India : Parameters for Growth

1. India : Parameters for Growth By Dr. Ajay Dua Secretary to Govt. of India Ministry of Commerce & Industry, New Delhi E-mail: ajay.dua@nic.in

2. Healthy macroeconomic fundamentals Growth • Average annual growth rate* • In the 50s, 60s and 70s – 3.5% • In the 80s – 5.7% • During 1990-2005 – 6.0% • During the last three years – 8% • India is now targeting a growth of 9% plus over the next 5 years *Source – Reserve Bank of India

3. Healthy macroeconomic fundamentals Fiscal deficit Source – Reserve Bank of India

4. Healthy macroeconomic fundamentals External debt Source – Reserve Bank of India

5. Healthy macroeconomic fundamentals Forex reserves (All figures are in US$ billion) Source – Reserve Bank of India

6. Healthy macroeconomic fundamentals Inflation (All figures are in %) Source – Reserve Bank of India

7. Composition of GDP (All figures are in %) Source – Reserve Bank of India

8. External trade (All figures are in US$ billion) Source – DGCI&S

9. Foreign investments (All figures are in US$ billion) FDI in 2006-07 is expected to touch US$ 12 billion Source – Reserve Bank of India

10. Calibrated globalization • Reduction in import tariffs • Liberalization of FDI regime • Fully convertible current account • Moving towards fuller capital account convertibility • Complying with WTO norms to plug into the global economy

11. Calibrated globalization • Reduction in collection rates Source – Economic Survey 2005-06

12. Calibrated globalization Pre 1991 1991 1997 2000 Post 2000 FDI allowed selectively up to 40% Up to 51% under ‘automatic route’ for 35 priority sectors Up to 74/51/50% in 111 sectors under ‘automatic route’ 100% in some sectors Up to 100% under ‘automatic route’ in all sectors except a –ve list Liberalization of FDI policy in India More sectors opened; equity caps raised; conditions relaxed

13. Buoyant corporate performance Source – CMIE

14. Striking future projections What Goldman Sachs says - • India likely to show the fastest growth over the next 30 to 50 years • Growth could be higher than 5% over the next 30 years and close to 5% as late as 2050 • India’s GDP will exceed Italy’s in 2016, France’s in 2019, Germany’s in 2023 and Japan’s in 2032 • India to become the world’s 3rd largest economy by 2032

15. Unmatched demography • Over 1 billion population – 52% below the age of 25 • Median age of India’s population would remain 25 even as late as in 2025 • India’s workforce (20-59 age group) would go up by around 263 million by 2050 • Today’s youth would drive tomorrow’s boom

16. Unmatched demography Growth in global working-age population (15-64) in millions Source – United Nations

17. Expanding domestic market Total number of households to increase from 188.2 million in 2001-02 to 221.9 million by 2009-10 Source – NCAER

18. Untapped market potential While the absolute size of the market is large, penetration rates are still low – untapped potential Source – Morgan Stanley

19. Untapped market potential Penetration rates for non-durable products Source – Morgan Stanley

20. Large intellectual capital base Annual additions to the stock of science and engineering graduates Source – Morgan Stanley

21. India - An emerging hub for knowledge based industries • India has potential to attain leadership position in sectors like pharma, chemicals, biotechnology, avionics, nanotechnology, material sciences • Over 100 MNCs have set up their R&D centers in India

22. Cost competitiveness Average annual pay for various jobs in India and China (US$) Source – FICCI Compilation

23. Automobiles and auto ancillary • Information technology and IT enabled services • Food processing • Telecommunications Sectors with Potential

24. Automobiles and Auto ancillary • Largest three wheeler manufacturer in the world • Second largest two wheeler manufacturer in the world • Third largest car market in Asia • Fifth largest commercial vehicle manufacturer in the world • All major MNC auto companies present – Daimler Chrysler, Suzuki, Ford, Fiat, Hyundai, General Motors, Volvo, Yamaha, Mazda • India exports automobiles to critical markets

25. Automobiles and Auto ancillary Auto production includes commercial vehicles, passenger vehicles, two and three wheelers Source – Society of Indian Automobile Manufacturers (SIAM)

26. Automobiles and Auto ancillary Source – FICCI computation based on data provided by SIAM

27. Automobiles and Auto ancillary • The growth of the automobile industry has been accompanied by growth in the auto components industry • Indian auto component manufacturers are today globally competitive and are making significant inroads in the global market Source – Auto Component Manufacturers Association (ACMA)

28. Automobiles and Auto ancillary The BIG opportunity !!! • Car ownership in India is 10 per thousand inhabitants – Brazil (122), Russia (160), UK (400), Japan (502), USA (745) • Auto ancillary output projected to go up from US$ 10 billion in 2005-06 to US$ 40 billion by 2015 • Auto ancillary exports crossed the US$ 1 billion mark in 2003-04 and projected to touch US$ 25 billion by 2015 • With design, engineering and components manufacture facilities India can be an important R&D hub Source – Industry Estimates

29. Information technology and ITeS Industry snapshot • CAGR of over 28% since 1999-2000 • Contribution to GDP up from 1.9% in 1999-2000 to nearly 4.8% in 2005-06 • Currently employs 878,000 people, added 120,000 during the last fiscal • Clocked 31% growth in 2005-06, registering revenues of US$ 29.6 billion, up from US$ 22.5 billion in 2004-05 • Exports grew by 33% in 2005-06, domestic revenues witnessed a growth of 24%

30. Information technology and ITeS All figures are in US$ billion Source – NASSCOM IT-ITeS exports projected to reach US$ 60 billion by 2010

31. Information technology and ITeS Look at India for • Software product development • Embedded software • Offshore product development / R&D outsourcing • IT application solutions • ITeS

32. Food Processing • India - One of the largest food producers of the world • Output of the organized segment - US$ 34,827 million • Marine and Spices together contribute more than 70% of export earnings • Investment requirement is around US$ 15 billion • The Indian scientific and research talent - a knowledge source that can be tapped for advantage

33. Food Processing - Projections Excluding consumption of alcoholic beverages and out-of-home consumption

34. Telecommunications • The 6th largest network in the world with a wide range of services including basic, cellular, internet, paging, VSAT, etc. • Network growing at an annual average rate of approximately 22 percent for basic services and more than 100 percent for cellular and internet services • The current tele-density of approximately 14 percent is to be increased to 22 percent (250 million telephone connections) by 2007 • Investment requirement of approximately US$32 billion between 2005 and  2010

35. Growth of Telecommunication Network (In Million) Source – TRAI

36. Growth of Telecommunication Network (In Million)

37. Issues needing to be addressed Making the growth process more inclusive • Growth has been urban centric. • 8 large metros witnessing the revolution in manufacturing and services, though there are over 750 towns and cities. • Rural areas which have about 60% of the population remain largely unaffected by the progress. Agriculture , their main stay is growing slowly at about 2% p.a.

38. Making the growth process more inclusive (contd.) • Growth has not been accompanied by significant new employment opportunities. • Agriculture growth at 2% p.a. is supporting over 600 million persons, but with only 20% share of GDP – consequently farm employment not growing. • Services growth at 7% plus for last decade , accounting for 54% of GDP, employs only 20% of work force • Manufacturing growing at 8% plus , is also not labour intensive in view of the need to remain globally competitive and because of easier availability of capital. Rigidity in labour laws contributing to higher capital intensity. • Population increase of about 100 million in last 5 years , which has seen about 50 million new jobs, largely in the unorganized sector.

39. Growth being constrained by inadequate infrastructure • An estimate that GDP rate of growth being limited by one percent on account of inadequate electricity – admitted energy shortage of 12% and peak time shortage of 20% - need for an additional 90 Giga Watts capacity over next 5 years. • Transaction costs high due to capacity constraints at ports resulting in delays. • Highways network expanding but grossly inadequate – Public Private Partnership Models evolved. • Railways network large but expanding very slowly – need for high capacity and high speed passenger and freight trains. • Estimated capital requirement in infrastructure US $ 320 billion during 2007-12. FDI seen as a major avenue.

40. Future Growth Dependant on Continued Availability of Skills • Indian comparative advantage of high skills and low wages could become minimal if continuous augmenting of skill training facilities is not kept up. • While at the top good technocrats are available, skill shortage at the shop floor level likely to arise in five years time particularly in IT , ITeS and many manufacturing operations. • Private sector involvement in capacity building is a must and ways and means to devise it still not in place. s