India After 20 Years

Draft January, 2007 INDIAs GROWTH PAST AND forthcoming by Shankar Acharya* * Honorary Professor and Member Board of G oernors, Indian Council for research on International stintingal Relations (ICRIER) Paper for presentation at the Eighth Annual Global victimisation Conference of the Global Development Network, January 14-16, Beijing. 0 Indias harvest-festival Past and Future By Shankar Acharya1 This penning is divided into five sections. Section I briefly reviews Indias emersion deed since 1950 and prognosticates a few salient features and turning points.Section II discusses nigh of the major(ip) drivers of Indias current fruit momentum (which has aver senesced 8 portionage in the finish 3 geezerhood) and give rised widespread expectations (at least, in India) that 8 per centum plus harvest-feast has be advance the sensitive norm for the Indian thriftiness. Section III points to slightly of the risks and vulnerabilities that could stall the current dynamism if restorative bodily function is not taken. Section IV appraises the countrys average term exploitation cycloramas. The final section assesses somewhat implications of Indias devise for the military personnel deliverance. I Review of Growth Performance, (1950-2006) bow 1 summarizes Indias proceeds bear since the warmness of the twentieth carbon. For the first thirty days, frugal step-up averaged a modest 3. 6 portion, with per capita branch of a meager 1. 4 portion per stratum. Those were the heydays of state- guide, import-substituting industrialization, especially afterwards the 1957 verbotenside vary crisis and the heavy industrialization bias of the Second Five Year Plan (1956-61). While the outline achieved some success in raising the level of imaging mobilisation and investment in the economy, it turned out to be tremendously extravagantly-priced in impairment of sparing efficiency.The inefficiencies stemmed not beneficial from the toleration o f a statist, inward1 The author is Member, Board of G e verywherenors and Honorary Professor at Indian Council for Research on International sparing Relations (ICRIER). He was header Economic Adviser to Government of India (1993-2000). This paper draws liberally on his new paper, Indias Growth Past Performance and Future Prospects, presented at the large(p) of Japan Club Macro parsimoniousness Conference on India and china travel, celestial latitude 6-7, 2006, Tokyo. 1 ooking policy stance (at a time when world change over was expanding quickly) but also from the extremely detailed, dysfunctional and corruption-breeding controls that were imposed on industry and trade ( charm, for example, the classic study by Bhagwati and Desai (1970)). turn off 1 Growth of gross domestic product and Major Sectors (% per year) Year 1951/521980/81 (1) 1981/821990/91 (2) 1992/931996/97 (3) 1997/982001/02 (4) 2002/032005/06 (5) 1992/932005/06 (6) 1981/822005/06 (7) Agriculture and eitherie d Industry 2. 5 3. 5 4. 7 2. 0 1. 9 3. 0 3. 0 5. 3 7. 1 7. 6 4. 4 8. 0 6. 6 6. 5 Services 4. 5 6. 7 7. 6 8. 2 8. 9 . 2 7. 4 gross domestic product 3. 6 5. 6 6. 7 5. 5 7. 0 6. 4 5. 9 gross domestic product per capita 1. 4 3. 4 4. 6 3. 6 5. 3 4. 4 3. 8 root CSO . Note Industry overwhelms Construction. At the same time, one should not immerse that the GDP growing rate of 3. 6 per centum was quatern generation greater than the 0. 9 per centum step-up estimated for the introductory half century of British colonial rule ( evade 2). Moreover the harvesting was reasonably sustained, with no extended closures of p arntage. Nor were on that point inflationary bouts of the kind which racked m whatever countries in Latin America. However, step-up was furthermost below potential and untold less than he 7-8 per centum rates being achieved in some countries of East Asia and Latin America. Worst of all, the proportion of the Indian normalwealth below a (minimalist) di punctuat e line actually increased from 45 to 51 per centum ( tabularize 3). plank 2 Economic Growth Pre -independence (% per year) Year 1900-46 1900-29 1930-46 GDP 0. 9 0. 9 0. 8 Population 0. 8 0. 5 1. 3 Per Capita GDP 0. 1 0. 4 -0. 5 tooth root Sivasubramonian (2000) 2 Table 3 office of People Below Poverty Line, 1951-52 to 1999-00 Official Estimates Year countryfied urban All India 1951-52 47. 4 35. 5 45. 3 1977-78 3. 1 45. 2 51. 3 1983 45. 7 40. 8 44. 5 1993-94 37. 3 32. 4 36. 0 1999-2000 26. 8 24. 1 26. 1 Source Planning Commission, Government of India G rowth quicken substantively in the 1980s to 5. 6 percent, entailing a much than multiply of per capita egression to 3. 4 percent a year. This acceleration was due to a number of factors, including the early efforts at industrial and trade liberalization and assess straighten out dur ing the 1980s, a step- up in semi universal investment, better uncouth performance and an increasingly expansionist ( or so profligate ) fisc al policy.Fiscal controls weakened and shortfalls attach and spilled over to the outside sphere of influence, requiring growing recourse to outside(a) borrowing on commercial terms. Against a background of a low export/GDP ratio, rebellion trade and current account deficits and a deteriorating remote debt profile, the 1990 disconnection War and consequent oil price spike tipped Indias balance of givements into crisis in 1990/91. Although the policy reforms of the 1980s were modest in coincidence to those undertaken in the ensuing decade, their productiveness bang for the buck seems to sire been towering (see Table 4) 2 .Perhaps this 2 Several different factor productivity studies support this conclusion, including Acharya-Ahluwalia Krishna-Patnaik (2003), Bosworth and Collins (2003) and Virmani (2004). 3 w as a subject of modest improvements in a juicyly kinky policy milieu yielding significant gains. Table 4 Growth of GDP, Total agentive role Input and Total Factor Productivity (% per year) 1950/511966/67 3. 8 GDP 1967/68 1981/82 1980/81 1990/91 3. 4 5. 3 1991/92 1999/2000 6. 5 Total Factor Input (TFI) 2. 4 2. 7 3. 3 3. 9 Total Factor Productivity (TFP) . 4 0. 7 2. 0 2. 6 Proportion of Growth Explained by TFP (%) 37. 6 20. 8 37. 7 39. 7 Source Acharya, Ahluwalia, Krishna and Patnaik (2003). Note For each sub- finis, GDP, TFI and TFP argon trend harvest-time rates. The new Congress authorities of June 1991, with Manmohan Singh as finance minister, undertook emergency measures to be cured _or_ healed external and domestic confidence in the economy and its management. 3 The rupee was de value, the fiscal deficit was cut and special balance of payments financing mobilized from the IMF and the realism Bank.Even much importantly, the disposal seized the opportunity offered by the crisis to launch an array of farseeing overdue and wide-ranging frugal reforms. They encompassed external sector liberalization, deregulation of industry, reform s of tax income and the pecuniary sector and a more commercial approach to the ordinary sector (see Table 5 for a summary of key reforms in 1991-93). 4 3 at that place has been a great deal write on Indias economic reforms and the consequent performance of the economy, including Acharya (2002a and 2004), Ahluwa lia (2002), Kelkar (2004), Kochhar et. l (2006), Panagariya ( 2004a and 2006) and Virmani (2004). at that place is a tendency to view the post-1991 economic performance as a single unified experience. I p diagnose the more nuanced and disaggregated view adumbrate here. 4 As I aim pointed out elsewhere (Acharya, 2006a), these reforms ar better characterized as moderate bang than gradualist (as by Ahluwalia, 2002). 4 Table 5 Main Economic Reforms of 1991-93 Fiscal Reduction of the fiscal deficit. innovation of reform of major tax reforms. External Sector Devaluation and transition to a food market-determined exchange Rate. Phased reduction of import licensing ( qua ntitative restrictions). Phased reduction of peak custom duties. Policies to advance direct and portfolio distant investment. Monitoring and controls over external borrowing, especially bunco term. Build-up of foreign exchange reserves. Amendment of FERA to reduce restrictions on starchys. Industry Virtual abolition of industrial licensing. Abolition of separate permission needed by MRTP ho substance abuses. disconnected reduction of industries reserved for the public sector. Freer access to foreign technology.Agriculture More moneymaking procurement prices for cereals. Reduction in protection to the manufacturing sector. Financial Sector Phasing in of Basle prudential norms. Reduction of reserve assumements for banks (CRR and SLR). Gradual freeing up of come to rates. Legislative em mightinessment of SEBI. Establishment of the National comport Exchange. Abolition of organization control over expectant issues. Public Sector Disinvestment programme be gun. great autonomy / accountability for public enterp elevators. 5The economy responded promptly and positively to these reforms. afterward virtual stagnation in 1991/92, GDP growth surged in the contiguous five historic period to clock a record 5-year average of 6. 7 percent. It is noteworthy that in this high growth Eighth Plan period all major sectors (agribusiness, industry, serve) grew noticeably faster than in the pre-crisis decade. The acceleration in the growth of agricultural value added is particularly careing in the lightly of oft-repeated criticism that the economic reforms of the early ni meshingies neglected the agricultural sector.The factors which exempt this remarkable and broad-based growth surge in the period 1992-97 appear to include Productivity gains resulting from the deregulation of trade, industry and finance, especially in the sectors of industry and some services The surge in export growth at round 20 percent per year (in dollar terms) f or three successive years beginning 1993-94, attributable to the substantial devaluation in real putive terms in the early ni winningsies and a freer policy regime for industry, foreign trade and paymentsThe investment peg of 1993-96 which exerted expansionary effects on two proviso and demand, especially in industry. The investment boom itself was probably driven by a combination of factors including the unleashing of animal spirits by economic reforms, the swift loosening of the foreign exchange bottleneck, confidence in broadly ordered administrational policy signals and easier availability of investible funds (both through borrowing and new equity issues)The partial success in fiscal consolidation, which kept a check on politics borrowings and facilitated expansion of aggregate savings and investments amelioration in the terms of trade for agriculture resulting from a combination of higher(prenominal) procurement prices for important crops and reduction in trade protectio n for manufactures handiness of capacity in key groundwork sectors, notably power A buoyant world economy which supported expansion of foreign trade and private outstanding inflows.The momentum of growth slowed noticeably in the ninth Plan period, 1997-2002, to an average of 5. 5 percent, compared to the 6. 7 percent achieved in the previous five years. Among the factors which contributed to this deceleration were the significant worsening of the fiscal deficits ( primary(prenominal)ly due to voluminous public pay increases followers the Fifth Pay Commission) and the associated decline in public savings, the slackening of economic reforms after 1995 as coalition governing body became the norm, a significant slowdown in 6 gricultural growth for a variety of reasons, a marked downswing in the industrial troll and an increasingly unsupportive international economic environment (including the Asian fiscal crisis of 1997-98, rising energy prices and the global recession of 2001). Indeed, Indias economic growth in 1997-2002 might have been even weaker but for the unexpected and some inexplicable strength of services sector growth, which clocked an average of 8. 2 percent, scorn industrial growth of only 4. 4 percent. The services sector accounted for al close to 70 percent of all growth in this period. Economic reforms picked up pace in 2000-04, fiscal deficits trended down after 2002 and the world economy rebounded sozzledly in 2002-06. These factors supported a broadbased upswing in Indian industrial output and investment from the second half of 2002. Growth of industrial valued added surged to 8 percent in 2002-06. With continued strong growth of services (at more or less 9 percent), GDP growth climbed to average 7 percent, condescension continued sluggishness of agriculture.In the three years, 2003-06 overall economic growth has averaged over 8 percent and the outlook for 2006/7 is equally bright. This latest economic surge has raised the interesting issue of whether Indias trend growth rate has accelerated to 8 percent (or higher) from its previous level of or so 6 percent. The ensuing sections of this paper explore this question. II. Main drivers of Recent Economic Growth What are some of the main ingredients of the new surge in economic growth? I would suggest the following seven major elements ) The momentum of a quarter of a century of strong economic growth 2) A much more open economy (to external trade and investment) 3) A growing snapper class fuelling domestic enjoyment 4) The demographic dividends of a young population 5 Acharya (2002a and 2003) tell this whimsical phenomenon and raised questions rough both the look of the data and the durability of such sharply divergent growth rates of industry and services. More recently, similar doubts have been expressed by Bosworth-Collins -Virmani (2006). 7 5) Strong companies in a modernized capital market 6) Some recent economic reforms. ) A supportive internationa l economic environment. Let me elaborate briefly on each of these factors. The Momentum of Growth The last thirty years experience suggests that very few developing countries have sustained decent per capita growth for two decades or more (Acharya, 2006b). Specifically, out of 117 developing countries with population over half a one thousand million, only 12 countries achieved per capita growth of more than 3 percent per year in 1980-2002, with at least 2 percent growth in each decade of the eighties and nineties. These twelve countries were mainland China (8. 2), Vietnam (4. 6), South Korea (6. 1), Chile (3. ), Mauritius (4. 4), Malaysia (3. 4), India (3. 6), Thailand (4. 6), Bhutan (4. 3), Sri Lanka (3. 1), Botswana (4. 7) and Indonesia (3. 5). (The number falls to 9 if we specify a minimum population of 3 million). Nine of these 12 countries are in Asia and, fortunately, they include the three most populous China, India and Indonesia. (See Table 6). If we take the climb 25 year s (1981-2006), Indias per capita growth has averaged 3. 8 percent or almost 4 percent per year. 8 Table 6 near Growth Performers of Recent Decades Average Annual Per Capita Growth (%) Country 1980-2002 mid-nineties 1980s Population in 2000 (Millions) 1. China . 2 8. 6 7. 7 1262 2. Vietnam 4. 6 5. 7 1. 9 78 3. South Korea 6. 1 5. 0 7. 4 47 4. Chile 3. 3 4. 3 2. 1 15 5. Mauritius 4. 4 4. 1 4. 9 1 6. Malaysia 3. 4 3. 7 3. 1 23 7. India 3. 6 3. 6 3. 6 1016 8. Thailand 4. 6 3. 4 6. 0 61 9. Bhutan 4. 3 3. 4 5. 4 1 10. Sri Lanka 3. 1 3. 1 3. 1 18 11. Botswana 4. 7 2. 7 7. 2 2 12. Indonesia 3. 5 2. 6 4. 4 206 Source flying field Bank (2005) Sustained improvements in standards of living of this order embody their own growthreinforcing elements. People come to guess more positively almost the future and base their savings, investment and performance decisions on an expectation of continued growth.Electorates in Indias democracy come to expect training and h nerve-aged government perfo rmance to higher standards, patronage disappointments. Companies think big when they invest. And so on. A More Open Economy The Indian economy in 2006 is far more open to external trade, investment and technology than it was fifteen years ago. 6 Table 7 presents some key comparative 6 The story of Indias external liberalization whitethorn be found in several places, including Acharya (2002b) and Panagariya ( 2004b). 9 indicators. Peak import duties on manufactures have come down from over 200% to 12. 5%, a remarkable reduction by any standards.The regime of tight, detailed and discretionary import controls has been almost completely dismantled. The exchange rate was devalued and made market-responsive (1991-3). The policies towards foreign portfolio and direct investment have been greatly liberalized. As a result, the ratio of traded goods to GDP has more than double from less than 15 percent to nearly 33 percent. Because of the sustained boom in software exports and worker remitta nces, the ratio of current receipts (goods exports plus gross invisibles) has more than tripled from 8 percent to over 24 percent of GDP.Foreign investment has come up from negligible levels to US $ 20 billion in 2005/6. Table 7 Towards A More Open Economy 1990/91 2005/06 200% plus 12. 5% Tight, detailed Almost gone make do (goods) / GDP Ratio (%) 14. 6 32. 7 Current Receipts / GDP (%) 8. 0 24. 5 Software Exports ($ billion) Nil 23. 6 Worker Remittances ($ billion) 2. 1 24. 6 Foreign Investment ($ billion) Negligible 20. 2 2. 2 145. 1 35. 3 10. 2 Peak Import Duties (manufacturers) I mport Controls Foreign up-to-dateness Reserves ($ billion, March 31) Debt Service Ratio (%) Source RBI, Annual Report, 2005 /06, eject for first two rows.After initial periods of sometimes painful ad besidesment in the 1990s, Indian industry has thrived in the more open and competitive environment. The magnification in software ITenabled service exports is well-known, having risen from nil in 1991 t o $ 24 billion in 2005/6. Anecdotal evidence suggests that subaltern-scale units have benefited greatly from 10 the much freer access to traded raw materials, components and designs. Perhaps most important, the old mindset of foreign exchange scarcity (and the welter of bad economic policies it spawned) has been effectively banished.Interestingly, the opening up has also streng consequentlyed the prudential yardsticks of foreign exchange reserves and debt service ratios. Rise of strong companies in a modernized capital market The 1990s ushered in far-reaching reforms in Indias capital markets. The Securities and Exchange Board of India was statutorily empowered in 1992 and quickly moved to improve standards of disclosure and transparency. The new electronic-tradebased National Stock Exchange was established in 1993 and set high technical and governance standards, which before long had to be emulated by the much older (and, sometimes scam-hit) Bombay Stock Exchange.Depositories economy was enacted and soon paperless trading became the norm. Brokers were encouraged to corporatize. Futures markets were nurtured. These and other reforms transformed Indian capital markets into one of the best in the developing world. The combination of a modernizing capital market, an increasingly liberal and competitive environment for investment, trade and return, a riches of entrepreneurial talent and sustained economic growth has helped the rise of strong new companies and supported the expansion of the more agile and aggressive among the established firms.By way of example, Airtel, the leading private telecom, went from nothing to a multi-billion dollar confederacy in a decade. The same was true for the leading domestic airline, greenness and the IT icons wish well Infosys, Wipro, TCSand HCL. Old pharma companies, like Ranbaxy, transformed themselves. New media companies like Zee and NDTV bloomed. Established somatics houses restructured and flourished (such as some Tata companies, Reliance, Bajaj, Mahindra and Hero Honda) or truism their market shares decline.In recent years quite a few Indian companies have expanded through overseas investments and acquisitions, facilitated by direct investments oversea averaging $1. 5 to $ 2 billion in the past five years. The recent bid for Corus by Tata Steel is a well-publicized example. 11 Aggregate financial data also point to the strength and expansion of Indias corporate sector in recent years. The market capitalization of companies listed on the Bombay Stock Exchange rose nearly 14-fold from $ 50 billion in 1990/91 to $ 680 billion in 2005/6 (Table 8).In the last five years, the growth of cabbage has outpaced the growth of sales of private corporates, indicating rising profit margins. With falling interest rates and growing recourse to internal funding, the share of interest master in gross profits dropped sharply from above 50 percent in the late 1990s to 15 percent in 2005/6 (Reserve Bank, 2006 , Box 1. 7). Unsurprisingly, data for the top 1000 listed companies showed net profits as percent of net sales rising from 4. 5 % in 2001/2 to 8. 9 % in 2004/5 ( avocation Standard, 2006). Table 8 Rising middle Class 1990/91 Cars + UVs sold devil Wheelers sold Telephone emailprotected (million) 15 million 100 million $50 billion $680 billion 205 curtilage People in households with income (Rs. 2,00,000 10,00,000 OR PPP $20,000- $1,00,000 approximately)a Bombay Stock Exchange Market Capitalisation* 2005/06 1319 thousand 1800 thousand 7570 thousand 5 125$ a Based on data from NCAER (2005) * RBI, enchiridion of Statistics on the Indian Economy, 2005-06 Business Beacon, CMIE and Monthly Review of the Indian Economy, CMIE, October 2006 Business Beacon CMIE and Economic Survey, 2005-06 $ December 2005 A Growing Middle Class In the mid-1990s, shortly after the major economic reforms of 1991-4, there as premature exuberance about Indias rising middle class and their acquisitive aspira tions. Today there is a much firmer basis for emphasizing the importance of the growing middle class in transforming intake, production and investment in the Indian economy. Table 8 provides a few indicators. Based on surveys by the NCAER, about 100 million people now live in households with yearbook incomes between Rs. 200,000 and Rs 1 12 million (approximately PPP$ 20,000 to 100,000), compared to about 15 million in 1990/91. With a lower defining threshold, the size of the middle class would be greater.For example, if the middle class cut-off is defined as the non-poor by standards of developed economies, then Bhalla (2007) estimates that 34 percent of India s population was middle class in 2005 compared to about 10 percent in 1990. Purchases of iconic middle class consumption items have certainly soared in the last 15 years (Table 8). Annual sales of cars (including multi- utility vehicles) have risen more than six times to 1. 3 million in 2005/6. Two wheeler sales have increa sed mo re than four times to 7. 6 million in 2005/6. In 1990/91 India had just 5 million telephone connections (all fixed).By the end of 2005 the number was 125 million (about two-thirds were mobile connections). Indeed, in October 2006 the new mobile connections were close to 7 million, more than the total of phone connections fifteen years ago The Demographic Dividend It has function commonplace to emphasize the growth potential of Indias young population and declining dependency ratio. concord to most population projections the share of working age population in total population leave alone continue to rise for the next 30 years or so, long after the decline has set in other major countries like China, USA, horse opera atomic number 63 and Japan (Table 9).These demographics point to a large potential for higher growth through augmented supply of parturiency and savings. Indeed, these trends have already been at work over the 15 years or so, helping to raise Indias household s avings from around 15-16 percent of GDP in the late 1980s to 22-24 percent in recent years. 7 7 This could be an important part of the explanation to the puzzle How does India sustain high growth despite aggregate fiscal deficits above 7 percent of GDP over the last twenty years? 13 Table 9 piece of ground of Working Population (15-59 yrs) Country 1950 1975 2000 2025 2050 India 55. 5 54. 0 58. 9 64. 3 59. 7 China 59. 53. 6 65. 0 62. 1 53. 8 Japan 56. 9 64. 0 62. 1 52. 8 45. 2 US 60. 5 60. 0 62. 1 56. 6 54. 6 Western Europe 61. 7 58. 1 61. 3 54. 8 50. 4 Source http//www. un. org/esa/population/publications/worldageing19502050/countriesorareas. htm Some Recent Policies As noted above economic reforms slowed after 1995 and then revived to some extent in the period 2000-04. Also, real interest rates declined worldwide and in India too. In India this may have been helped by renewed efforts to reduce burgeoning fiscal deficits, including through portrait of the Fiscal Responsibility and Budget Management Act (2003) at the underlying level.The fiscal position of the States also improved from the dire straits plumbed following the Fifth Pay Commission. The states too adopted fiscal responsibility laws following the recommendations (and conditional debt write-offs) of the Twelfth Finance Commission (Government of India, 2004). Furthermore, tax grosss at both levels of government were buoyed by resurgent economic (especially industrial) growth after 2002/3. The net result was a decline in the gross fiscal deficit from almost 10 percent of GDP in 2001/2 to 7. percent in 2004/5 and an even larger decline in the revenue deficit from 7 to 3. 7 percent of GDP (Table 10). This was the single most important factor explaining the increase in aggregate savings from around 24 percent of GDP in 2001/2 to 29 percent in 2004/5, which, in turn, helped finance the current investment boom. 14 Table 10 famines, Savings and Investment (as % of GDP) Year 1995-96 Gross Fiscal dearth 2 001-02 2004-05 6. 5 9. 9 7. 5 3. 2 7. 0 3. 7 25. 1 (-2. 0) 26. 9 23. 6 (-6. 0) 23. 0 29. 1 (-2. 7) 30. 1 (Centre and States) Revenue Deficit (Centre and States)Gross Domestic Savings (of which Government) Gross Domestic Investment Source RBI, Handbook of Statistics on the Indian Economy, 2005-06 and CSO website (http//mospi. nic. in/mospi_cso_rept_pubn. htm ) (http//mospi. nic. in/mospi_press_releases. htm ) International Economic surround Despite the war in Iraq and the high oil prices of recent years the world economy has grown at almost 5 percent over the last four years, propelled by strong growth in US and China and some recovery in Japan and Europe. innovation trade in goods and services has expanded rapidly.This favorable environment has helped rapid growth of exports (of goods and services) from India, which, in turn, has been a significant driver of economic growth in this recent period. 8 III Risks to Future Strong Growth There are some well-known risks or constraints to the sustenance of the 8 percent growth enjoyed by India since 2003. These include 1) regenerate fiscal stress from populist policies 8 Panagariya (2006) emphasizes this point. 15 2) substructure bottlenecks 3) Labour market rigidities 4) washy performance of agriculture 5) Pace of economic reforms ) Weaknesses in human resource development programmes 7) The international economic environment. Each of these merit brief elaboration. Populism and Renewed Fiscal Stress The recent advancement in fiscal consolidation, noted above, is real but modest. The overall fiscal deficit hang ons high at 7. 5 percent of GDP in 2005/6, as does the government debt to GDP ratio at 80 percent (compared to about 60 percent in 1995/6). While the fiscal responsibility laws enacted by primaeval and state governments (22 out of 28 states have passed such laws so far) are promising, they are not immune to populist pressures.Especially since the advent of the UPA government in 2004, populist expenditur e programmes, such as the National Rural physical exercise Guarantee scheme, have gained fresh momentum. The Sixth Pay Commission has been accomplished and is expected to submit its report by mid-2008, with governmental action promising before the next general election. The possibility of significant public pay increases is obviously high. On the revenue side, the state level VATs have contributed to revenue buoyancy. But the recent scheme for Special Economic Zones is fraught with unduly generous tax concessions.So the prospects for fiscal consolidation are mixed, at best. Infrastructure Bottlenecks Indias base problems are legendary and also reflect failures in public sector performance and governance. A recent appraisal (World Bank, 2006) points out that the average manufacturer loses 8. 4 percent in sales annua lly on account of power 16 outages, over 60 percent of Indian manufacturing firms own generator sets (compared to 27 percent in China and 17 percent in Brazil) and In dias combined real cost of power is almost 40 percent higher than Chinas. The quantity and quality of roads is also a real bottleneck.While there has been some progress in recent years with national highway development, the state and folksy road networks are woefully inadequate, especially in poorer states ( fleshure 1). Urban infrastructure (especially water and sewerage) is another major constraint for rapid industrial development and urbanization ( human bodyure 2). The prospering example of rapid telecom development is very promising. But unlike telecom, the sectors of power, roads and urban infrastructure are bowed down(p) by long histories of a subsidy culture and dual (centre and states) radical responsibilities.Unless the various infrastructure constraints are addressed swiftly and effectively, it is difficult to see how 8 percent (or higher) economic growth can be sustained. Fig 1Percentage of habitations not connected by roads, by Indian state Haryana Kerala Andhra Pr adesh Punjab 0% 3% 4% 7% Karnataka 8% Tamil Nadu 8% Maharashtra Gujarat Uttar Pradesh Rajasthan 12% 23% 43% 51% Bihar 58% Orissa 58% Jharkhand Madhya Pradesh West Bengal 59% 62% 69% Chattisgarh 82% Source Ministry of Rural Development, Government of India, as cited in World Bank (2006). 17 Fig 2 Percentage of the population with access to sewerage facilities, by Indian stateRajasthan 8 Orissa 9 Chattisgarh 10 Madhya Pradesh 10 Andhra Pradesh 15 West Bengal 17 Tamil Nadu 29 Karnataka 33 Uttar Pradesh 37 Uttaranchal 37 Maharashtra 49 Gujarat 63 0 10 20 30 40 50 60 70 Source Central Public Health and Environmental technology Organization, 2000, as cited in World Bank (2006). Labour Market Rigidities According to official data, Indias non-agricultural employment in the private organized (units employing more than 10 workers) sector has stagnated below 9 million for over 20 years, although the labour force has grown to exceed 400 millionA major cause has been Indias complex and rigid la bour laws, which hugely discourage fresh employment while protecting those with organized sector jobs. 9 Investment climate surveys by the World Bank indicate that India has some of the most restrictive labour laws in the world, which, in effect convert labour (in organized units) into a fixed factor of production (lay-offs are extremely difficult) and thereby discourage fresh employment in the organized sector while promoting more casualization and insecurity among the 9The skill and capital-intensive strain of development of Indias modern industrial and services sectors (despite the endowment of broad unskilled labour) has been noted by some(prenominal) analysts, including Kochhar et. al. (2006), Panagariya (2006) and World Bank (2006). All of them point to restrictive labour laws as a major culprit. 18 93 percent of workers in the unorganized sector. The laws are not just rigid but also numerous (a typical firm in Maharashtra has to deal with 28 different acts pertaining to la bor, World Bank, 2006).Without significant reform of existing labour laws, Indias cheap labour advantages remain hugely underutilized. Looking to the future, the challenge will increase as the demographic dividend brings further large increases in the labour force. In fact, as I have pointed out elsewhere (Acharya, 2004), the economic and political challenge is far greater than normally appreciated because the bulk of the demographic bulge will occur (in the next few decades) in the poor, slow-growing and populous states of central and eastern India (notably, Uttar Pradesh, Bihar, Orissa and Madhya Pradesh).Weak Agricultural Performance Since 1996/97 the growth of agriculture has dropped to barely 2 percent, compared to earlier trend rate ranging between 2. 5- 3. 0 percent. The reasons are many and include declining public investment by cash-strapped states, grossly inadequate attention of irrigation assets, f lling water tables, inadequate rural road networks, a refractory resea rch and extension services, flaw damage from excessive urea use (encouraged by high subsidies), weak credit delivery and a distorted incentive structure which impedes diversification away from food grains.Tackling these problems and revitalising agriculture will take time, money, understanding and political will. It will also require much greater investments in (and maintenance of) rural infrastructure of irrigation, roads, soil conservation, etc. and reinvigoration of the present systems of agricultural research and extension. While the central government can play a significant role in revamping systems, the main responsibility for strengthening rural infrastructure lies with the states. However, their financial and administrative capabilities have weakened over time. The share of agriculture in GDP has declined to exactly 20 percent.But agriculture is still the principal occupation of nearly 60 percent of the labour force. Thus better performance of this sector is intrinsic for poverty alleviation and containment of rising regional and income inequalities. 19 Pace of Economic Reforms There is little doubt that economic reforms have slowed since the UPA government put on office in May 2004 10 . The privatization programme has been halted, although Government dust the dominant owner in banking, energy and transport and the usual ills of public ownership afflict the performance of many enterprises in these key sectors.The legislative proposals of the previous government to reduce government ownership in public sector banks to 33 percent have lapsed and not been renewed. There has been some revival of interest rate controls and directed credit. Follow-up action on the reformist new Electricity Act (2003) passed by the NDA government has been slow. The pricing of petroleum products has become more politically administered than before. Education policy has focused on introducing caste-based reservations in institutions of higher education. Introduction of suc h reservations in private sector employment are also being considered.Reform of labour laws remains stalled. There has been little forward progress in reform of agriculture policies. Indeed, the wonder is that the economys growth momentum has remained so strong despite the stalling of economic reforms. If the growth dividends of econo mic reforms occur with a lag, then the paucity of reforms in the period 2004-06 may take their price in the years ahead. Weak Human Resource Policies The long-run performance of the Indian economy must surely depend on successful policies and programmes f r education, skill-development and health service o rovision. Yet the government- led programmes in these sectors suffer from very serious weaknesses and lack of reform impetus. For example, World Bank (2006) cites a number of surveys which show that less than half of government teachers and health workers are actually to be found in schools and clinics they are serving (the situation is typically wor se in poorer states) . Even though school enrolment rates have climbed over time, the actual cognitive skill acquired in schools (even simple reading and arithmetic) is still very 10 For a recent review see Acharya (2006c). 0 low (Pratham, 2006). In health, a survey shows that medics in primary health clinics in Delhi had a greater than 50 percent chance of prescribing a harmful therapy for specified, common ailments (Das and Hammer, 2004a and 2004b). The competence of these medics was found to be less than comparably situated counterparts in Tanzania and substantially worse than counterparts in Indonesia. Even in higher education, an area of supposed competence, studies point to enormous problems of quality, quantity and relevance (see, for example, Aggarwal, 2006).Quite clearly, the current portfolio of policies and programmes in these critical sectors need urgent improvement if India is to retain her competitive delimitation in an increasingly globalized, knowledge-based, world economy. International Economic Environment The last mentioned half of 2006 has witnessed a distinct slowing in the growth of the US economy, still the single most potent locomotive of global growth. The capital of Qatar Round of multilateral trade liberalization remains mired in limbo. Oil prices, though off their peaks, remain high with little prospect of falling below $50 a barrel.The chances of some slackening in the growth of world output and trade are clearly rising. that as the Indian economy has benefited from strong global expansion in the last four years, so it may expect to bear some downside risks from slower world growth in the years ahead. IV intermediate termination Growth Prospects Since 2003/4 there have been quite a few studies projecting sustained, high growth of the Indian economy in the long-run, including the Goldman Sachs BRICs report (Wilson-Purushothaman, 2003), Rodrik-Subramanian (2004) and Kelkar (2004).Their specific projections and time-periods diffe r Goldman Sachs foresaw near 6 percent growth for 50 years Rodrik-Subramanian projected a minimum of 7 percent for the next 20 years and Kelkar was even more optimistic with his growth expectation of 10 percent. 11 More recently, with a three-year 8 percent average already achieved and the 11 See Acharya (2004) for a critical mind of these bullish growth expectations. 21 current year likely to picture a similar rate, the Governments Planning Commission (2006) has describe GDP growth projections for 2007/8-2011/12 of 8 to 9 percent.Bhalla (2007, forthcoming) goes further and foresees 10 percent growth as almost inevitable. Most probably, the majority of serious economists in India would today expect economic growth in the medium term (say, 2007-12) to average at least 8 percent. Such optimism is not wholly misplaced. It is based on the continuing strength of the positive factors outlined in section II above, especially globalization and catch-up, the demographic dividends, the ri sing middle class, a vibrant entrepreneurial culture, positive expectations of future economic reforms and a generally benign international economic environment.The optimists are not blind to the risks and threats outlined in section III. They simply expect the growth-enhancing tendencies to brave out or, more subtly, for the self-propelleds of growth to generate solutions to constraints such as infrastructure and education. Figure 3 provides encouragement to the bullish outlook. 22 Figure 3 Indias GDP Growth 8 7 Percentage 6 5 4 3 2 1 2006-07 2003-04 2000-01 1997-98 1994-95 1991-92 1988-89 1985-86 1982-83 1979-80 1976-77 1973-74 1970-71 1967-68 1964-65 1961-62 1958-59 1955-56 0 Year turn over Average (5 year)In my view, the downside factors outlined in section III, should carry more load in assessing Indias medium term growth prospects. There is a good chance that the currently bullish view of growth expectations is excessively influenced by the recent past (2003 onwards), a p eriod of strong rotary upswing in both the global economy and Indian industry. The strength of the rhythm could abate in the next couple of years and Indias growth could revert to a trend rate in the range of 6 to 7 percent, perhaps closer to the higher figure.Even then, under this pessimistic scenario, annual per capita growth would be at a historical peak for India (Table 11). If this is pessimism, then I plead guilty to the charge (though it does place me among a small minority of Indian economists today) 23 Table 11 Medium Term Growth Expectations 1992/3 2005/6 2002/3 -2006/7 2007/8 2011 /12 Optimist Pessimist GDP % 6. 4 7. 2 * 8 10 6. 5 7. 0 GDP per capita (%) 4. 4 5. 5 6. 5 8. 5 5 5. 5 * Assuming Reserve Bank projection of 8. percent GDP growth for 2006/7 Perhaps the most noteworthy point is that medium- term growth expectations for India are so buoyant that the range between optimists and pessimists is placed so high, within a fairly narrow band of about 7 to 9 percent . Only time will tell who is closer to being right. V Some Implications of Indias Rise Indias growth at an average rate of almost 6 percent a year over the past quarter of a century (with per capita growth of nearly 4 percent a year) is both remarkable and commendable.Certainly, back in 1980, there was almost no respectable scholar or institution predicting such sustained development of this poverty-ridden, populous country. At the same time, the preponderating fashion of bracketing Indias rise with Chinas exceptionally dynamic development under rubrics like China and India Rising may conceal more than it reveals. If Indias development in the last 25 years has been good, Chinas has been extraordinary. Furthermore, while India has been a gradual globalizer, Chinas surging development has been far more intensively based on global trade and capital flows.As a consequence, the global economic electric shock of Chinas rise has been much more dramatic in terms of the usual metrics of international economic relations trade, capital flows and energy. A glance at Table 12 illustrates this obvious point. The comparing of columns 5 and 6 of the table is especially instructive. It highlights both the 24 dramatic increase in Chinas engagement with the world economy over the five years 2000 to 2005, as well as the much milder rise in Ind ias international economic integration. For example, Chinas goods exports increased by an amount which was five times the level of Indias total goods exports in 2005.Similarly, the increase in oil consumption in China was almost equal to Indias total oil consumption in 2005. Table12 China and India Global Impact China India Increment (2000-05) 2000 (1) 2005 (2) 2000 (3) 2005 (4) China (5) India (6) 249. 1 762. 4 45. 5* 104. 7* 513. 3 59. 2 Share of World Exports (%)e 3. 9 7. 3 0. 7 0. 9 3. 4 0. 2 Service Exports ($ billion) a,b 30. 4 74. 4 16. 2* 60. 6* 44 44. 4 Current Account Balance ($ billion) a,b 20. 5 160. 8 -2. 7* -10. 6* 140. 3 -7. 6 Foreign Exchange Reserves ($ billion) a 165. 6 818. 9 37. 2 131. 0 653. 3 93. 8FDI inflow ($ billion)c 30. 1 72. 4 1. 7 6. 6 42. 3 4. 9 FDI stock (Inward, $ billion) c 193. 3 317. 9 17. 5 45. 3 124. 6 27. 8 Oil usance (million tonnes)d 223. 6 327. 3 106. 1 115. 7 103. 7 9. 6 pristine Energy Consumption (million tonnes oil equivalent) d 966. 7 1554. 0 320. 4 387. 3 587. 3 66. 9 Merchandise Exports ($ billion) a,b Note * Data for India refer to fiscal year 2000-01 and 2005-06 1990-2000 (Annual Average) Sources a International Financial Statistics, December 2006 (http//ifs. apdi. net/imf/) b RBI, Handbook of Statistics on the Indian