• Market driven economies of scale
• Imported input constraints removed
• Restructured firms, supply chain rationalization
• Investment Allowance has been largely abolished
• Relatively higher competition (domestic/global)
• Productivity growth is key to survival

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POST-REFORM TOTAL FACTOR PRODUCTIVITY(TFP) GROWTH

• Lower tariff barriers have led to higher firm
  level efficiency and TFP growth
• A decrease in the tariff by 10 leads to a 0.5
  increase in TFP (Trade Liberalisation and Firm
  Productivity The Case of India Petia Topalova,
  IMF Working Paper, February 2004)

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POST-REFORM TOTAL FACTOR PRODUCTIVITY(TFP) GROWTH
Source Reforms and Productivity Trends in Indian
Manufacturing Sector, DES Tata
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RISK FACTORS

• Domestic
• Oil commodities price increase
• Interest rate increase
• Appreciating Rupee
• US Economy
• Sub Prime crisis leading to a general crisis in
  the financial sector
• Decline in consumption demand
• Non-tariff barriers Developed Economies
• Competition from China

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UNFINISHED AGENDA

• Infrastructure Development/ New Investment
• Poverty Reduction, Primary Education, Health
• Agricultural Reform
• VAT implementation and improvement in tax GDP
  ratio
• Managing fiscal deficit at the Centre and the
  States
• Labour Reform soft-landing approach

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• INDO CHILE TRADE

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TRADE - CHILE

• Main Exports Copper, fresh fruit cellulose,
  paper printing
• Major markets US, Japan, China, Netherlands
  South Korea
• Main Imports intermediate goods, capital goods
  consumer goods
• Major markets US, Argentina, Brazil, China
  Peru

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INDO CHILE TRADE 2006-07

• Indias exports to Chile USA grew by 146.63 to
  375.24 mn and accounted for 0.3 of total Indian
  exports
• Exports to Latin America account for 3.38of
  Indias total exports and grew by 42.81 to
  4.3bn
• Imports from Chile grew by 341.63 to 1.9 bn
  accounting for 1.01 of Indias total imports
• Imports from Latin America grew by 127.64 to
  6.1bn accounting for 3.18 of India's total
  imports

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GROWTH IN INDIAN IT SECTOR DOMESTIC EXPORTS

• Total revenue expected to exceed 47.8bn in
  2006-07 nearly 10 fold increase over 1997-98.
  The sector contributes an estimated 5.4 to GDP
  from 1.2 in 1997-98.
• Direct employment in the sector is estimated to
  be above 1.6mn from 284,000 in 1999-00 (indirect
  induced employment opportunities is estimated
  at above 3 mn

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DOMESTIC IT SECTOR

• Service software exports are the key drivers of
  the Indian IT sector. Exports account for approx.
  66 and the domestic market accounts for approx
  33 of the total sector
• Domestic industry valued at estimated 15.9bn in
  2006-07 (21 growth y-o-y on the back of 29
  growth in 2005-06)
• The domestic market was largely dominated by the
  hardware segment. However in 2005-06 for the
  first time the software and services spending
  being higher than that of the hardware segment
• Manufacturing, telecom and the Government are the
  key vertical markets driving domestic IT
  spending growth
• MNCs had a large presence in this segment but now
  Indian companies are also expanding their presence

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SOFTWARE SERVICES EXPORT GROWTH IN INDIA
Software services exports have grown at a CAGR of
34.3 between 2002-03 to 2006-07
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ADVANTAGE INDIA

• Large talent pool
• Favourable demographic profile with more than
  half the population less than 25 years,
  imparting of relevant training
• Cost advantage
• on average 25-50 over the original cost base
• Emphasis on Quality Information Security
• Currently India-based centres (both Indian firms
  as well as MNC-owned captives) have the largest
  number of quality certifications by any single
  country
• Fast growth in vital Business infrastructure
• Swift development of telecommunication sector
  into a competitive environment from public sector
  monopoly helped the IT-BPO sector to deliver
  better and competitive services
• Conducive Business Policy Regulatory
  Environment
• Minimalist regulations along with fiscal and
  procedural incentives given at both State and
  Centre level.

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OFFSHORING RANKING
Source A.T. Kearney, 2005
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