Effects of India’s growth on the global economy and environment

1. Effects of India’s growth on the global economy and environment Veena Jha

2. Outline of presentation • Stylised Facts on India’s growth and poverty. • Broad drivers of growth in India. • Implications of India's success for other countries. • Policy lessons learnt that may have relevance for other countries

3. Stylised Facts about the Indian Economy • 1980 to 2005, economic growth averaged 5% per year, with over 7% growth since 2001. • Capital efficiency increased in 1980s, and investment grew by about five times since 2001. • Agriculture grew rapidly till mid-1990s, but slower since then. • Non-farm employment growth picked up after 1999. • Share of profits in Net Value Added in organised manufacturing almost doubled during 1999-05. • Real wages (rural and urban) declined after mid-1990s. • Managerial emoluments increased much faster, especially after 1999.

4. Stylised Facts about the Indian Economy • Period after 1999 saw significant poverty reduction, particularly in rural areas, though income distribution worse. • Important reasons were: • a sharp decline in inflation (particularly food prices), • Higher worker participation rate due to demographic changes and opportunities created by growth.

5. India’s real GDP growth

6. Poverty

7. Informal Sector Asset formation

8. Effects of Interstate migration • Some case studies show that before migration, 24% of the migrants earned at least minimum wages. Others earned less. • After migration, 72% earned at least minimum wages in the state of destination. • Nearly 63% of the migrants built assets in rural areas and 22% in urban areas. • Minimum wages in rural areas below that in urban areas.

10. Drivers of Growth • Quarter century of strong economic growth built a momentum of sustained growth; average 5% per annum. • Services driven growth, where services account for nearly 60% of GDP today. • More open economy (to external trade and investment); fall in applied tariffs from over 100% in 1991 to 12% in 2006. • Budget deficit declined from 7 to 3.7 percent of GDP from 1991 to 2001. • Supportive international economic environment fuelled by growth of China and the US. India itself now contributing to global economic growth significantly.

11. Drivers of Growth • “Demographic dividend” of a young population: • Working population nearly 60% of total. • Household savings rose from around 15-16 % of GDP in late 1980s to 22-24 percent in recent years • A growing “middle class” fuelling domestic consumption: • 100 million with $10 th. to $ 40 th. • 340 million with incomes above poverty levels but less than $10 th. • Six fold increase in sales of motor vehicles and a 10 fold increase in telephones since 1991. • Strong companies in a modernized capital market. • Market capitalization on the Bombay Stock Exchange rose fourteen-fold from $50 billion in 1990/91 to $680 billion in 2005/06. • Share of interest outgo in gross profits dropped sharply from above 50 percent in the late 1990s to 15 percent in 2005/06

12. What India needs for sustaining growth and poverty reduction • Make growth more inclusive by stimulating agricultural growth. • Improve the output and labour share of manufacturing. The growth of key services like transport, storage, communication, insurance, banking, trade and real estate has to be considerably manufacturing driven. • Improve labour participation rates further from 61% to 82% as in China. • Maintain price stability which is threatening to rise on all fronts. • Fiscal consolidation. Difficult in an election year with pressure for populist expenditures. However revenues have risen dramatically over the past 2 years at over 40% per annum. • Infrastructure bottlenecks particularly in power and roads needs to be addressed.

13. What India needs for sustaining growth and poverty reduction • Change labour laws which are so rigid as to discourage additional employment in the formal sector altogether. Without significant reform of existing labour laws, India’s cheap labour advantages remain hugely underutilized. • Improve India’s weak human resource policies. Serious shortages in education, skill-development, and health service provision. This applies to both primary and tertiary schooling. • While there is some evidence of decoupling of India’s growth from the US, the slowdown in the global economy is nevertheless a matter of concern. Oil price rise is another area of concern. • Rise in the price of metals and food may also dampen some of India’s growth expectations.

14. Effects Of India’s growth on the global economy • According to a World Bank study, “Dancing with Giants’, there is scope for India to expand its trade significantly without hurting development prospects of most other economies. India is expected to contribute 12% to global economic growth by 2020. • If India were to grow at a real rate of 5.5% per annum upto 2020, then the EU would experience a concomitant growth of 2.3% per annum with a physical capital formation of 2.6%. Of course most of the gains are expected to come to the UK as India’s trade and investment links are most intensive with the UK amongst all the EU countries.

15. Effects Of India’s growth on the global economy • Large efficiency gains because of: • severe competition in the high-tech sectors • outsourcing and technological developments. Global BPO sector saves 80% costs through India • more countries catching up with capacity augmentation and business links, as wages in fast growing emerging economies (India) rise. • While India may displace other countries in markets for high-tech products, it would create space for other countries to increase production of light manufactures, agriculture and a large number of services. • Improvement in the range and quality of exports from India may create substantial opportunities and welfare benefits to the world. The welfare benefit for EU is one of the highest in the world valued at over 3 trillion dollars. • Indian companies would invest abroad in both developed and developing countries.

16. Effects of India’s growth on Africa • Upward pressure on raw material price levels which would benefit Africa. • Exchange rate developments and resource allocation could go either way • Low-wage competition and income distribution, which may cause structural shifts while at the same time bring increasing consumer welfare. • Industrialisation strategies, input linkages to India’s growth process which would be overall beneficial. • Capital-flow effects (such as through FDI, project finance, public-private joint ventures from India), which is likely to augment investment in Africa. • Donor assistance from India which is already about US$2b.

17. Some Questions remain… • Will India become an important source of FDI to Africa? • What would be the beneficiary sectors – Would it graduate from natural resource intensive sectors to intermediate processing sectors? • Would the poor be able to benefit from these developments, or would they remain outside any benefits, especially if most FDI goes to resource-intensive industries? • Where will interests be competitive, e.g would India divert indirectly investment resources away from African economies?

18. Effects of India’s growth on the global environment • India accounts for 5% of the global energy use at current levels. • India’s energy intensity of growth has declined by 0.2% per annum over the last 25 years. • In 2003, India’s total primary energy production was estimated at 441 Mtoe, with coal accounting for 36 percent of the supply mix, oil for 9 percent, gas for 5 percent, hydroelectric power for 1 percent, nuclear for 1 percent, and biomass energy and other renewables for 48 percent.

19. Effects of India’s growth on the global environment • India is an energy scarce country with per capita consumption of energy about one seventh that of the UK, and one fourth that of China. • If India were to grow at an average rate of 5% per annum till 2050, studies project that total energy demand is likely to rise by about 3 times by 2050. • The switch to electricity in India increases the share of coal in primary energy demand from one-third in 2001 to almost 58 percent in 2050.

20. Effects of India’s growth on the global environment • World Bank study says: • combined effects of India and China’s demand for oil is likely to raise prices at roughly the same rate by 2050 as over the last about thirty years • dampening effect of oil price rise will be mitigated by the “growth-stimulating” effects of the larger markets in China and India. • If India’s GDP growth were to be higher, global GDP growth would also be pushed upward, price rise of oil would be small • India’s share of global emissions would rise substantially.

21. Effects of India’s growth on the global environment • All these scenarios have not introduced any assumptions on energy efficiency or decarbonisation. If these are taken into account than there is a dramatic reduction in carbon emissions from India, with 33% less than predicted by 2050. • These alternative scenarios would require an increase in investment of nearly 30% in clean energy.

22. India’s effort at sustainability • India is focusing on environment. • Several examples of India using "leapfrog strategy" to sustainability. • India aims to increase renewable energy's share of its power from five percent to 20-25 percent – it already has the fourth largest wind power industry, and the third largest photovoltaic industry in the world. • Rainwater harvesting strategies are spreading in India.

23. Policy Lessons for other developing countries • Initial growth phases may demand strong economic reforms, wage stability and increase in profitability to stimulate investment. • Both agricultural and non-farm sector growth are important for poverty reduction. • Links between manufacturing and the growth of key services like transport, storage, communication, insurance, banking, trade and real estate. • Investment in both primary and tertiary education pays high growth dividends.

24. Policy Lessons • Investment in research and technology, removal of the mis-match in availability and need of skills, and removal of infrastructural bottlenecks – both of physical and social infrastructure is crucial for sustaining growth. • Essential to maintain price stability. • Importance of fiscal consolidation. This improves the Government’ credibility and reduces crowding out. It also provides the fiscal space for allocating larger resources for capital investment, especially in social and economic infrastructure. • A supportive international environment with low levels of protection is essential to sustain growth and poverty reduction in developing countries.

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