Chapter 5 The Case of India
5.1 The Current Indian Scenario
India is the world’s largest democracy. Over the past decade, the India’s integration into the global economy has been accompanied by impressive economic growth and its emergence as a global player. According to the IMF India's gross domestic product in purchasing power parity (PPP) terms at USD 4.46 trillion in 2011 made it the third biggest economy after the United States and China. There is tremendous opportunity for India’s growth, despite the prevailing mood of pessimism in the global economy.
The Indian economy has been adversely affected by the global crisis, one of the major challenges of macroeconomic policymaking is managing growth. According to the Ministry of Finance, Government of India, India’s GDP growth is likely to decline to 6.9 per cent during the year 2011, indicating a slowdown compared to preceding years (refers Table 2).
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Table 2: India Macroeconomic Summary, 2006-07 to 2011-12 (as on 1st April 2012) Particulars 2006-07 2007-08 2008-09 2010-11 2011-12 AE
Gross Fixed Capital Formation 16.2 3.5 6.8 7.5 5.6
Consumption; Investments, Savings (%GDP)
Combined Deficit (Centre + State) -4.1 -8.4 -9.6 -8.1 -8.3
Inflation - WPI (Average) 4.8 8.0 3.6 8.6 9.0
Current Account Deficit (US$ bn) -15.7 -27.9 -38.2 -45.9 -64.2
% to GDP -1.3 -2.3 -2.8 -2.7 -3.5
Capital Account (US$ bn) 106.6 6.8 51.6 62.0 62.1
% GDP 8.6 0.6 3.8 3.7 3.4
Forex Assets (excl. gold) (US$ bn) 299.1 241.6 252.8 273.7 271.6
External Debt (US$ bn) 224.4 224.5 261.0 306.4 326.6
Short Term Debt 45.7 43.3 52.3 65.0 71.5
Source: Databook for DCH, India Planning Commission; 10 April, 2012.
Apart from controlling an inflation of over 9 per cent for much of the year 2011, the pressures of democratic politics also slowed reforms. The main reason for the recovery to be
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initially slow is the slight decline in investment rate. Tighter macroeconomic policies, slow growth in the core Organisation for Economic Co-operation and Development (OECD) countries and reservations about another global recession, and the base effect of high growth in agriculture during 2011 are also weighing down growth. With the inflationary pressures easing in the months to come, there could be a reduction in policy rates by the RBI, which would encourage investment activity that could have a positive impact on growth.
Population
The most populous countries in the world today are China, India and USA (refers Table 3). According to United Nations Population Division, the global population has reached 7 billion in October 2011. During the last decade, India’s population has increased by more than 181 million. With a population of more than 1.2 billion, India has one of the world’s largest workforces. With around 8 million to 9 million new entrants each year, it is important to build the skills of India’s rapidly expanding workforce.
Table 3: Top three populous country in the world - Year 2011
Sl. No. Country Reference date Population (millions) Decadal change
1 China 1.11.2010 1341 5.43%
2 India 1.03.2011 1210.2 17.64%
3 USA 1.04.2010 308.7 7.26%
Source: Provisional Population Totals Paper 1 of 2011 India Series 1 (Compiled from preliminary / provisional census figures provided in respective government websites)
Around two third of the Indian work force is engaged in agriculture, but this sector is responsible for only about 18 per cent of India’s GDP. This over concentration on agriculture is unsustainable in India’s pattern of growth. Most of India’s growth can be attributed to service producing industries that mostly employ relatively skilled labour. In the manufacturing sector also, India lacks labour intensive industries and tends to specialize in relatively skilled and capital intensive activities. India’s growth during the last two decades
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has failed to transfer surplus labour away from the agriculture sector.
Education
Education is considered as one of the most powerful instruments for reducing poverty and inequality. With over ten million students, India’s tertiary education system is one of the largest in the world. However, only 1 out of 10 young people has access to higher education.
From India Census 2011 (data shown in Table 4), three fourth of the country’s population aged 7 years and above are literate. The effective literacy rate is 74.04 percent (male 82.14%, female 65.46%). However, this percentage is well below the desired target of 85 percent which was set for 2011-2012 by the Indian Planning Commission. With more children entering elementary school, there is the need for universalizing secondary education.
Nearly 44% of India’s labour force is illiterate, only 17% of it has secondary schooling, and enrollment in higher education is just 11%.
Table 4: Number of literates and illiterates among India's population aged 7 and above (Year 2001 and 2011)
Population aged 7 and above
Literates/ Illiterates Persons Male Female
2001 864,900,041 447,214,823 417,685,218
2011 1,051,404,135 540,772,113 510,632,022
Literates
2001 560,753,179 336,571,822 224,181,357
2011 778,454,120 444,203,762 334,250,358
Illiterates
2001 304,146,862 110,643,001 193,503,861
2011 272,950,015 96,568,351 176,381,664
Source: Provisional Population Totals Paper 1 of 2011 India Series 1
42 Health
A large proportion of India’s population lacks access to good quality health care, and progress in improving health indicators is slow. Although it is home to over 16 percent of the world’s population, India’s public financing for health care is less than 1 percent of the world’s total health expenditure. Families in India bears almost 70 percent of their health expenses, this placed considerable financial burden on poor households.
Despite health improvements over the last thirty years, lives continue to be lost to early childhood diseases, inadequate newborn care and childbirth related causes. Most infant deaths occur in the first month of life, up to 47 per cent in the first week itself. While the Infant Mortality Rate (IMR) showed a rapid decline during the 1980s, the decrease has slowed during the past decade. Children in India continue to lose their life to vaccine preventable diseases such as measles, which remains the biggest killer.
Over the last few years, government sponsored schemes have contributed to a significant increase in the population covered by health insurance in the country. In 2010, over 300 million people, that is more than 25 percent of India’s population, gained access to some form of health insurance and around 60% of these were people below the poverty line.
For years now, India has been producing more food than it needs. With the poor state run cold storage system and leaky public distribution system, every year large quantities of food rot in the food warehouses and the food grains do not reach the intended beneficiary. Despite the government supposedly spending billions of rupees on poverty and food relief programs, it is shocking for India to have one of the highest rates of malnutrition in the world, According to the United Nations Children's Fund (UNICEF) data in 2011, one in three malnourished children worldwide are found in India. Malnutrition is not only affected by food intake but it is also influenced by access to health services, quality of care for the child and pregnant mother as well as good hygiene practices. India still has a very young
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population, and politicians often talk of this future “demographic dividend”. But there will not be much of a dividend if so many Indian children continue to be malnourished and stunted in their first years of life.
Religion
India covering around 17.6% of world’s population is a country of varied cultures and religions. As per the 2001 Indian Census (refers Table5), 80.5 per cent of the total population Indian population is Hindus, Muslims account for 13.4 percent and Christians 2.3 percent of the total population. growth and in areas of employment generation, balanced regional development and poverty reduction. India’s growing economy is placing huge demands on critical infrastructure.
During 2010-2011, Indian infrastructure services have shown signs of revival from the recent global economic crisis that affected many sectors. The distinctive signs of revival were seen
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in the robust momentum of growth in telecom services and in power, ports, civil aviation, railways and roads. The government has raised its investments in infrastructure and is encouraging private participation in infrastructure development.
Telecommunication services have been recognized as one of the important tools for the socio-economic development of a nation. The growth of telecom sector has direct and indirect bearing on the country’s GDP. Over the last five years Indian telecommunication infrastructure has grown and with the tremendous growth in wireless sector it has emerged as a strong growth engine for the Indian economy. According to India’s Department of Telecommunications, the sector growing at a speed of 36 percent with 926 million telephone connection (refers Table 6) is currently the second largest network in the world after China.
The growth in the telecom sector can be attributed to the liberal policies of the Government of India that provided easy market access for telecom equipment, fair regulatory framework for offering telecom services to the people and the increasing role of the private sector in the expansion of various telecom services (74% to 100% FDI permitted).
Table 6: Growth of Telephone in India
In millions March’08 March’09 March’10 March’11 December’11
Wireline 30.41 37.97 36.96 34.73 32.69
Wireless 261.08 391.76 584.32 811.60 893.86
Gross Total 300.49 429.73 621.28 846.33 926.55
Annual Growth 45.96% 43.01% 44.58% 36.22% 9.48%
Source: Department of telecommunications, Ministry of communications & Information technology, Government of India
India is the second largest road network (3.34 million kilometers) in the world (refers Table 7). As per the Ministry of road transport and highways, the road network carries around 65 percent of freight and 85 percent of passenger traffic. Traffic on roads is growing at an annual rate of 7 to 10 percent while vehicle population growth at 12 percent per annum.
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Major distributed road, rural road & urban road 3.14 million
Density distribution of National Highway (as on 30 June, 2011)
Name of
Source: Ministry of Road Transport & Highways (1lakh = 100,000)
The government is planning to increase the spends on road development substantially.
With funding already in place the Delhi Mumbai Industrial Corridor (DMIC) being developed along the alignment of the Western Dedicated Rail Freight Corridor, it will serve to take India’s transport network to a higher level.
For the actual impact of Delhi Mumbai Industrial Corridor (DMIC) to seep through the economy and take India’s transport network to another level, there is need for prompt and timely implementation of these projects.
Indian Railways is the third largest railway network (64,460 km) in the world under a single management and plays a key role in India’s social and economic development (refers Table 8 and 9). The vast Indian railway network is a national common carrier for transporting passenger and goods. It is a cheap and affordable means of transportation for millions of people and as a carrier of bulk freight like ores and minerals, iron and steel, cement, mineral oils, food grains cargo etc., the importance of Indian Railways for agriculture, industry is well acknowledged.
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Broad Gauge (1676mm) 55,188 77,347 102,680
Metre Gauge (1000 mm) 6,809 7,219 8,561
Narrow Gauge (762 mm and 610 mm) 2,463 2,474 2,753
Total 64,460 87,040 113,994
Source: Indian Railways Year Book 2010-11, Ministry of Railway, Government of India
Table 9: Indian railway traffic volume (as on 31 March, 2011)
Volume of Traffic 2007-2008 2008-2009 2009-2010 2010-2011 Passenger traffic (in millions)
No. of Passengers originating 6,524 6,920 7,246 7,552
Freight traffic - Tonnes originating (in millions)
Revenue Earning traffic 793.89 833.39 887.79 921.73
Total Freight Traffic 804.11 836.61 892.22 926.43
Source: Indian Railways Year Book 2010-11, Ministry of Railway, Government of India
Ports play a vital role in the overall economic development of the country. Along India’s coastline, there are 12 major ports and over 200 non major ports. The major ports are under the direct administrative control of the Central Government while the non major ports are under the jurisdiction of the respective maritime State Government.
India’s ports have suffered from capacity constraints, the major thrust in the medium term is to expand capacity and to take ports development program to higher level. Necessary actions are to be taken that will speed up award of projects relating to capacity augmentation and improve productivity. Ensuring vibrancy, efficiency and safety are the main goal of development of ports.
There is large demand supply gap in the Indian power sector, with all peak demand shortfall of 12%. By 2012, India requires additional 100,000 MW of generation capacity. A glance of the Indian power sector is provided in Table 10 and 11.
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Table 10: Indian Power Sector at a Glance (as on 30 May, 2012) Total Installed Capacity
**RES= Renewable Energy Sources(include small hydro project, biomass gasifier, biomass power, urban & industrial waste power and wind energy)
MNRE = Ministry of Renewable Energy
Source: Ministry of Power, Government of India (Central Electricity Authority)
Table 11: Power supply position for 2012-13 (Provisional as on June 2012)
Region Energy (MU) Deficit Peak Deficit
Source: Ministry of Power, Government of India (Central Electricity Authority)
A shortage of power is also a serious constraint on growth, India produces majority of its energy supply, mainly from thermal stations. But demand is rising far beyond the capacity of the public sector. The government is eager to draw private investment into the power sector, 100 percent FDI are permitted in generation, transmission and distribution, and incentives like income tax holiday for a block of 10 years are granted in the first 15 years of operation;
waiver of capital goods import duties on mega power projects (above 1,000 MW generation capacity) will provide a conducive environment to foreign investors hence attracting FDI.
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India has the world's most extensive railway system, road system and telecommunication network. However, they suffer from poor quality, inefficient management and overload. India's investment in developing infrastructure when compared with China, is still a mere fraction of total government spending. The strategy followed so far by the government is to increase investment in infrastructure through a combination of public investment and public private partnerships (PPP). Investments in these key areas have failed to keep pace with developments in the overall economy and thus emerged as major impediment to the economic development and growth of the country. Improving basic infrastructure services and encouraging greater private sector participation in telecommunications, transport and power can make a major contribution to development and growth of the economy.
Financial Sector
According to data released by the Reserve Bank of India (RBI) in June 2011 shows that the current account deficit in the fourth quarter of 2011-12 had rose to a level of 4.5 percent of GDP, compared with 1.3% in the same period last year. The current account deficit for the full fiscal 2011-2012 stood at 4.2 percent of GDP, or USD 78.2 billion.9 According to the RBI, if the current account deficit widens to uncontrollable level India's financial stability could be impaired.
Reforms in the financial sector have been pursued with the objective of more efficient market intermediation between savers and investors. During the year 2011, the government of India took a series of steps to deepen the capital market and encourage investment in infrastructure sector. These steps included increasing the Foreign Institutional Investors’ (FII) investment limit in long term infrastructure bonds, corporate bonds and government securities.
For 2009 and 2010, India battled near double digit headline inflation. The monetary and fiscal
9 Database on Indian Economy, Reserve Bank of India
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policy response during this period was geared towards taming domestic inflationary pressures.
A tight monetary policy impacted investment and consumption growth. The fiscal policy had to absorb expanded outlays on subsidies and duty reductions to limit the passing of higher fuel prices to consumers. As a result growth moderated and the fiscal balance deteriorated.
The Indian markets lack sufficient risk mitigation devices, this is not to be ignored since the financial linkages is an issue very close to the heart of the foreign investor. Some of these would come only after the market achieves sufficient depth. Steps should be taken to smoothen out the regulations. There is need to improve the Indian macroeconomic environment and strengthen domestic growth drivers to sustain high growth in the medium term.
Export and Import
In 2011, the world trade growth was weighed down by the Euro zone sovereign debt crisis, supply chain disruptions from natural disasters in Japan and Thailand, and turmoil in Arab countries. But during the recent period India’s share in world export has shown improvement. According to the WTO, India had the fastest export growth among major economies in 2011, followed by China (refers Table 12).
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Table 12: India Top 10 Total Trade for Year 2011-2012
Values in USD Million
Rank Country Export Import Total Trade Trade Balance
1 China 18,076.55 57,517.88 75,594.44 -39,441.33
Top 10 countries Total 140,696.66 250,329.45 391,026.11 -109,632.79
India's Total 305,963.91 489,319.48 795,269.50 -183,355.57
Source: Export Import Data Bank, Department of Commerce (DOC-NIC) Foreign Relations
India has friendly relations with several countries in the developing world. It has close strategic and economic relationship with most of the major countries across the world.
Though there is the presence of territorial disputes with neighboring countries like Pakistan, China, and Bangladesh. India has also forged relationships with developing countries like South Africa, Brazil, and Mexico. India also enjoys friendly relations with the Persian Gulf countries and most members of the African Union.
China is currently India’s largest goods trading partner (refers Table 12). India and China has established diplomatic relations since 1950. The two sides had signed the Most Favoured Nation Agreement and with the growth in bilateral trade between India and China, many Indian companies have set up operations in China to serve both their Indian and MNC clients.
In India many large Chinese state owned enterprises have also set up projects in the field of machinery and infrastructure construction. India and China has signed agreements, memorandums and issued declarations related to discuss strategic macroeconomic issues
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impacting both nations as a result of the changing international economic and financial landscape.
The relation between India and the United States of America covers cooperation in areas such as trade and economic, defence and security, science and technology, education, civil aviation, energy, environment and health. Trade and economic partnership between the US and India has been a key component of the bilateral relationship. The United States is the fourth largest source of FDI into India. As per the United States 2010 census, the Indian American community which includes a large number of professionals, educationists and entrepreneurs is the second largest Asian community in the States. This Community also acts as a catalyst to forge closer and stronger ties between India and United States.
India and Saudi Arabia enjoy cordial and friendly relations. The economic relations between the two countries have shown remarkable in the last few years. The bilateral investment between the two countries is growing steadily and Saudi Arabia is the fourth largest trade partner of India. With Saudi Arabia being India’s largest supplier of crude oil, accounting for almost one fifth of its needs, the import of crude oil by India forms a major component of bilateral trade.10
There has been steady progress in the relationship between India and ASEAN since the
"Look East Policy" policy was initiated in 1991. There has been increased cooperation between India ASEAN in the context of culture, education and academic, through the promotion of people to people contacts, and initiatives in the forms of exchanges and programs. There had been agreements with the leaders of ASEAN countries to enhance cooperation on issues ranging from trade, maritime security, food and energy security, and connectivity.
India was among the first countries to establish diplomatic relations with the EU in the
10 Department of Commerce, Minister of Commerce & Industry