challenges of indian economic growth

8/6/2019 Challenges of Indian Economic Growth

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Challenges of IndianChallenges of Indian

Economic growthEconomic growth

Submitted By:

Bidit Neel Mandal- 10202108

Arnab Sinha Roy-10202074

Kastur Banerjee-10202073

Jagannath Giri-10202121

Sambit Choudhury-10202098

Priyanka Singh-10202083

Sayamdeep Mohanty-10202092


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Road MapRoad Map Reviews on Indias economic reforms;

Comparison between Indias economy with a peer group of largedeveloping economies in Asia the Peoples Republic of China,Indonesia, Malaysia, the Philippines, and Thailand thatcompete with India both in export markets and for inward foreigndirect investment; and

Assesses the challenges that India must overcome to sustainrapid economic growth and reduce poverty over the long term.

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The Indian situationThe Indian situation S

econd largest population in the world Very successful service sector, but a poorly

performing industrial sector

Nation of English speakers

Geographic economic disparity

Democratic government & traditions

Strong financial institutions

The Economy of India is the tenth largest in the world bynominal GDP and the fourth largest by purchasing power parity(PPP)

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Comparing India WithComparing India With

China we see that..China we see that..

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Economic ReformsEconomic Reforms--An overviewAn overview

From 1947 to 1984, India had a development policy of import

substitution industrialization - discouraging imports throughinternational trade and investment barriers, Soviet-style centralplanning .

India instituted comprehensive controls, known as the license raj(regime).

In 1984, Prime Minister Rajiv Gandhi began economic reform byabolishing the licensing system for twenty-five industries andsubstantially liberalizing it for others.

An economic crisis prompted Prime Minister Narasimha Rao toinitiate sweeping reforms - progressively abolished licensing for allindustries except atomic energy, defense equipment, alcoholicbeverages, and tobacco.

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Bifurcated EconomyBifurcated Economy India is the worlds second most populous country. In contrast

to China, Indias working age population (ages 15 to 64) isprojected to grow by 53.9 percent from 691 million in 2005 to1.064 billion in 2050.

India favored developing internationally competitive colleges,universities, and technical institutes for a limited number of

students -developed a large pool of educated, highly skilled,English-speaking managerial, professional, and technicalworkers compared with the peer group .

Another sector of Indias economy is underdeveloped.

Agriculture still accounted for 18.4 percent of Indias GDP,54.2percent of Indias total employment - both higher thancompeting Asian economies.

As a result, India suffers from far more extreme poverty than thepeer group.

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Why services grew but notWhy services grew but not

industry?industry?

In 1981, Indias industrial sector was on par with those of othercountries.

At that time, its service sector actually lagged (in terms of thevalue-added as a percent of GDP and in terms of employmentshare)

However, at that time India did not favor labor intensive industryin 1981; it instead favored skill intensive industry

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Continued.Continued. (B) Workforce Quality- Skilled labor shortages have ignited a bidding war,

Widespread adult illiteracy prevents many Indian workers from securing jobs in

knowledge-intensive and capital-intensive industries.

(C) Incomplete Economic Reforms

(1) Remnants of License Raj-In 2006, the World Bank found that Indiaranked 134th of 175 economies as an overall place to do business. Indias rankingin opening new facilities, paying taxes, trading across borders, enforcingcontracts, and closing a bankrupt business were lower than the peer group.

(2) Rigid Labor Market- Indias rigid labor laws are a major impediment tolabor-intensive manufacturing. These laws slow the transition of the 93.6 percentof Indian workers who are employed in agriculture or the informal urban sectorinto generally higher productivity jobs in the formal urban sector.

Indias labor laws apply to employers with ten or more workers, become morestringent as the number of employees increase, encourage unionization, andgenerally favor workers over employers .

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Continued..Continued..

(3) Inefficient Government-Dominated Financial System- Indiascentral government-controlled financial system is highly inefficient in channeling

Indias saving into productive investment.

Because banks cannot lend gold bars and jewelry, a large portion of Indian savingscannot be intermediated into economically productive investments through banksand other financial institutions. This reduces the potential size of Indias economy.

Excessive regulations have stunted Indias corporate debt and equity markets as

external financing sources for large private Indian firms. Consequently, these firmsmust rely on bank loans to a larger extent than similar firms elsewhere, crowdingout small- and medium-size firms .

The McKinsey Global Institute reported that reforming Indias financial systemwould increase the current size of Indias economy by $47.3 billion and wouldboost Indias potential real GDP growth rate to 9.4 percent a year over the next

decade

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Continued.Continued.(4) International Trade and Investment Liberalization- In 2007,

India reduced its peak import tariff rate on most non-agricultural goods to 10percent. Nevertheless, import tariff rates on agricultural goods remain extremelyhigh. India also retains significant non-tariff trade barriers including cumbersomecustoms procedures and weak enforcement of copyright protection for recordingsand software.

Indias international trade flows do not compare favorably with competing Asian

economies. Despite its size, India accounted for only 1.3 percent of world goodsexports and 1.6 percent of world goods imports in 2005.

Likewise, India trailed competing Asian economies in attracting foreign directinvestment .

(D) Chronic Large Fiscal Deficits- In fiscal year 2006-07, the

consolidated deficit for both the central and state governments was 6.3 percent ofGDP. The relatively high fiscal deficits compared with the peer group limit theability of central and state policymakers to fund education and necessaryinvestments in infrastructure.

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Actual and Predicted Output per workerActual and Predicted Output per worker

growthgrowth

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Indias greatest obstacle to growthIndias greatest obstacle to growth

is its poor industrial sectoris its poor industrial sector

We believe that Indias service sector growth cannot substitute forindustrial growth indefinitely

Indias large (and quickly growing) population needs abundantindustrial jobs to raise living standards

Service sector jobs requiring extensive education affect too fewpeople

We will now address why Indias manufacturing sector isperforming poorly, and how it can be set right

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Why did some statesWhy did some states

accelerate faster than others?accelerate faster than others?

Some states simply had a larger capacity for growth (initially)

Kochhar, used a diversification index to capture each states

capacity for growth Diversification is a proxy for the amount of highly skilled human

capital

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The role of decentralizationThe role of decentralization Decentralization led to Indias states being more in control of

their growth paths

Some states had inherent qualities that enabled them to takeadvantage of the liberalization reforms and boost their servicesectors

Quality of infrastructure

Amount of investment

Education level

Financial sector strength

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Data Relating to Divergence amongData Relating to Divergence among

StatesStates

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Indias pathway to growthIndias pathway to growth

Dual-track growth: industrial growth in the inland states alongside

continued service-sector expansion

Pruning regulations and labor laws relating to manufacturing

Allow people to be fired

Encourage industrial firms to achieve economies of scale

Gradually wean India off of import-substituting policies to forcedomestic industry to become competitive in the internationalmarketplace

Investing in education, especially in primary and secondaryeducation for the general public

Investing in public infrastructure

Focus on aiding industry

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Is corruption hinderingIndian growth?

We initially thought so, but

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Although its economy is booming, India must confront a number

of challenges to sustain rapid economic growth .

India should encourage labor-intensive manufacturing to createjobs for these workers.

India must overcome a number of challenges to foster labor-

intensive manufacturing and broaden economic prosperity.

Indias electricity supply is costly and undependable, and itstransportation system is woefully inadequate

High adult illiteracy prevents many workers from benefiting from

Indias boom.

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challenges of indian economic growth

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