The Future of Indian Economy: Opportunities and Responsibilities

Mukul G Asher Professor of Public Policy, National University of Singapore sppasher@nus.edu.sg

Presented at Opportunities and challenges for Future Generations in Leadership in Ahmedabad (26-27 December 2008)

India: An Introduction
Population: 1.13 billion (2007) Federal State with 28 States and 7 Union Territories GDP USD1.2 trillion (2007) External Trade USD 528 billion (2007) Forex Reserves USD 247 billion (end Nov 2008) Market capitalisation (as end Nov 2008): USD 560 billion (50% of GDP).

Indias Geography
Country Population Land mass

India USA

1.13 b 0.30 b

3.2 m sq km 9.6 m sq km

India has one-third the land mass of the United States; and nearly four times its population. India therefore must develop strategies for sustainable growth and livelihood which suits its requirements, while continuing to integrate with the world economy and moving towards a knowledgebased society Economic efficiency in the use of scarce resources, growth and social cohesion promoting institutions, socio-political norms are therefore imperatives.

Indias Share in World GDP

India constitutes nearly 17 percent of the worlds population, but even in PPP terms its GDP share is only 5 percent. In all good things (eg, agricultural production, GDP, patents, tourists, FDI) Indias share is at least one-sixth of the worlds total.

Indias Share in World GDP

Conversely, in bad things, India has a much smaller share, India, can not feel a sense of accomplishment. There is therefore no room for complacency. India must continue to be outward oriented, and cultivate a mindset that absorbs ideas and good practices from all parts of the globe an apply them to meet Indias challenges. Yashend Huang (2008) has argues that if India can grow, then no other poor country must face a Faustian choice between growth and democracy
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25%

23%

24% 16%

3% 13% 4% 9%

Evolution of Global and Per Capita GDP in the Last 2,000 Years

Source: Commission on Growth and Development (2008)

Key Demographic Indicators in Asia

Country Total Population (millions)
2007 2050

Average annual rate of change of population

20052010
1.17 0.58

Total Median Age Life Expectancy Fertility Rate at Birth (TFR) Medium Variant
20052010
2.6 1.7

20452050
0.36 -0.32

20452050
2.0 1.8

2005

2050

2005-2010

2045-2050

World

6671.2 1328.6

9191.3 1408.8

28.0 32.5

38.1 45.0

67.2 73.0

75.4 79.3

China
India

1103.4
231.6 48.2 26.6 87.9 4.4 19.7 63.9 87.4

1592.7
296.9 42.3 39.6 140.5 5.0 18.7 67.4 120.0

1.55
1.16 0.33 1.69 1.90 1.19 0.47 0.66 1.32

0.30
0.10 -0.89 0.41 0.50 -0.38 -0.55 -0.27 0.21

3.0
2.2 1.2 2.6 3.2 1.2 1.9 1.8 2.1

1.8
1.8 1.5 1.8 1.8 1.6 1.8 1.8 1.8

24.3
26.5 35.0 24.7 21.8 37.5 29.5 32.6 24.9

38.7
41.1 54.9 39.3 36.3 53.7 43.4 44.3 41.6

63.1
70.7 78.6 74.2 71.7 80.0 72.4 70.6 74.2

75.9
78.6 83.5 80.1 78.7 84.6 77.6 78.1 80.3

Indonesia Korea Malaysia Philippines

Singapore Sri Lanka Thailand Vietnam

Sources: Population Division of the Department of Economic and Social Affairs of the United Nations Secretariat, World Population Prospects: The 2006 Revision, http://esa.un.org/unpp, 23 November 2007; 3:48:26 PM; UN Statistics Division, http://unstats.un.org/unsd/demographic, 28 November 2007; 6:29 PM. 8

Key Demographic Indicators in Asia

Country Life Expectancy at age 60, 2000-2005 Percentage of total population aged 60 and above Medium Variant
2005
N.A. 17 10.3 11.0

Population aged 60 and above (millions) Medium Variant

Men World
N.A. 20

Women

2050
21.8 31.1

2005
672.8 144.0

2050
2005.7 437.9

China
India

16
18 23 19 19 23 17 20 20

18
16 18 17 17 20 21 17 18

8.0
8.3 13.7 6.7 6.0 12.3 9.7 11.3 7.6

21.0
24.8 42.2 22.2 18.2 39.8 29.0 29.8 26.1

89.9
18.9 6.6 1.7 5.1 0.5 1.9 7.1 6.5

329.6
73.6 17.8 8.8 25.5 2.0 5.4 20.1 31.3

Indonesia Korea Malaysia Philippines Singapore Sri Lanka Thailand Vietnam

Demographic Trends
Asia is set to experience rapid ageing in the 21st century. China, Indonesia, Korea, Malaysia, Philippines, Singapore and Thailand will have nearly as many elderly by 2050 as in the world in 2005.

Asia in 2050 will account for nearly three-fifths of the worlds population.

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Demographic Trends
The rapid ageing of Asia is a result of reduction in fertility rates and increased life expectancy at birth and at age 65. By 2045-50, the above countries will have Total Fertility Rate (TFR) below the replacement rate as compared to only four in 2005-10. As is well known, increased longevity raises social security costs disproportionately. Uncertainty about longevity trends (example, due to uncertain impact of medical technology) is increasing the complexity of designing pension programs.

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Demographic Trends
The median age in Asia (with the exception of Philippines) will be well above average for the world in 2050. In Korea and Singapore the median age will be nearly 55 years. Sharply increasing median age and reduction in the working-age population can be seen across Asia. As the timing and pace of this reduction will vary among the Asian countries, there may be opportunities to leverage demographic complementarities for greater economic integration.

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Population Aged 15-59 for Asia-Pacific Economies 19502050

Source: United Nations, 2002, World Population Ageing 1950-2050 Sales No E02XIII.3, Department of Economic and Social Affairs, Population Division, New York: United Nations Publications.
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New Jobs in the World Economy 2005-2020

New jobs in the developing world In millions % of world increase

Developing Asia
China India Latin America United States

315.5
65 142.4 45 12.5

67
13.8 30.2 9.5 2.6

EU 25
Total

8.4
471.3

1.8
100

Source: Economist Intelligence Unit

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The Four Phases

Panagariya (2008) identifies four distinct phases in Indias growth and economic reforms since independence. Phase I (1951-65): Takeoff under a liberal regime Phase II (1965-81): Socialism Strikes with a Vengeance Phase III (1981-88): Liberalization by Stealth Phase IV (1988-06): Triumph of Liberalization

1. 2. 3. 4.

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The Four Phases

Phase Phase I Phase II Phase III Phase IV Time Period 1951-65 1965-81 1981-88 1988-06 Growth Rate 4.1 % 3.2 % 4.8% 6.3%

Indias real GDP grew at 6.9% pa during 2000-2007 (RBI Handbook 2008)

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Four Phases of Growth (percent)

7

Annual GDP Growth Rate (%)

6 5 4 3 2 1 0 1951-65 1965-81 1981-88 1988-06

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India: Changing Composition of GDP

Year 1950-51 1964-65

1980-81 1987-88 2004-05

Agriculture & Allied Industry Manufacturing Service 57 15 9 28 49 21 14 31 40 24 14 36 33 26 16 41 21 27 17 52

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Composition of GDP
1950-51
Agriculture and Allied Industry Manufacturing Service

2004-05
Agriculture and Allied Industry Manufacturing Service

Declining share of agriculture; increasing share of industry and services

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Food grain production

The governments wheat stocks on August 1 were up 102% y-o-y, rice was down 6% Rice procurement is still on and the government will be able to buy about 1.2 mt in the last two quarters of 2008
The governments rice stocks have fallen despite higher procurement, as several states have kept stocks for their own use.

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Merchandise Exports and Imports as Proportion of GDP

Year 1965-66 1975-76 1985-86 2005-06 Exports/GDP 2.9 4.8 3.9 20.5 Imports/GDP 5.1 6.3 7.1 22.6

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Merchandise Exports and Imports as Proportions of GDP

Merchandise Exports and Imports as Proportions of GDP
25 20

% of GDP

15 10 5 0 1965-66 1975-76 1985-86 2005-06

Exports/GDP Imports/GDP

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External Sector Data

In 2007, Indias total external trade in goods and services was USD 528 billion (47.9% of GDP) This is one of the important indicators of Indias rapidly integration with the world economy. India plans to achieve a target of USD 1000 billion before 2015 in its external trade. This will be a huge challenge in view of the current global crisis. The others are inward Foreign Direct Investment ( $32.3 billion in 2007-08), and remittances (~$ 30 billion in 2007) Indias outward investment is also growing.
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Official Poverty Estimates

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Poverty Decline under Liberalization Reforms

25

 Growth in PerCapita Net State Domestic Product Wide variation among states
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Major Challenges
Ensuring that good economics is good politics (this will require a shift from ruling to governing mindset, and administrative and civil service reforms). Environmental challenges. Energy and Food Security. Managing Urbanization. Accelerating physical and social infrastructure investments. Developing human capital for sustainable livelihoods through application of knowledge economy . Coping with demographic challenges.
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