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					 Effects of India’s growth on the
global economy and environment
            Veena Jha
       Outline of presentation

• Stylised Facts on India’s growth and
• Broad drivers of growth in India.
• Implications of India's success for other
• Policy lessons learnt that may have
  relevance for other countries
    Stylised Facts about the Indian
• 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
• 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.
   Stylised Facts about the Indian
• Period after 1999 saw significant
  poverty reduction, particularly in rural
  areas, though income distribution
• Important reasons were:
  – a sharp decline in inflation (particularly
    food prices),
  – Higher worker participation rate due to
    demographic changes and opportunities
    created by growth.
      India’s real GDP growth
Period    1950-   1980-   1990-   2000-
          1980    1990    2000    2007

Annual   3.7%     5.9%    6.2%    6.8%
Real GDP

Annual     1.5%   3.8%    4.4%    5.8%
Real GDP
per Capita

          1999-2000   2004-05

1 Rural        27.1      21.8

2 Urban        23.6      21.7

3 Total        26.1      21.8
Informal Sector Asset formation

                                       pd 1pvrty
 150.00                                pd2pvrty

                                       pd 1wages
                                       pd 2wages

   0.00                                pd1asset
          1 4 7 10 13 16 19 22 25 28   pd2 asset
  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.

   The average HDI has risen in the 1990s, the coefficient of variation has

      These numbers are therefore quite consistent with the conclusion that inter-state disparities
                            in well-being have not worsened in the 1990s
             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
• 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.
                 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
    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
• Improve labour participation rates further from 61% to 82% as in
• 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.
   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.
   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.
    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

• 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.
  Effects of India’s growth on Africa
• Upward pressure on raw material price levels which would benefit
• 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
• 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.
      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

• 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?
   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.
   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.
   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
   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.
   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
Policy Lessons for other developing
• 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.
                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.
Thank you very much. Pl. email comments

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