INDIA : Challenges Ahead

by Asif Parvez – Innovatori Europei India

India has witnessed rapid economic growth in the past decade, and it has now become one of the emerging economies in the world. It is the major force among the BRICS countries. The economic reforms undertaken at the beginning of the 1990s have helped India shift towards an average annual growth rate of 6.5% in the past decade. It moved from its previous socialist policies to a more open market-oriented model. Still, weaknesses and contradictions persist, with a large unfinished agenda that needs to be tackled to maintain India’s success. India is occupying two worlds simultaneously. In the first, rapid economic growth and social changes occur. In the other, a large percentage of the population appears to be left behind due to lack of good social services, low employment opportunities and few prospects. Bridging this gap will be a major challenge. With more than a billion people and one third of the world’s poor, India needs rapid growth, together with strong employment creation and extended social protection, to reduce poverty and sustain income increases for its very young population.

India has also increasingly asserted itself on the international stage, seeking greater presence in multilateral institutions, for example through its campaign for a permanent seat in the UN Security Council. The role of the powerful Indian Diaspora (US, UK, Gulf) weighs heavily on India’s foreign policy. The country is facing both short- and medium-term policy challenges. In the current situation, with declining economic growth (around 7.5% in 2011 from high of 9-10% in 2007) albeit with uncertainties of how well entrenched growth is-policy makers face a dilemma. Too slow a removal of the fiscal stimulus may lead to a quick uptake of inflation and force them to raise interest rates by more than they would otherwise choose. Alternatively, too rapid a removal of monetary accommodation may lead the economy to stall and prolong the downturn.

Despite the strikingly rapid growth in the services sector over the last decade, India is still heavily reliant on agriculture and effects of the monsoon. While the share of agriculture in GDP has fallen from nearly 40% of GDP in 1980-81 to less than one quarter of GDP in 2010-11, the sector employs about 65% of the Indian workforce. India is one of the leading exporters of IT services-driven mainly by the availability of a low cost, English-speaking, qualified labour force. But huge gaps continue to exist on the supply side–the digital divide, for instance. While the urban population, with access to modern facilities, is increasingly getting used to computers, rural India is mostly starved of IT facilities.

Good health facilities exist in the urban areas, but in rural areas these are very limited and access is beyond the financial and physical reach of the poor. The current investment in health is less than 1% of GDP remains largely inadequate to address the needs of the population. Therefore, rural reforms are crucial to eradicating poverty and improving medical facilities. Another major challenge in poverty reduction is the correction of regional imbalances, since poverty is highly concentrated in the northern and eastern parts of the country. Structural reforms and social cohesion are needed to accelerate growth and substantially reduce poverty.

With a long, densely populated and low-lying coastline and an economy tied closely to its natural resource base, India is very vulnerable to the impacts of climate change. Between 1990 and 2010, India’s carbon emissions increased by more than 180 per cent. The per capita carbon emissions are expected to increase further due to rapid pace of urbanization, increased vehicular usage and continued use of older and more inefficient coal-fired plants. These increased carbon emissions (recently highlighted at Climate Change Summit 2011 in South Africa) are likely to have severe adverse impacts on India’s precipitation patterns, ecosystems, agricultural potential, forests, water resources, coastal & marine resources, besides an increase in the range of several disease vectors. (Source: World Resources Institute’s (WRI) Climate Analysis Indicators Tool (CAIT)

For most outsiders, India has an image of an exciting, but dirty and unsafe country. Currently, India has a very small share of the world tourism market in-spite of huge potential. There are various good reasons why this percentage is so dismal. Current external sources of information do not portray a positive image of India. International tourists who visit India have a mixed experience. While most return satisfied with the variety of unique experiences India has to offer, safety, cleanliness, and quality of infrastructure still bother many.

GDP growth in recent years and now accounts for 55% of GDP and 25% of total employment-it is difficult to see how India will be able to sustain inclusive growth without boosting agricultural productivity and further strengthening manufacturing. Fiscal management of the economy, notably the fiscal deficit, is a major reason for concern, particularly at the state level. Despite the success of its IT services industry in global markets, India is perceived un-favourably on some dimensions by prospective customers. Sources of information that investors and foreign business executives usually rely on do not convey a favorable impression of India on a broader note. The principal shortcomings are perceptions of security risks, unreliability of Indian suppliers generally (other than IT perhaps), and lack of sound infrastructure in power, rail, road and airport (despite significant improvements in telecom recently).

The outline of the improving economic landscape is, however, recently blurred by a recent surge in inflation reaching to more than 10% in 2010-11, largely propelled by food inflation and by weakening of rupee in the international market. The government took several supply-side measures to counter the recent surge in prices, including selling wheat and rice from buffer stocks, temporarily suspending duty on sugar imports, and initiating measures against hoarding. Uncertainties about domestic fuel prices (which again require heavy subsidies as global oil prices climb hovering above 100 USD per barrel amidst growing tension between Iran and US) are also contributing to inflation expectations.

While India faces an unemployment crisis, ironically, many countries (like in EU & other western countries) are projected to face workforce shortages in the same period due to lower birth rates and an increase in the proportion of the elderly in their population. Based on current demographic trends, India will need to generate upwards of 150 million jobs over the next decade simply to keep the unemployment rate from rising. Generating job intensive growth and reducing the size of the informal economy requires a development strategy focused on labour-intensive sectors, including more labour and product market flexibility and adequate labour market policies. Long-term prospects for widespread employment generation will depend upon continued economic diversification, and development of industrial and health sector. Increasing employment and investment in health, infrastructure and R&D sector are the best ways to make India’s economy more productive, socially inclusive and sustainable. Also, India needs to move faster from its present image of merely ‘low cost’ to become strong on other important dimensions of customer satisfaction such as quality and innovation. While several agencies are working to promote India, their efforts are not coordinated. As a result, different images of India are projected and the fragmentation of resources across various initiatives leads to limited impact.

Sources: Asian Development Bank Report-India; India-EU, Ecorys; India Strategy Paper 2007-2013, European Commission; World Economic Forum Report etc.