Mid and Long-Term Perspectives on India, Pakistan and Bangladesh

1. Mid and Long-Term Perspectives on India, Pakistan and Bangladesh Some Thoughts.. Joseph E. Stiglitz Columbia University April 2004

2. Bangladesh, India and Pakistan: At A Glance Source: WDI 2003

3. GDP Growth Rate: 1980-2002 Source: WDI 2003

4. Economic Forecast: Real GDP Growth Rate e: estimate; Source: Economist Intelligence Unit It is highly likely that India, Bangladesh and Pakistan will grow at an average of 6%-7% per year during 2005-2008

5. India, Pakistan and Bangladesh: Economic Forecast • At an average of 7% a year during 2004-08, India will boast one of the fastest-growing economies during the period • The services sector will remain the main engine of growth in 2004-08, particularly in the area of information technology (IT)-enabled services • Major government infrastructure programs, including the Golden Quadrilateral road project to build highways linking India's main cities and provinces, will continue to fuel industrial expansion during this period • The growth projection heavily hinges on the expectation that peaceful relationship with Pakistan will continue and that there will be no major outbreak of insurgency, in Kashmir or in the NE, during the forecast period • Pakistan’s annual growth rate of about 6% during 2004-2008 will largely come from the investment to modernize its textile sector

6. India, Pakistan and Bangladesh: Economic Forecast • US financial support in return for Pakistan's continued cooperation in the US-led "war on terror" will also support the country’s overall growth during the forecast period • Domestic turmoil,rise of fundamentalists and fall of President Musharraf factions or another war with India (though unlikely) may undermine Pakistan’s growth prospects • Growth in Bangladesh, projected at 5.5% during 2004-08, will be largely fuelled by solid increases in government and private consumption, reflecting a strong performance in the agricultural sector and a further increase in remittances from Bangladeshi workers abroad • The biggest challenge for Bangladesh will be to remain competitive in post MFA ready-made garments export. Exports are expected to increase further in response to more robust demand in Bangladesh's main trading partners, but will be limited by infrastructural weaknesses and intensified competition—especially from Chinese-based producers

7. Income of the Top Ten Percent and Car-Ownership in Bangladesh, India and Pakistan Source: WDI 2003 • It is assumed that only top ‘Decile’ (top 10%) of the income groups owns a Car and that each person only owns one car • There are only 5.85 million passenger cars for the 125 million people belonging to the top ‘Decile’ in these three countries i.e 46.35 cars per 1000 people • To reach the car ownership rate of the ‘Upper Middle Income’ countries (about 115 cars per 1000 people), this groups’ car ownership rate must grow at the rate of 20% per year for the next 5 years

8. Import of Passenger Cars e: estimate; Source: ITC, International Trade Statistics • Passenger car imports stagnated largely because India meets most of its demand with domestically produced cars. India also had a ban on import of cars with engine capacity between 1000 CC and 2500 CC (the most common range for passenger cars) until 2001 • India’s import volume for cars (in $ terms) increased 268% between 2001 and 2002 due to lifting of the ban on import of second-hand cars and engine capacity

9. Import Duty on Foreign Cars Source: National Revenue Boards of India, Bangladesh and Pakistan • Both India and Pakistan have maintained very high import duty on foreign cars, mainly to support domestic production and assembly of cars • Bangladesh’s import duty on cars is very low but it also is a relatively small importer of foreign cars

10. Passenger Car Production Source: www.autoindustry.co.uk India is losing ground to China as preferred production base for automobiles

11. Prospect of the Automobile Industry in the Region • Thirteen manufacturers make cars and utility vehicles in India, most of them local units of global automakers like General Motors, Toyota and Ford. Total industry sales are estimated to touch a million units in the financial year ended March 31, 2004 • According to industry statistics, India's passenger vehicle sales surged 34 percent this year driven by GDP growth forecast at over 8.0 percent and very low interest rates. • India’s national Auto Policy (2002) aims to establish a globally competitive auto industry in India and double its contribution to the GDP by 2010 • The Auto Policy allows automatic approval for foreign equity investment up to 100% in the automotive sector and does not lay down any minimum investment criteria • Despite this very favorable treatment, Indian Auto Industry has not been able to attract major foreign investments during the past two years (except for General Motor’s decision to take over Daweoo plant)

12. Prospect of the Automobile Industry in the Region • On the other hand, high import duty of 105% have restricted import of foreign made cars into India (also into Pakistan) • But while high import duties have encouraged domestic production, they will create a stumbling block for India as it must lower import duties to meet the Asian Free Trade Area's (AFTA) requirements • India’s car market could grow at the rate of 20 percent a year provided that the country can achieve the projected 8% growth rate, interest rates and oil price remain low, and provided it significantly lowers the import duty on foreign cars. Rapid urbanization will also contribute to the increase of demand for automobiles • Once the tariff is lowered, it is unlikely that domestic producers will be able to compete with the foreign manufacturers – the excess demand will be met through higher import of foreign cars (already the trend is evident and consumers are unlikely to tolerate the long present level of waiting period) • Pakistan is also likely to lower import duty on cars and there will be surge in import provided growth expectations are met