India’s Development Challenges

1. India’s Development Challenges Higher School of Economics April 1, 2008

2. India – Economic Indicators

3. Context: Achievements and Challenges • India’s economic success: • sustained rapid growth rates, • expansion of exports, • emergence of new industries, • leader in some high tech fields, • Avoided macro/financial crisis Has India poised as a global super power of the 21st century

4. India is now a star—but experience shows stars generally fall to earth

5. Regional variation in poverty in India—poorest places are at African levels, richest near upper middle income

6. Main issue is that while the middle income states accelerated in the 1990s over 1980s, lower income states did not The lagging states failed to accelerate

7. Lagging sector: slow structural transformation in Agricultural Sector • Ag GDP has declined to 24% in 2003/04 • …but 58% of labor force still employed in agriculture, higher in poorest states • Extremely low labor productivity (closely linked to rural poverty) Source: Census 2001, CSO

8. Major Causes • Over-regulation of markets continue • Unbalanced composition of public expenditures • Rising subsidies • Distorts incentives (water intensive foodgrains in water scarce areas) • Leading to natural resource degradation • Crowding out productivity-enhancing investments • direct impact on agric. growth • indirect impact on private investments, e.g. R&D, roads > diversification • Inadequate O&M • Recurrent expenditures going to salaries  deterioration of irrigations, weak cost effectiveness of research and extension India Public Ag Investments and Subsidies as % of GDP Note: Ag subsidies include GOI foodgrain and fertilizer subsidies, state government power and irrigation subsidies Source: Min.of Agriculture, Acharya and Jogi 2004

9. Biases growth towards services: “infrastructure camels” Supply chain manufacturing—India as an export platform hindered the most Not “need to invest X billion” but “fix the institutions that fix the pipes” Binding constraint I: Economic Infrastructure—falling further behind China

10. Debt is high Deficit is high Interest payments are large Binding Constraint II: Fiscal Deficit

11. For every one person in organized private sector there are four unemployed. The hollow middle: the proportion of small firms ten times as high in India as Korea (40% vs. 4%) Employment elasticity of manufacturing output growth was negative. Sustaining and Equalizing Growth: Labor Laws

12. Sustaining and Equalizing Growth : Financial sector • Reforms have gone much further in some sectors than others • Access of new firms to debt finance is still limited and limiting—but more ‘old style’ directed credit is not the solution • Micro-finance can be part of the solution, when integrated with more broad based empowerment.

13. Conclusions • India has achieved much in a decade of transformation • The agenda for sustainability remains daunting: infrastructure, fiscal consolidation, financial system reform, labor regulation • Combining reforms with attention to inclusiveness will be key to find the consensus required to carry this ambitious agenda forward