Economic Highlights

New Delhi, 3 May 2007

Rise Of Indian Economy

Entering Trillion Dollar Club

By Dr. Vinod Mehta

Last week India joined what is known as the “trillion dollar economy club” as its “eleventh member”, as per the calculation of a Swiss firm, Credit Suisse financial services conglomerate.  The other “members” of the “club” are the USA, Japan, Germany, China, the UK, France, Italy, Spain, Canada and Brazil. The push came when rupee appreciated vis-à-vis US dollar; the GDP of Rs. 41,00,000 crore when translated into US dollar at the current rate of exchange gives the figure of 1.01 trillion dollars.

This is not surprising considering nine per cent growth rate, booming stock market and positive economic sentiments.  In fact economists, financial and investment experts from the developed countries, who have been closely assessing the economic developments in India, are upbeat about the Indian economy. 

Three months ago Gerard Walsh, Regional Director for Asia at the Economist Intelligence Unit in London, had said that India was already on the threshold of  a dollar one trillion economy.  According to a report prepared by investment bank Goldman Sachs, if this high growth rate continues, India's economy may then surpass the US and be second only to China's by mid-century. The report also says that India's programme of reforms has brought increased competition and efficiency.

Professor John Williamson of the Institute for International Economics in Washington observed in his keynote address on “The Rise of the Indian Economy” during a two-day seminar on "Teaching About India," held in March 2006, in USA: “I see little reason so far to think that the Indian growth rate is currently above 6-7 per cent on a trend basis, but that's a lot higher than most countries have achieved for long periods of time. It is high enough to take India into the first world in the course of some of our lifetimes. I do not see this as a threat to the United States in any event. For all the jobs that are being outsourced to India, there's some outsourcing in the opposite direction, opportunities that are only going to increase as India grows richer. So the outlook is basically optimistic.”

Various studies conducted across the globe envisage India and China to rule the world in the 21st century.  According to some experts, the share of the US in world GDP is expected to fall from 21 per cent to 18 per cent and that of India to rise from 6 per cent to 11 per cent in 2025, and hence the latter will emerge as the third pole in the global economy after the US and China.

Again economic experts have projected that by 2035 the Indian economy will be about 60 per cent the size of the US economy. “The transformation into a tri-polar economy will be complete by 2035, with the Indian economy only a little smaller than the US economy but larger than that of Western Europe. By 2035, India is likely to be a larger growth driver than the six largest countries in the EU, though its impact will be a little over half that of the US.”

But there is also a flip side to this current success story and if not handled properly could take back India once again to low growth rate of four per cent (the so called Hindu rate of growth) and perhaps to social upheaval. There are contradictions galore behind this success story.  As a write up in Christian Science Monitor noted: India has had nearly 60 years free of famine, growing enough food for its 1.1 billion people. Yet nearly 40 per cent of its vegetables rot in warehouses before reaching market. The country has a space programme, yet 30 per cent of the population lives on less than $1 a day; 78 per cent on less than $2. No wonder this years budgetary proposals have rightly emphasized inclusive growth.

The economic growth has so far benefited the rich and the middle class.  There are specific economic programmes for the poor people.  But a vast majority of the people who fall between the middle class and the poor people and can be said to belong to informal sector have not benefited to any significant extent.  These are the people all over India working as migrant workers in big cities and towns with their families back in villages.

When the economy grew by 6 percent from 1995 to 2005, the growth passed them over. During this time, poverty in India fell by only 0.8 percent, according to a study by the National Sample Survey Organization. These are the people who are not even allowed to open a bank account because they cannot furnish permanent residential proof in the city where they are working; these are the people who do not have access to insurance, to housing etc.  And we are talking of financial sector reforms!

Children of rich and middle class have access to good education because their parents can afford it; these children are equipped better to take advantage of job opportunities in the economy than the children studying in government and municipal schools.  The education standards are so poor in state-run schools that the children coming out of these schools find themselves unemployable.  How many of the children from these schools have become IT professionals, bankers, investment advisers or managers or lawyers?  The education in government and municipal schools needs to be brought on par with education in private schools so that the products of these schools can also take advantage of the economic opportunities being thrown up by high economic growth.

So far the IT sector has been the major contributor to India’s success story in terms of employment generation.  The jobs in this sector will continue to grow and it is feared that India may face shortage of trained manpower, but the problem is that one cannot just transfer farm hands and people working in the informal sector to IT sector.  Only the manufacturing sector has the ability to absorb these people to start with.  It is only now that the manufacturing sector has started growing.  Efforts are needed to facilitate the movement of these sections of people to the organized manufacturing sector.

The other contradiction is country's poor infrastructure which is already struggling to keep up with growth; power cuts are common as there isn't enough electricity to meet current demand, ports are overflowing, many roads are pot-holed and crumbling.  It has been noticed that India's roads and power grids are ill-equipped to handle the strain of a manufacturing economy. 

China has already completed half of an 80,000 km national dual carriage highway network. India has at present only about 5,000 km of comparable standard highways. Chinese ports and airports have much greater capacity and are more efficient than India’s. In fact India has under-invested in infrastructure and is now facing obstacles to broadening and deepening its growth process as a result. India   You wish to make Mumbai a world financial hub but how will the financial institutions function in Mumbai with everyday power cuts?

Finally the agricultural sector calls for special attention.  More than 58 per cent of country's population depends on agriculture, a sector producing only 22 per cent of GDP. However, the full potential of Indian agriculture as a profitable activity hasn't been realized yet. Agriculture upliftment will not only benefit farmers and a large section of the rural poor, but also will give fillip to overall growth of the economy through the backward and forward linkages of agriculture with the rest of the economy.

Time is running out and India has to move fast to tackle the obvious contradictions to remain “member” of the “trillion dollar club.”---INFA

 (Copyright, India News and Feature Alliance)

Economic Highlights

New Delhi, 19 April 2007

Keep Pace with Growth

REFORM ADMINISTRATION FOR RESULTS

By Dr. Vinod Mehta

Economic reforms were initiated 15 years ago, but successive governments are still struggling to start reforming the administration, which has become anarchism by world standards.  The governments are not keeping pace with the high economic growth rate. Worse, in many cases they appear to be coming in the way of economic reforms. The bureaucracy is unable to shed its old mindset. There is no initiative to introduce police reforms; the jail manual is as old as 1861; an officer is promoted over his 20 seniors one fine day with no justification and so on.  All this is leading to confusion, heart burning and low morale within the bureaucracy. Those who want to do something feel frustrated.

This imbalance in the reform process is creating problems and the Government is unable to implement its schemes.

Reforms in administration essentially mean transparency and putting an end to inefficiency and red tapism in governance. The second administrative reforms commission headed by Veerappa Moilly is looking into all of it. However, implementation of its recommendations at the earliest is was is required.

The APEC economies (consisting of Australia and Asian countries) are implementing wide-ranging regulatory and administrative reforms, resulting in improved market access, increased efficiency and reduced impediments to competition and innovation. According to studies, the reforms have generated large reductions in compliance and administrative costs, and in some cases have underpinned far-reaching domestic reforms that have significantly improved efficiency across a range of sectors. So, if administrative reforms can benefit the APEC economies’ economically, why not us?

The Prime Minister is quite aware of the imbalance between economic and administrative reforms. Delivery mechanisms are weak. Transfer of bureaucrats, often and without any reasons, has affected their morale, forcing him to personally supervise administrative reforms. One only hopes that he would be able to set things right.

It is common knowledge that decisions are taken but seldom implemented. Difficult decisions are glossed over by referring these to fresh committees.  There are too many layers of hierarchy, affecting the smooth functioning of administration; files keep hopping from one desk to another, back and forth, without any meaningful addition to the decision-making process.

Office rules and procedures are outdated and clearly hampering the functioning of various government offices. Discipline amongst employees is very bad.  Citizens are simply fed up with the administration. The Right to Information and creation of websites will not help unless mindsets and official procedures are also changed.

Therefore, it is time to introduce administrative reforms without further delay.  Already a number of committees have made recommendations, which need to be implemented with all seriousness. For instance, the report of the Fifth Pay Commission’s far reaching recommendations regarding administrative reforms.

But instead of accepting the report in toto, the Government only accepted populist recommendations! So we have an absurd situation, where recommendations on pay-scales is accepted, but suggestions on a freeze on fresh appointments, downsizing of the bureaucracy, simplification of office procedures etc. are ignored. This makes baloney of the whole report and some bureaucrats are of the firm opinion that the report should have been accepted in full.

In simple words, if recommendations regarding administrative reforms were not acceptable to the employees, those regarding pay-scales should not have been accepted. The latter led to heavy expenditure on the non-Plan side and the financial condition of some States which implemented the pay-scales is in bad shape.  

Also, the bureaucratic structure in the country is not officer-oriented and is rather heavy at the bottom. Once their jobs are permanent, the employees rarely show any interest in their work.  There is growing public opinion that work should be outsourced at the lower level on a contractual basis as there is no need to have a permanent cadre at that level. Some even believe that the higher posts too should be given out on contractual basis! 

Another disturbing factor is that over the years the bureaucratic structure has been highly politicized.  Interference from political leaders in bureaucrats’ postings has not only vitiated the work atmosphere, but has also led to a growing indifference towards work amongst them. Fixed tenure of postings for bureaucrats may be the answer to this anomaly, feel experts.

Then there is the question of training and retraining of government employees from top to bottom. It is common knowledge that people from different social backgrounds, enter the services at various levels and one cannot expect similar kind of behaviour from all.   Senior officers with middle-class background appear to have some sophistication, but live in their own cocoons, while those coming from the lower strata of society are relatively crude while dealing with the public. Therefore, proper training of employees becomes all the more important to achieve results. 

In fact, there is an emerging view that politicians too need training in administrative matters to enable them to understand the problems of administration. A case in point is that of France -- all the politicians are expected to clear a course on administrative matters before they are entrusted to handle the Ministries. 

Besides, opinion is growing that instead of the "general administrator" there should be the "specialist administrator", who knows what he/she is expected to do in their area.  Today, bureaucrats are made to move, say, from the Department of Animal Husbandry to that of Education, followed by Commerce and health etc. In the process, the incumbent has no specialist knowledge in the area he is assigned.

In sum, it is time to initiate reforms in administration, which go in line with the economic reforms. And, while the Administrative Reforms Commission is looking into this question and the Sixth Pay Commission into pay and productivity,  the bottom line is how soon can we implement the reforms.—INFA

 (Copyright, India News and Feature Alliance)

Economic Highlights

New Delhi, 12 April 2007

Reserve Bank’s Role

Controlling Inflation Canadian Style

By Dr. Vinod Mehta

Inflation has been a worldwide problem and most of the governments across the world have to tackle it one way or the other as it not only erodes the real incomes of the people but also hurts the economy over a period of time. Moderate Inflation rate of two to three per cent may be tolerable but inflation rate going beyond five per cent  becomes a political hot potato.

President Jimmy Carter was seriously bothered about inflation during his Presidency.  In a televised speech on October 24, 1978, he said: “I want to have a frank talk with you tonight about our most serious domestic problem. That problem is inflation. Inflation can threaten all the economic gains we've made, and it can stand in the way of what we want to achieve in the future. “This has been a long-time threat. For the last 10 years, the annual inflation rate in the United States has averaged 6-1/2 percent. And during the 3 years before my inauguration, it had increased to an average of eight percent.

“Inflation has, therefore, been a serious problem for me ever since I became president. We've tried to control it, but we have not been successful. It's time for all of us to make a greater and more coordinated effort. “If inflation gets worse, several things will happen. Your purchasing power will continue to decline, and most of the burden will fall on those who can least afford it. Our national productivity will suffer. The value of our dollar will continue to fall in world trade.”  Inflation continued and Jimmy Carter did not get the second term.

China has also been bothered by this problem.  In Vietnam, which is considered to be “emerging China”, consumer prices in the first eight months of 2006 rose from 4.8%, mainly prompted by high fuel prices and interest rate-driven high production costs, to 7.5%.

In India too the rate of inflation was around 17% in 1991, which was brought down to the level of seven per cent in 1993.  As recently as 2004 the rate of inflation was around six per cent.  And most of the time the Reserve Bank of India has responded by restricting money supply as all the Central Bankers do.

The problem at the moment is that inflation has raised its ugly head at a time when the economy is growing at the rate of about nine per cent and the Government fears that any hike in interest rates and credit curbs would lead to a decline in growth rates.  For instance, a hike in the interest rates for home loans or car loans will lead to decreased demand for homes and cars which in turn will affect the growth rate of vehicle and construction industries.  Higher interest rates would also add to the cost of production when the loans are taken by the business and finally affect the growth rate.  It appears that in India the Government and the Central Bank do not see eye to eye on the ways to curb inflation; this is also true of many other countries.

But the Central Bank and the Government in Canada have found a way to cooperate in keeping the inflation under control.  The Government of Canada and the Central Bank of Canada have developed “inflation-targeting framework”  Instead of working at cross purposes both the Government  and the Central Bank have signed a kind of MoU to keep the inflation under control.  This has been going on for the past 15 years and this agreement is signed every five years. 

To quote from their recent Joint Statement: “The primary objective of Canada's monetary policy  is to enhance the well-being of Canadians by contributing to sustained economic growth, rising levels of employment and improved living standards. Experience has clearly shown that the best way monetary policy can achieve this goal is by giving Canadian households and businesses confidence in the value of their money.

“It has been 15 years since Canada adopted an inflation-targeting framework to guide its monetary policy. During this time, Consumer Price Index (CPI) inflation has been reduced to a low, stable and predictable level of close to 2 per cent, real output has expanded at an average rate of 3 per cent per year and the unemployment rate has fallen to a 30-year low. Although a generally supportive international environment, coupled with significant domestic economic reforms and a prudent fiscal policy track, has played an important role in these positive developments, a key contributor has been Canada's monetary policy under the inflation-targeting framework.

The joint commitment of the Government of Canada and the Bank of Canada to the inflation targets has helped anchor inflation expectations. It has also provided a more stable and certain economic environment in which Canadians can make their investment and spending decisions.”

This agreement has been further extended by five years up to 2011.  As per the renewed agreement, the target will continue to be defined in terms of the 12-month rate of change in the total CPI (Consumer Price Index) and the inflation target will continue to be the 2 per cent mid-point of the 1 to 3 per cent inflation-control range.

The first such agreement was signed in 1991 when the rate of inflation in Canada was 5.9 per cent.  The  rate now ranges around two per cent.  Canada has found that  inflation-control target assists the Central Bank in determining what monetary policy actions are needed in the short and medium term to maintain a relatively stable price environment.  To achieve a rate of monetary expansion consistent with the target range, the Bank of Canada uses its influence on short-term interest rates.

If inflation is moving towards the top of the 1 to 3 per cent target range, that is usually a sign that demand in the economy for goods and services needs to be restrained through a rise in interest rates. If inflation is moving towards the bottom of the range, it is often a sign that demand is low and needs some support through a reduction in interest rates.

In this way, Canadian experience shows, monetary policy tied to an inflation-control target tends to act as a growth stabilizer. Ensuring economic growth at a sustainable pace means preserving past gains by avoiding a recurrence of the inflationary "boom-and-bust" cycles of the early 1980s and 1990s. It also means encouraging long-term investment in future growth and job creation by maintaining a stable, low-inflation environment.

The lesson from the Canadian experience is that the Reserve Bank should not act only when the inflation rate goes out of hand but act throughout the year by way of  inflation-control target shows.  This is a sure way to avoid recession which tight money policy (severe curbs on credit creation, higher interest rates etc.) may bring. 

The Ministry of Finance and the Reserve Bank of India should sit across the table and develop inflation targeting framework. The need of the hour is to preserve higher growth rate with moderate inflation over a longer period of time.  In the 1990s the tight monetary policy of the RBI to control inflation, which was raging at seven per cent, led to severe recession; that needs to be avoided now.---INFA

 (Copyright, India News and Feature Alliance)

Economic Highlights

New Delhi, 5 April 2007

Remove Barriers

Indo-Pak Trade Should Grow

By Dr. Vinod Mehta     

After the 2004 SAARC summit in Islamabad and the meeting between the Prime Minister of India and the President of Pakistan, there were positive indications that direct trade between the two countries would grow in the coming years.  At that time Pakistan was reported to have said that it was willing to give MFN plus  (whatever it may mean) status to India. But till date Pakistan has not moved an inch in that direction.

After nuclear tests by the two countries, while India has been able to maintain its growth rate at around six per cent then and increase it to nine per cent today, Pakistan suffered a decline to 3.1 per cent in 1999 against 5 per cent in 1998. Pakistan’s GDP growth rate in the year 2002 was placed at 2.8 per cent. The steep fall was attributed to fall in exports and in investment.  The economic sanctions imposed by the Western countries following nuclear tests had affected Pakistan the most, as compared to India. 

According to a report prepared by the Centre for Strategic and International Studies, Pakistan, the nuclear test precipitated a balance of payment crisis and near default on its external debt.  It further stated: "The Pakistani economy, unlike India’s, faced an immediate foreign debt crisis. A US dollar 1.56 billion loan from the International Monetary Fund helped stave of default and stabilize the country’s external financing position." 

But now Pakistan’s economy is also growing at a very fast pace, overcoming the debilitating impact of economic sanctions. According to Dawn, “Pakistan’s economy is on the up and business is booming. In 2005, the GDP growth rate hit 8.4%, which was the fastest growth rate achieved in over two decades, and per capita income has now surpassed the US$ 700 mark.

Adding to the buoyancy is the fact that growth is taking place across all sectors of the economy, including agriculture (7.5%), manufacturing (12.5%) and services (7.9%). As a result, Pakistan is now counted among the fastest growing economies in Asia.”  According to Pakistani newspapers, Pakistan is the third fastest growing economy in Asia after China and India.

In 2002 Pakistan exported goods worth US $ 11 billion and imported goods worth US $ 11.6 billion.  As for India, it exported goods worth 65.2 million US $ and imported worth 73.7 million US $ in the same year. Pakistan's major export items are cotton, fabrics and yarn, rice and other agricultural products while its imports consist of machinery, petroleum products, chemicals, transport equipment, edible oil and grains, pulses and flour. 

As far as trade between India and Pakistan is concerned, it is not much by world standards. According to available data, the bilateral trade between the two countries has increased almost 14 times between 1987-88 and 1998-99; in absolute terms it increased from Rs 47.15 crore to Rs 463.92 crore during this period. This is what is legal trade between the two countries either on Government to Government basis or between two private organizations of the two countries. 

However, much of the trade between India and Pakistan is being routed through a third country generally countries from the middle-east are South-East Asia. It is estimated that the trade between India and Pakistan through a third country has increased from about US $ one billion to US $ two billion in the past few years.  If this could be converted into direct trade both would gain a lot.

The older generation would recall that before the partition, the fertile agricultural areas, which are now in Pakistan, were areas which produced surpluses in the agricultural sector and supplied them as raw materials to industries which were in this part of undivided India. This complimentarity relatively speaking still stands. If this was to be revived India would get the raw materials still relatively cheap at international prices as the transport costs between the two countries will be much lower.

In fact, since the two countries are contiguous, freight charges of any commodity that moves between the two countries will be much lower whether they are transported by ship or by rail.  Therefore, if they open up their economies to each other, they would be able to satisfy each other's demand at much lower prices.

It is common knowledge that there is a great demand for commodities like tea, tyres and iron ore in Pakistan.  India is well placed to sell these items directly to Pakistan.  But Pakistan at the moment imports tea from countries as far as Kenya, iron ore from Australia and Argentina while Indian tyres are either smuggled or imported via Dubai and Singapore. All these items can be easily purchased by Pakistan from India directly at much lower prices. India on the other hand would still be interested in procuring apart from Sugar goods such as cotton and textiles, moulded plastic goods, fresh and processed agricultural produce, spices, cooking oil etc. directly from Pakistan.

If one goes beyond this India can meet Pakistan's demand for various kinds of machinery and equipment, including transport equipment, extend help in the modernization of its railways while India in turn can buy power from Pakistan.

Apart from trade in merchandise both the countries can benefit from trade in services, especially in the tourist sector.  As a confidence building measure why not start one day conducted tours from Amritsar to Lahore and vice-versa.  One day inter-country-inter-city tours are quite common in Europe.  The tourist industry of the two countries too will gain much from the regulated movement of tourists.

It has been generally argued in Pakistan that opening up of its economy would hurt its industry and business.  But one can counter-question Pakistan that if opening up of its economy to China has not hurt it, how could opening up to Indian economy will hurt its economic interests? The argument as advanced by some groups in Pakistan in defence of its industry is not valid.  India has already extended MFN status to Pakistan.  It is now for Pakistan to decide whether it wants to reciprocate in the same manner. The sooner the better.

Apart from Iran-Pakistan-India gas proposed gas pipeline, If the business grows India and Pakistan may also think of a gas pipeline from Turkmenistan via Afghanistan. The Turkmen gas will be the cheapest even after paying to Afghanistan and Pakistan the royalty/fee for transit to India. Similarly Pakistan has a number of products to offer, including dry and fresh fruit to India. It is also interested in selling electricity to India.

According to a report prepared by Indian Council for Research on International Economic Relations (ICRIER), trade between India and Pakistan could increase manifold, to US $ 6.6 billion, if barriers are removed and Pakistan implements the requirements of the South Asia Free Trade Area (SAFTA) agreement. The World Bank Chief believes that the trade between India and Pakistan has the potential to grow to US $ nine billion.

The sectors identified by the ICRIER report for trade between India and Pakistan are textiles, agriculture, engineering, chemicals, pharmaceuticals, electronics, metals and minerals, rubber and plastic. In addition, there is scope for trade in several services such as health, entertainment, IT, energy and tourism, the report concludes.---INFA

 (Copyright, India News and Feature Alliance)