A Summary of Indian Economy (with politics and demography)

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A Summary of Indian Economy(with politics and
demography)

• Tapen Sinha
• AXA Chair Professor, ITAM, Mexico
• Special Professor, University of Nottingham, UK

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Outline

• Democracy
• Demography
• Macroeconomic performance
• Role of the government
• Broad sectoral performance
• Trade and investment
• Socioeconomic problems
• Macroeconomic modelling of the future

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Election in India

• 670 million voters
• One million electronic voting machines
• The machines cost around US100
• No electricity is needed 6 volt battery
• Design is akin to a black box in aircraft
• Once a vote is cast, it is impossible to repeat
• Counting is done in a few hours
• Box stuffing is virtually impossible
• Invalid votes used to exceed the winning margin

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Election Results of 2009
Parties Seats Votes Seats
INC 205 28.52 37.75
BJP 116 18.84 21.36
BSP 21 6.18 3.87
CPM 16 5.34 2.95
NCP 9 2.05 1.66
CPI 4 1.43 0.74
RJD 4 1.27 0.74
Others 168 36.38 30.94
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Current demographics

• Population 1,189,172,906 (July 2011 est.)
• (Mexico 111,211,789)
• Age structure
• 0-14 years 31.1
• 15-64 years 63.6
• 65 years and over 5.3
• Median age 25.3 years
• (Mexico 26.3)

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Current demographics

• Population growth rate 1.55 (2010 est.)
• (Mexico 1.13)
• Birth rate 22.01 births/1,000 population
• (Mexico 19.71)
• Death rate 8.18 deaths/1,000 population
• (Mexico 4.78)
• Net migration rate -0.07 migrant(s)/1,000
• (Mexico -3.61)

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Current demographics

• Sex ratio
• at birth 1.05 male(s)/female
• (Mexico 1.05)
• under 15 years 1.06 male(s)/female
• (Mexico 1.04)
• 15-64 years 1.07 male(s)/female
• (Mexico 0.94)
• 65 years and over 1.02 male(s)/female
• (Mexico 0.82)
• Total population 1.06 male(s)/female
• (Mexico 0.96)

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Why is there an imbalance of sexes?

• In many Asian countries the ratio of male to
  female population is higher than in the West
• As high as 1.07 in China and India, and even
  higher in Pakistan.
• Amartya Sen, 1992 has suggested that this
  imbalance reflects excess female mortality
• As a result, he has argued that as many as 100
  million women are missing

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Sex Ratio in India 1961-2001
Year Females per 1000 males
1961 941
1971 930
1981 933
1991 927
2001 934
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Preston Curve
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Current rate 55, Mexico 21, US 6.5 and Singapore
2.2
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India has a large rural population
This is very different from the Latin American
experience
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Is India densely populated?

• Are there too many people in Holland?
• Population density highest in the world are Hong
  Kong and Singapore over 6,300 per square km
• Perception versus reality Indian ranks below
  Bangladesh (1,000), Belgium, the Netherlands and
  Japan (400)
• India has 330 persons per square km (rank 15)
• Mexico ranks 117
• The story of The Little Prince

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Macroeconomic performance

• Measure of general well being is measured by per
  capita income
• But which per capita income
• Atlas Method
• PPP Method
• Reason they do not coincide is that the exchange
  rates do not reflect underlying purchasing power
  BigMac Index

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Comparing per capita income India China 1700-2000
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Healthcare expenditure is extremely uneven in
India
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Sectoral

• Agriculture how it is shrinking but not
  demographics
• Industry the industry puzzle
• Services
• Banking/Finance
• IT the expanding role (cyber cafes and post
  offices)

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Socio-economic problems

• Human development
• Poverty
• Corruption
• Unemployment
• Regional imbalance
• Ethnic-religious problems

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HDI
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Poverty
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Corruption
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1.5
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Role of the state

• State planning
• Over half a century, India has undergone ten five
  year plans
• Problem What is planned does not necessarily
  happen
• The idea was to have key sectors under state
  control defense, electricity, roads, education
  (public goods)
• Later it expanded to other things insurance
  business, banking, sugar mills
• Public expenditure and receipts what goes where

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Government does not do things well

• Why? Incentives are wrong
• Most activities are NOT driven by needs
• They are driven by politics
• Example 1 public education problem
• Example 2 salaries of comparable public and
  private sector jobs
• Note Mexican case

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Government Role of the state

• Deficit(t)Revenue(t) minus Expenditure(t)
• Debt(t)Deficit(t)plusDeficit(t-1)plus.
• They are usually measured as a percentage of GDP
  GDP gives a proxy of ability to pay
• Is high debt to GDP ratio bad?
• Note debt is not all foreign debt

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Are government bonds net wealth

• Government deficit can be financed in two ways
  printing money or issuing bonds
• But bonds have to be paid
• How does government pay for outstanding debt by
  taxing
• Who does it tax
• Portfolio of people government bonds versus
  private bonds or stocks

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What is the difference between pre-crisis and
post-crisis periods?
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Government revenue

• In the developed countries, they mainly come from
  income taxes
• In India, 8 people work in the formal sector
• Most taxes come from customs duty and other types
  of indirect avoidable taxes
• Government revenue is around 8 of GDP

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Government expenses

• Policy free rural electricity
• It benefits the rural rich, it distorts the use
  of energy for production
• Policy highly subsidized seeds and fertilizer
• Most subsistence farmers do not benefit from
  them, it benefits the agri-business
• It distorts incentives for farming

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Trade

• Trade and investment
• Internal trade and infrastructure
• External trade
• Domestic saving and investment
• Foreign investment

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Trade is good if...

• ...there is no compulsion
• Usually developing countries export agricultural
  products, textile, ...
• Low tech
• This is exactly what economic theory tells us
• India is exporting high tech does that
  contradict economic theory?
• No http//papers.ssrn.com/sol3/papers.cfm?abstrac
  t_id705801

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Why
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Future

• Growth rate in the past decade has been high with
  low volatility
• India has the institutions right better trade
  regime, better domestic institutions (such as
  democracy), better financial institutions (such
  as banks) yet it is low on growth compared with
  other countries with same traits

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Thank you

• Tapen Sinha
• tapen_at_itam.mx
• http//icpr.itam.mx/Colmex2009/