CHALLENGES TO

INDIAN GROWTH
1
1. Managing the Growth Inflation
Dynamics

In India, however, inflation has not come down in

line with deceleration.
Many explanations:
Supply bottlenecks
Structural imbalances
Rise in wage rates
Higher Fiscal Deficit
Depreciation of exchange rate
2
2. Mitigating the Vulnerability of the External Sector
Three concerns about CAD
(a) the Quantum of CAD
(b) the Quality of CAD
(c) the Financing of CAD
 Regarding the first, the sustainable CAD India is 2.5
pc. Of GDP
Above that, risky
 Regarding the quality of CAD
(i) Oil and gold imports are inelastic to income
changes
(ii) On non-oil imports, domestic supplies are still
unable to complete with imports
(iii) Supply constraints and subdued external demand
are impeding exports 3
 Regarding the Financing of CAD
We have been able to finance it because of a
combination of “push” and “pull” factors.
On the push side is the amount of liquidity in the
global system consequent upon extra ordinary
monetary stimulus provided by advanced economy
central banks.
On the pull side are the measures taken by us to
attract FDI.
- expanding limits of FDI
- easing restrictions on external commercial
borrowings by companies.
In trying to finance such a large CAD, we are
exposing to the risk of sudden stop and exits of 4
capital flows.
3. Managing the Political Economy of
Fiscal Consolidation
• In 2011/12, the combined fiscal deficit of both
central and state governments was 8.1 percent of
GDP.
• There has been some action

5
4. The Manufacturing Challenges
• The traditional economic growth recipe relies
heavily upon industrial sector expansion
• Industrial growth can lift a large proportion of a
country’s population out of poverty
• Industry brings in capital and encourages
infrastructural development
• Yet India is lacking in industrial growth
• Why is India’s manufacturing sector performing
poorly?
• Historical legacy
• Colonial India 6
 • Post independent India:
Impressed by Soviet Model
Import substitution
Hosility to FDI
License Permit Raj
1991 crisis and Reforms
Ind. Polity Returns
Trade Reforms
FDI Reforms
Financial Sector Reforms
Services led growth: The acceleration in GDP growth from 4 to 8 per
cent was to a large extent attributable to the growth of the service
sector
GDP Growth by Broad Sectoral Groups (Percentages)
Sectors 1980-90 1990-200
Agriculture 3.1 3.0
7
Industry 6.9 6.4
Services 7.0 8.0
Sectoral Composition of GDP (percentage)

Sector 1950s 1960s 1970s 1980s 1990s 2000- 2001- 2002-

01 02 03

Agricul-
ture 56.1 47.8 42.8 36.4 29.1 23.8 23.9 22.1

Industry 11.7 15.1 16.9 19.5 21.5 22.0 21.5 21.8

Services 32.6 37.3 40.3 44.0 49.0 54.1 54.6 56.1

8
9
Source: CMIE Industry Analysis (compiled by Exim Bank of India
10
Note:*Forecast
Growth of Industries
Annual Growth rates of India’s industrial production in major
sectors (%)

Period Mining & Quarrying Mfg Elements Overall

1990-91 4.5 9.0 7.8 8.2

1995-96 7.4 13.6 8.1 12.4
2000-01 2.8 5.3 4.0 5.0
2004-05 4.8 9.0 6.4 8.4
2010-11 5.23 8.95 5.55 8.23
2011-12 -1.97 3.00 8.16 2.89
11
 Table: Overall Growth Performance of the IT-BPM Sector
Growth rate
Value (US $ billion) (percent)

2007- 2008- 2009- 2010- 2011- 2012- 2013- 2011- 2012- 2013-
Year 08 09 10 11 12 13E 14P 12 13E 14P

Total IT- 106- 13-

BPM 52.1 59.9 64 76.3 87.7 95.2 111 15 8.4 15
12-
Exports 40.4 47.1 49.7 59 68.8 75.8 84-87 16.5 10.2 14
13-
Domestic 11.7 12.8 14.3 17.3 19 19.3 22-24 9.7 1.9 15

Source: NASSCOM
Note: Data excludes hardware, E: Estimates; P: Projections 12
 WHOSE ECONOMIC STRUCTURE DOES INDIA MOST
CLOSELY RESEMBLE?

(Percentage of GDP)
China India USA

Agriculture 11.90% 19.90% 0.90%

Industry 48.10% 19.30% 20.40%

Services 40.00% 60.70% 78.60%

13
• India’s greatest obstacle to growth is thus its poor
industrial sector.
• We believe that India’s service sector growth can not
substitute for industrial growth.
• India’s large and quickly growing population needs
abundant industrial jobs to raise living standards.

14
 The Narendra Modi led administration has, however, spurred
industrial output, which jumped to a 19 month high in May 2014.
Factory activity as per the HSBC Manufacturing purchasing
managers’ index, is at its highest level since Feb. 2013.
This upturn is coming at a time when China is grappling with
shortages of labour and rising wages.
But will this manufacturing growth sustain?
• The biggest bottleneck for India’s manufacturing sector has
been infrastructure – its quality and the cost. Our roads, railways
are in pathetic condition.
• Today, processing and getting approval for the government is as
complicated as in 1991.
• The application of rules such as GAAR, or general anti-avoidance
rules that limit tax avoidance, and the lack of transparency around
them, creates suspicion about long term investment.
• We are 134th rank in the ease of doing business
• Introduction of GST (Goods and Service Tax) will facilitative 15
manufacturing
• Labour laws need to be simplified
• India has to identify the right industry and the cluster
approach it needs to adopt.
• Look at Bangladesh in the garment sectors. They are double
our size and second only to China.
• We face a challenge with issues such as land acquisition,
labour laws.
Look at mobile phones: We have 900 million subscribers, but
we do not make any components here.
Even for local brands, everything is imported. In certain
areas, we have missed the boat.

16
5. “Make in India” campaign
Narendra Modi launched his ambitious project to make India a
manufacturing hub.
This has attracted many industry leaders, who have started
looking at ways to do their bit for the same.
The NASSCOM Engineering summit held in Pune (October).
Its theme in “Engineered for India”
“We believe that we should not only consider
manufacturing in India, but also designing of products
here”
According to him, India’s strength lies in frugal engineering,
supported by the scale and volume and masses it can offer
“To make designing and engineering in India a reality, we
have to work at the attitude of our talent force, … The
government can also aid in the creation of local test centres
for prototypes and promotion of technology
entrepreneurship”. 17
 What are the challenges?
(i) Fuel crisis: Fuel crisis is worsening and no short term
solution in right. In 2008, power plants had coal
stocks of 10 days on average at the beginning of each
month. By 2014, the average has come down to six
days.
According to guidelines of the Central Electricity
Board (the Power Minister’s technical wing), thermal
power plants have to maintain coal stocks for 15 to
30 days. The agency’s data published on coal supplies
for September 10 showed that only 12 of 100 plants
had stocks for 15 days and 64 plants that make up
more than 40 percent of the country’s installed
capacity had stocks for a week or less. Since most of
coal is carried on railway wagons even the slightest
delay in coal supplies can shut down these plants and
impact industrial output. 18
The irony is that India is sitting on an estimated 301
billion tonnes of local reserves.
What are the challenges?
This is enough for another 200 years. Yet the country
has been struggling to increase coal supplies to meet
the growing requirements of its power and other
industries.
(Supreme Court has cancelled all allocations since
1993, it would affect only 40 million tonnes of the 587
million tonnes that was produced last year in the
country. This is because only 40 of the 216 coal mines
allocated to private players are actually being mined.
The rest still waiting the environment clearance)
The biggest problem is that Coal India, the public
sector monopoly that produces 80 percent of the coal
in country, has been unable to boost production
dramatically to meet rising demand. 19
Its annual production has inched up from 431.26
million tonnes in 2009/10 to an estimated 462.46
million tonnes in 2013/14. This has forced power
countries to look for alternatives. Some brought coal
mines abroad, while others relied on gas supply from
Krishna Godavari Basin.
 After Modi’s becoming P.M.
 Appointed Mr. Goyal as minister for Coal and Power
 Set the goal of increasing coal production to 1 billion
tonnes a year by 2019.
 To achieve this target, coal production will have to
grow by more than 18 percent annually.
 This pace has not been achieved in the last decade
 India also missed its target to ramp up coal output to
680 million tonnes by the end of the 11th year plan
(2007-12) 20
 When Goyal took charge of the Power Ministry, he
pushed for higher generation, and that added to the fuel
supply problem. In the first three months of the new
govt, coal based Ely remain rose 21 percent . But the
coal supply has gone up only by 5 to 6 percent.
(b) Technical and vocational training: If China is a global
manufacturing giant, this has to do with the ability of
policy makers in Beijing to build a foundation of
Technical and Vocational Education and Training (TVET)
over many years.
The 1996 Vocational Education Law of China spells out
the roles and responsibilities of stakeholders: Central
Ministry of Education, Human Resource and Social
Security. The law has provision for integrating
education and training with the industrial process.
If we are serious about “Make in India”, we need to
have such a law that encourages greater industry 21
participation.
 Half of all children completing nine years of
compulsory schooling in China enter vocational
schools at the senior secondary level.
In India, the compatible share at the senior
secondary level is 3 percent.
China encourages vocational education through
stipends
China’s TVET system also ensured regular training of
teachers. The practical training equips them with
knowledge of evolving industry needs.
“Make in India” is a powerful mantra. But it will remain
a whim if the ground work is left for another day”
22
6. “Swachh Bharat”
On Oct. 2, 2014, “Swachh Bharat”
Broom and Sweeping: across the country.
Do you know that India leads the would in open defecation (OD)
with about 600 million people defecating in the open everyday.
This is 60 percent of the OD in the world. (although Indians are
only 17 percent of World’s population).
This also means that close to 300 million Indian women and
young girls sit out in the open, often in heat, cold and rain, and
under constant threat of being watched, molested and raped.
OD causes undernutrition on account of poor absorption, it
damages immune systems, and generally impairing mental
development – reducing future earnings and human capital. 23
India has one third of world’s stunted children. A half to two
thirds of stuntings results from OD.
Central government programmes - the Central Rural
Sanitation Programme (1986-99), Total Sanitation Campaign
1999-2012 (TSC), Nirmal Bharat Abhiyan 2012-22 (NBA) have
failed.
Share of Rural Households with toilets increased for 21
percent to 31 percent between 2001 and 2011. At this rate, it
will take 70 years before India becomes OD free.
 The situation indicates basic design weakness in the
approach--------------- individual financial subsidies to build
toilets have failed.
Yet, governments have successfully increased the subsidy:
For individual household toilets for Rs.10000 to Rs.15000 24
For a school, for Rs.35000 to Rs.54000
for anaganwadi for Rs.8000 to Rs.20000
for community sanitary complex, for Rs.200000 to Rs.600000.
 Corruption is a close friend
The Rural Development Ministry reported that in 2011 the
government built toilets for 68 percent oftotal households.
But Census 2011 showed but 60 million toilets reported as
constructed were not found on the ground in 2011.

 Bureaucrats and Govt. perhaps believe that villagers do not

build and use toilets because they are too poor.
But Census 2011 shows that a higher proportion of
households own TVs than toilets. Many more have mobiles.
Poverty is not the issue.
25
7. Huge inequity in the way the wealth and
accompanying opportunities are distributed
across various communities.
India achieved a status of trillion dollar economy, but there is a
huge inequality in the way the wealth and accumulating
opportunities are distributed across various communities.
 Some sections like the Dalits, Muslims and women, and
people with disability continue to be largely excluded from
the growth story despite innumerable schemes and special
efforts of greater inclusion.
 Women, who constitute roughly half the population, have
very low work participation rate.
Their share in the work force, far from improving, has slipped
26
steadily.
According to NSSO data, female labour force participation
(FLEP) was above 40 percent in the mid 1990s.
Fell to 29.4 percent in 2004-05
23.3 per cent in 20009-10
22.5 percent in 2011-12
According to ILO, India’s FLEP was ranked 11th from bottom
among 131 countries.
Skewed land ownership also keeps women economically
disempowered.
Women constitute barely 11 percent of landholders though
they are nearly a third of farm labour – about 72 percent of
employed women are in the farm sector (FAO)
27
 Among disadvantaged communities such as Dalits, Tribals,
and Muslims, Women are the worst off.
A UNECEF – sponsored South Asia Regional Study “All
children in school by 2015”, revealed how Muslim children,
Scheduled Castes (SCs) and Scheduled Tribes (ST) face a
higher degree of non-participation in schooling than the
national average.
Compared to the national average rate of exclusion of 3.6
percent, average rate of exclusion for primary school age
SC children is 5.6 percent and for STs, 5.3 percent (UNECEF
Report), i.e. SC girls had the highest rates of exclusion at
6.1 percent.
The pattern is similar for lower-secondary school age
children, but the group with the highest rate of exclusion in
this are ST girls, 11.4 percent. 28
 A report on “Intergenerational and Regional Differentials in
Higher Education” pointed out that tribals and Dalits fared
the worst with 1.8 per cent with any higher education.
Muslims are almost as badly off, with 2.1 percent having
access.
Similarly, just 2 percent of rural population is educated
beyond higher secondary, compared to 12 percent of urban
population. Just 3 percent women got a college education
compared to 6 percent of men.
 The Indian Human Development Survey showed that
incidence of poverty was highest among STs (49.6 percent),
followed by SCs (32.3 percent), and then Muslims (30.6
percent).
 Along with all these is the exclusion and alienation of
persons with disability, who in the last census constituted
29
2.2 percent of the population on 26.8 million.
 As per the data of the Ministry of Social Justice only 38 percent of
those identified as disabled in census 2011 have been issued
certificates, the basic document needed to access everything – from
education to health care to job reservation and welfare schemes.
 It is no wonder then that it is estimated that only 1 percent of the
disabled have succeeded in getting employment in the mainstream job
market.
 In the face of widespread inequity and other areas where the state has
failed to deliver, the Right to Information Act was meant to empower
the common man in holding the government accountable.
 While it has proved to be effective in thousands of cases, the sheer
volume of applications filed, estimated to be 40 lakh a year (a mere 0.2
percent of 1.2 billion population), coupled with backlog of cases is
weighing the system down.
 While a plethara of schemes ostensibly aimed at promoting inclusion
and empowerment exist, it remains to be seen whether these
30
measures can arrest India’s increasing inequality.
8. Recent action of Judiciary may result in
appropriate reaction from the executive
branch

The recent judgement of the Supreme Court declaring the

allocation of all local blocks by the Govt. from 1993 as illegal
raises four issues:
(1) The nature of relations between the judiciary and the
executive and the legislative arms of the Govt. and its
implications for the economy.
(2) Violations (if any) in the past in the allocation of other
minerals by the central and state governments.
(3) Method of allocation of natural resources in the future.
(4) Pricing of natural resources in the future. 31
 As far as the first is concerned, we see that it may force the
government to either (a) address the underlying deficiencies
in the process of allocation and exploitation of natural
resources or (b) challenging the Supreme Court’s decisions.
 In either case, we see adverse implications for parts of Indian
economy. I think the most prudent course for the govt. would
be to fix the procedural gaps quickly.
 As far as the second: very little implications for oil and gas
blocks State government award mineral concessions for
minerals other than hydrocarbons. It is hard to say whether
the allocation of mineral ores by state govts followed
prescribed process or not.
 As far on the third: Allocation process for all natural resources
may have to move to transparent auctions. 32
As far on the fourth:

• We expect a combination of (1) one time payments (2)

royalties on revenues and (3) sharing of profits to
replace the current royalty system.

• Telecom companies pay one time spectrum payments

and recurring license fees while energy companies pay
royalty on revenues and a share of profit (petroleum
for NELP blocks)
33
9. DIVERGENCE AMONGST STATES

• India’s development strategy from

1950 s has lead to divergences in
investment and growth across states.
• Fast growing peninsular states vs. sluggish hinterlands

• Can the inland states catch up with

the growth of the peninsular states? 34
What can lagging states do?

• The lagging states need to follow a more traditional

pattern of growth: labour-intensive manufacturing

• Easier to employ the masses

• Easier to export manufactured goods

• What has prevented India from doing such a thing in the

first place? Harmful regulation is the primary culprit

35
REGULATIONS AND LABOUR LAWS

• While India has made reforms in the early 90s, it still

suffers from draconian restrictions

• High level of tariffs compared to China

• Restrictive Labour Laws

• A firm cannot fire workers if it has more than 100

employees

• This yields numerous small firms in Industries where

36
economies of scale would be helpful
INDIA’S PATHWAY TO GROWTH
• Dual-track growth: industrial growth in the inland states
alongside continued service-sector expansion
• Pruning regulations and labour laws relating to manufacturing
• Allow people to be fired
• Encouraged industrial firms to achieve economies of scale
• Gradually wean India off of import substituting policies to
force domestic industry to become competitive in the
international market place
• Investing in education, especially in primary and secondary
education for the general public
• Investing in public infrastructure
• Focus on aiding industry 37
 EDUCATIONAL ATTAINMENT
Highest level attained
Average
Country Year
No Below Post years of
schooling middle Middle Secondary secondary school
1960 72.2 16.2 11.1 0.4 0.0 1.7
India 1980 55.0 10.0 23.9 8.6 2.6 2.9
2000 40.7 9.9 27.1 16.8 3.6 4.5
1960
China 1980 34.0 19.5 35.6 10.2 0.6 4.8
2000 18.0 66.1 12.1 6.4 0.9 4.4
1960 36.9 12.7 47.6 2.3 0.4 4.3
Thailand 1980 14.4 66.1 12.1 6.4 0.9 4.4
2000 12.6 34.5 37.9 8.1 7.0 6.5
1960 49.7 25.0 20.5 3.6 1.1 2.9
Malaysia 1980 26.8 22.2 41.0 8.8 1.1 5.1
2000 16.2 16.4 48.7 15.8 2.9 6.8
1960 68.0 16.8 14.5 0.8 0.0 1.6
Indonesia 1980 31.9 33.0 29.3 5.7 0.1 3.7
2000 32.1 18.2 36.7 12.4 0.5 5.0
38
Source: Bosworth, Colin & Virmani, Sources of Growth in the Indian Economy, Brookings
Institute, 2006
DIG SMARTLY FOR HIGHER GROWTH
India has the fifth longest reserves of iron ore in the world (28.5
billion tonnes)
The fourth largest reserves of coal (248 billion tonnes) the
second largest reserves of manganese are (160 billion tonnes)
Prime Minister, Narendra Modi’s agenda of “Make India” thus
requires a vibrant mining industry that provides jobs and
livelihood to million and uses the basic feedstock source to
support the manufacturing industry.
Here are a few ways:
First, there needs to be greater focus on exploration and
development of our natural resources.
Second, sustained global exploration, coupled with advanced in
exploration technology has considerably increased known 39
mineral resources world wide.
40