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India: The Next Asian Economic Giant
Arvind Panagariya
NITI Aayog
Government of India
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POST INDEPENDENCE ECONOMIC HISTORY OF INDIA
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Slow Growth has been Behind Slow Transform of India
Period GDP
Per-capita
GDP
1951-88 3.8 1.6
1988-2003 5.9 3.8
2003-012 8.3 6.7
2012-14 4.6 3.1
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0
100
200
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500
600
700 1
95
0-5
1
19
53
-54
19
56
-57
19
59
-60
19
62
-63
19
65
-66
19
68
-69
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71
-72
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-75
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77
-78
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-81
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-14
Index of real per-capita GDP (1950-51 = 100)
Index of per-capita GDP
1980-81 = 151 1990-91 = 206
2000-01 = 295
2013-14 = 598
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Where We Stand Currently
2015-16 (Adv. Est.) Real Q1 (April-June) 7.6 Q2 (July-Sept) 7.7 Q3 (Oct-Dec) 7.3 Q4 (Jan-March) 7.8
Year Real 2012-13 5.1 2013-14 6.9 2014-15 7.2 2015-16* 7.6
*Advance Estimate
Annual growth in real GDP 2003-04 to 2011-12: 8.3%
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India’s Modernization Challenge
• After 65 plus years of development effort
– Low per-capita income ($1500 per annum in 2015)
– High extreme poverty (22% in 2011-12)
– Manufacturing stuck at 15% of the GDP
– Low urbanization (31% in 2011)
– Workers predominantly in informal employment
• 50% in agriculture
• Another 40% or more in the unorganized sector
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INDIA’S VAST GROWTH POTENTIAL
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523 618
722 834
948
1239 1226 1366
1710
1873
0 200 400 600 800
1000 1200 1400 1600 1800 2000
2002
-03
2003
-04
2004
-05
2005
-06
2006
-07
2007
-08
2008
-09
2009
-10
2010-1
1
2011-1
2
GDP at market prices in current dollars
($Billion): Annual Growth: 15.6%
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India can be the Third Largest Economy in Fifteen Years
• Annual Growth in Nominal Dollars from 2003-04 to 2011-12: 15.6%
• With the GDP deflator 2% in USA, annual growth in India in real dollars during 2003-4 to 2011-12: 13.6%
• The GDP in 2015-16 in current dollars: $2 trillion • Conservatively assuming annual real growth of
10%, in 15 years, the GDP will be: $8.4 trillion. • Therefore, becoming the World’s third largest
economy in 15 years is within India’s grasp.
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What If Growth Stagnates at 5%
• At 5%, we will rise from $2 trillion in 2015 to just $4.15 trillion in fifteen years.
• This will leave India fourth or fifth globally, behind USA, China, Japan and possibly Germany
• The difference between a $4.15 trillion versus $8.4 trillion economy will be – Domestically, significantly poorer progress in cutting
poverty and improving education and health outcomes
– Internationally, much diminished relative to China
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Why India has High Potential
• High Savings Rate
• A vibrant Entrepreneurial Class
• An Open Economy
• A Low Per-capita Income with Vast Scope for Catching up
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Slow Transition from Agiculture to Industry and Services
• According to data for 2011-12, the share of agriculture in employment is 49% while that in the GDP is 15%.
• The best agriculture has done over a ten-year period is 4.7% during the 1980s.
• But industry and services grow 8-10% or faster.
• So the share of agriculture in the GDP will continue to decline
• IMPLICATION: We MUST create good jobs in industry and services in much larger numbers so that farmers wishing to migrate out of agriculture may find employment at decent wages.
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Why the Focus on Labor-intensive Manufacturing is Important
• India has 500 million workers with another 10-12 million joining the workforce each year
• Except construction and retail, services will not create good jobs for low-skilled workers
• There is no known path to rapid transformation that does not go through labor-intensive manufacturing.
• Faster growth of manufactures helps create jobs in services as well.
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Acceleration in Manufacturing Also Accelerates Services Growth
Country and period Industry Services
South Korea
1954-62 11.6 4.4
1963-72 17.3 10.0
Taiwan
1951-53 to 1961-63 11.5 7.6
1961-63 to 1971-73 15.3 10.3
India
1991-92 to 2002-03 5.6 7.1
2003-04 to 2010-11 8.0 9.7
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WHY HAS MANUFACTURING NOT DONE WELL IN INDIA?
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Substantial Presence of Large-Scale Firms is the Key to the Success in Manufacturing
• Per-unit costs decline with scale
• Large firms must sell in the world market
• Fierce competition in world markets forces these firms to rapidly adopt cost-saving technologies and management practices
• Small and medium firms also become more efficient as they become ancillaries to large firms or compete against them.
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Apparel: Workers are in Small Firms in India, in Large Firms in China
0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
0-50 51-200 201-2000 >2000
Pro
po
rtio
n o
f w
ork
forc
e
Firm size in number of workers
China India
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Export Performance in Apparel: India and China Perform Very Differently (1992-2014)
0.0
20.0
40.0
60.0
80.0
100.0
120.0
140.0
160.0
180.0
200.0 1
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$B
illio
n
Clothing Exports ($Billion)
Clothing and accessories-SITC 84 (China) Clothing and accessories-SITC 84 (India)
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Make no Mistake, On Average, Indian Firms are Small
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Fewer Large Firms Translate in Low Productivity in Small and Medium Firms
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The Overall Impact of Relatively Few Large Firms
• Low overall productivity because too many workers are stuck in low-productivity, low-wage micro and small firms
• In 2010-11, firms smaller than 20 worker
– employed 73% of manufacturing workforce in India
– But they produced only 12% of manufacturing output
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THE PATH TO TRANSFORMATION STILL GOES THROUGH EXPORT-LED MANUFACTURING
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Focus on Labor-intensive Manufacturing
• India has 470 million workers with another 10-12 million joining the workforce each year
• Except construction and retail, services will not create good jobs for low-skilled workers
• There is no known path to transformation in to to three decades that does not go through labor-intensive manufacturing
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Export Orientation or Import Substitution?
• Cost competitiveness requires the presence of large firms. • Large firms require large markets to sell their product. Large
markets are outside, not at home
– Total world merchandise exports: $18 trillion. – India’s domestic goods market: less than $1 trillion.
– India’s domestic market in electronic goods: $65 billion – Global market: $2000 billion
• Inevitable conclusions:
– Import substitution will not go far – We must go for the LARGE world markets.
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Even India’s 8.3% Growth from 2003-04 to 2011-12 Came with Rapidly Expanding Exports
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Exports by India: 1990 to 2014 ($Billion)
Exports by India ($Billion)
$301 billion
$50 billion
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But Can We Rely on Robust Export Growth in a Stagnant World Economy?
• Yes. Thus, consider that – Between 1995 and 2013, the OECD countries grew
only 1.4% annually and yet China expanded its exports from $150 billion to 2.2 trillion (share in world exports rose from 2.9% to 11.7%).
– World merchandise exports today (2014) are $18 trillion. We can grow by expanding our share from 1.7% today to 6% in 10 years.
– Real wages in China are rising 10% per year since 2007 (Rs. 5 lakh annually currently). So China will vacate space in the world market in low-skill products.
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Rising Wages in Manufacturing in China (Renminbi)
Source: Albert Park, Hong Kong University of Science and Technology [Annual Wages in 2014: Rs. 5 lakh. In surveys, Chinese firms point to labor costs as the most important barrier to their growth.
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But What About Robots and 3D Technologies Taking Over Manufacturing?
• Commercial viability of these technologies remains far off.
• In industries with job potential such as apparel, footwear, assembly activities and food processing, even scientific feasibility is some distance away.
• If the threat from robots were imminent, China today would be preparing for complete collapse. That it is not should tell us something.
• Rather than freeze out of these fears, we need to get going.
• This approach will also better prepare us for the age of robots should it become a reality.
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A POSSIBLE STRATEGY
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What India Must Do
• Taking the context of the Sagarmala initiative, a geographically focused, port-led development strategy must be pursued
• We must create Coastal Economic Zones that offer an ecosystem that is friendly to large, employment-intensive firms and sectors
• In CEZs, we must create infrastructure that allows goods to move in and out of the country rapidly
• We must build external trade alliances that ensure open markets abroad for our goods
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At the Heart of the Strategy
• A handful of Coastal Economic Zones that
- Encompass production clusters and urban centers
- Are connected to selected deep draft ports on India’s east and west coasts via a network of highly efficient logistics and distribution systems
- Have a world class regulatory framework governing business, urban and industrial development
- Are gradually connected to the hinterland through an ever expanding multi-modal transportation network
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