Economic Reforms: How Good is the Shine

1
Economic Reforms How Good is the Shine?

• by
• Mohan Guruswamy
• Centre for Policy Alternatives Society (CPAS)

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Higher but unsustainable growth of the 80s

• India broke away from the Hindu Rate of Growth
  by posting a growth of 5.6 in the 1980s
• However, this turned out to be unsustainable as
  it resulted in the BOP crisis of 91

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How good has the Liberalization been?

• Why comparison of the post-reform economic
  performances of India and China?
• Both have populations of over 1 bn and are LDCs.
• Both abandoned rigid central planning and
  controls in favor of the market

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India vs. China

• In the past two decades China has grown at 10.
  India at less than 6
• China has outperformed India in all the three
  sectors of the economy
• In 1980 Indias GDP (155 bn) was higher than
  China (141 bn)
• In 2001 Chinas GDP (1117 bn) was more than
  twice that of India (492 bn)

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India vs China

• In 1980 Chinas per capita income (167) was
  lower than that of India (228)
• In 2001 China (878) was well ahead of India
  (477)

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GDP growth rates
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Comparison of real GDP
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Comparison of PCY
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Sectoral growth rates in 80s
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Sectoral growth rates in 90s
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India vs China

• About 50 of Indias GDP is from Services
• Industry accounts for almost 50 of Chinas GDP

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GDP structure ( share)
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Social Development Indicators (2001)
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Poverty levels (int. std.)
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Prosperity Indicators
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International Linkages
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FDI Inflows
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Basis for India Shining

• Growth rate of 8
• Forex reserves in excess of 100 billion
• Lowering interest regime
• Outsourcing success

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High growth rate

• The economy is expected to grow by 8 in the
  current fiscal year
• This is because of the low base the previous
  year when the economy grew by just 4
• Average GDP growth rate of last 6 years is just
  5.7

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Uneven Growth Rate
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Forex Reserves

• Economists mostly agree that 80 bn is adequate
  for Indian needs. 30bn hot
• More has led to appreciation of the Rupee
• Opportunity cost of holding reserves (feel good?)
  is high

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Outsourcing success

• Many MNC's have set up shop in India to take
  advantage of cheaper labour in India
• Job losses in US have led to election year
  protectionism
• Outsourcing to India has generally been in low
  value added services. Cyber coolies!
• Slow in transition to higher end services

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Outsourcing success

• Though IT is bringing in forex, employment
  limited
• By 2008 IT will create just 2.1 mn jobs against 8
  mn that is added to the workforce annually

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What are Indias realities? - 1

• Reality 1. 62 of agricultural land is rainfed.
  64.8 of the population is linked to agriculture
  for livelihood either as cultivators or as
  agricultural laborers. Rural workforce in 2001
  about 250 mn.
• Reality 2. In 2001, 260.3 mn or 26.1 below
  poverty line of 2400 calories per day or Rs. 328
  per month (rural) and Rs.454 per month (urban).
• Reality 3. 83.5 of all households (176.5 mn)
  below median per capita of Rs.17,736 per annum.
  Income inequality gini increasing

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What are Indias realities? - 2

• Reality 4 Regional imbalances growing
• Reality 5. 34.6 illiterate.
• Reality 6. Employment in organized sector
  stagnating at around 31 mn for past 5 years.
  Government employs 19.3 mn or 69, while
  pvt.sector employs only 10.65 mn.
• Reality 7. Government capital expenditure for
  development now down to about 15 of budget.

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Importance of Agriculture

• Provides employment to 59.84 of work force or
  237.56 mn
• Provides sustenance to 69 of population
• Accounts for 24.90 of the GDP

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Sector-wise employment (mn.)
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Post reform performance

• Agri. production growth down from 3.19 in the
  80s to just 1.73 in the 90s
• The growth in yield has halved from 2.56 in the
  80s to 1.02 in the 90s
• Indias yield rates are well behind other
  agricultural countries

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Population and Foodgrain Production/Growth
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Declining Plan Investment

• Share of Agriculture in plan outlays has come
  down from 14.7 in the fourth plan to just 4.9
  in tenth five year plan
• Share of Irrigation in plan outlays down from
  16.33 in the fourth plan to just 6.77 in the
  tenth plan
• As a result the combined share of Agriculture and
  Irrigation down from 31.03 in the fourth plan to
  just 10.63 in the tenth plan

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Plan Outlay on Agri.,Irri. Allied Sectors
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Prop.Area Irr. by Source ()
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Distribution of Land Holdings
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Major Agricultural Subsidies (Rs. crores)
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Growth of Crop Area, Production Productivity ()
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Agricultural Productivity, International
Comparisons
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Jobless Growth
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Lost jobs

• Between 1983 and 1993-94 the workforce increased
  by 71.69 mn.
• On an average 7.1 mn. jobs were created each year
  during this period
• If this trend was maintained in the following
  period (1993-94 to 1999-00) the workforce should
  have increased by 43 mn.

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Lost jobs

• However, only 22.55 mn. jobs were created during
  the period
• Thus 20.45 mn. jobs were lost or not created
  during the period

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Fiscal Health of the government

• Source Central Government Budget Documents

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Union Governments Budget 2004-2005 ( Rs. crores)
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Trends in Central Government Expenditure
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Cost of Government (Rs. crores)
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Combined Deficits as of GDP
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Combined Budgetary Position of Central State
Govts. 2002-03
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Areas of Concern
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(No Transcript)
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Regional Imbalance
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Developmental Expenditure (2000-2)
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BOP indicators ( bn)
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Power Situation
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Growth of Urbanization
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Petroleum Imports
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Capital Market Issues
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Critical Areas of Concern

• Low Capital Expenditure
• High Cost of Government
• Neglect of Rural Sector
• High Fiscal Deficit
• Low Development Indicators
• Regional Disparities
• Capital markets in poor state

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Indian Demographics A Window of Opportunity

• More the merrier?

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China and Japan Mirror image demographics
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India The Right Demography