Analyzing the Indian Economic Slowdown Part II - A presentation to NMCCA Vikram M Sampat Reliance Industries Ltd. August 19, 2012 Navi Mumbai

Areas needing improvement….. Fiscal discipline Investment & Capital Formation Inflation management –Agriculture –Energy –Infrastructure Earning the Demographic Dividend –Education –Urbanization –Importance of industrial sector Current account deficit

Need for improvement Despite all the advantages, high growth is not an entitlement, it has to be earned Needs concerted effort from –Business –Policymakers –Government –Technology & research India has structural issues in some key areas Focus efforts in key areas to put GDP back on growth track  Capitalize on the Advantages 

Fiscal Discipline India has slipped in fiscal management Overall deficit (incl. states) 10% of GDP  Public finance – A key concern

Crowding out of Private Investment Significant impact on private investment “Popular” spending stoke inflation –NREGA scheme, a case in point – payments delinked from value added –Increasing impact on inflation (as opposed to growth) Need to transparently measure effectiveness of public spending  India is paying a very high price for fiscal profligacy

Capital Formation Capital formation – key to developing country GDP growth Lower investment will depress short and longer term. ICOR for India is ~ 4 Stoke inflation  Focus on restoring high rate of capital formation

Investments & capital stock Support sharp demand growth due to accelerating PCI Need supply growth through capital stock addition India – one of lowest capital stock/GDP ratios in Asia Low investments leading to lower growth and inflation Infrastructure, energy and food are areas of particular worry  Need to boost investments

Gross Capital Formation Capital formation has improved for India However, more investments are required in infrastructure, energy and manufacturing Crowding out of private investment by Govt. spending  Focus on food, energy and infrastructure

Inflation Management Persistent, high inflation eats into growth Dual impact of inadequate capacity and rising per capita incomes Further fuelled by weakening currency and rising cost of imports Food and fuel – largest contributors  Inflation management essential to revive growth

Wage inflation Growing rural incomes (NREGA) NREGA - socially important but with low productivity leading to inflationary pressures Higher wage inflation  NREGA – Focus on productivity

Food inflation Agriculture output has not kept pace with income growth Changing food patterns – move to protein rich items  Focus on food production

Agriculture Over 55% population employed in agriculture: but slow growth Declining share in GDP Several areas of improvement –Productivity –Scientific crop management –Water management –Distribution: reduce wastage  Focus on food production growth to manage inflation

Agriculture – Need for Reform Agriculture YearNumber of holdings (in million) Area operated (in million hectares) Average area per holding (in hectares) Source: Agriculture Census India, A.K. Ojha Small land holdings Disguised unemployment Lack of technical expertise, knowledge & technology (India spends only 0.3% of agro GDP in R&D) Supply chain issues: − Improper storage facilities leading to high wastage − Large number of middle men leading to high cost  Reform agriculture with multi pronged benefits

Energy Management Energy is second most important inflation factor after food India – a growing energy consumer India deficient in petroleum resources Energy $155 bn contribute 32% to all imports and 85% of total current account deficit Failed to tap large coal resources due to inefficiency –Eg China: coal or US: shale Fuel subsidies – a large drain on fiscal balance and unsustainable  Energy policy - found wanting

Energy Scenario  Need proactive energy policy to meet India’s growing demand

Infrastructure Infrastructure bottlenecks throttle business Investments have stagnated Infrastructure investments – hitherto in public domain Need to resort to PPP in aggressive fashion  Policy for effective private participation in infrastructure

Inflation …. Summary Need to manage inflation to boost growth Monetary policy has little impact in view of major supply side constraints and demand pressures Need to pursue prudent, growth oriented policies in agriculture and energy Improve infrastructure bottlenecks  Inflation management through sound economic management

Earning the Demographic Dividend Demographic dividend not an entitlement..... needs to be earned –~600 mn Indians below the age of 25 –India entering a phase of lower dependency ratio Urgent need to empower the youth –…. Educate for employability –…. Foster environment for job creation in economy –…. Create urban infrastructure to ensure better standard of living GDP growth –A resultant of more people earning –Earn the fruits of demography  Focus on education, employment and urban infrastructure

Education… Focus areas Low reach (11% GER in higher education) Quality (Top 20% Institutes – world class, next 20% passable, next 60% lamentable) Need for knowledge economy education Growing demand (9% demand growth v/s 3.6% supply growth) Archaic Regulation (University Affiliations) –Syllabus –Fees –Public v/s private (education 3% of GDP, higher education 0.7% GDP, cannot meet the demand) –Return on investment (India spends $406/student v/s $2728 – China, $3986 – Brazil & $11790 – Malaysia) Political will and incentive (Voters need to make politicians feel accountable) Significant issues in primary and secondary education also  Mindset change an imperative for reform

Importance of Industry Sector India has a lower share of industry in GDP among peers Compared to peers, industry also employs lesser people Lower share for industry –Forces labour to remain agricultural –Caps services growth –Lower opportunity for unskilled and manual labour –Hampers overall economic development –Impact on exports and competitiveness  Industry sector - a key growth and employment driver

Urbanisation Cities are major source of economic activity At 32% urban population, India lags behind in urbanization (world average is 50%) India is slow in developing new cities This compromises quality of life in existing cities – particularly for rural migrants Limits migration opportunities High urban cost of living  Major urbanization drive – need of the hour Urbanisation

 Urbanization – India at cross roads

Current Account Deficit India – consistent current account deficit Indian reserves - built based on capital flows 85% of deficit is petroleum exports With high energy imports, industrial exports growth – an imperative  Concerted effort by industry /regulation to drive export competitiveness

Summary Indian growth has improved since 1988 post liberalization , a golden period helped by favourable conditions Indian economy has all the ingredients for sustained growth period However, need to address structural issues and weaknesses People and industry need to get their act together Create pressure on political system and government to provide policy framework supporting high growth  India – poised for takeoff; but we have work to do!!

Conclusions