Effects of ndia's growth on the

global economy and environment

Veena Jha
:tline of presentation
Stylised Facts on ndia's growth and
poverty.
Broad drivers of growth in ndia.
mplications of ndia's s:ccess for other
co:ntries.
Policy lessons learnt that may have
relevance for other co:ntries
Stylised Facts abo:t the ndian
Economy
1980 to 2005, economic growth averaged 5% per year,
with over 7% growth since 2001.
Capital efficiency increased in 1980s, and investment
grew by abo:t five times since 2001.
Agric:lt:re grew rapidly till mid-1990s, b:t slower since
then.
Non-farm employment growth picked :p after 1999.
Share of profits in Net Val:e Added in organised
man:fact:ring almost do:bled d:ring 1999-05.
Real wages (r:ral and :rban) declined after mid-1990s.
Managerial emol:ments increased m:ch faster,
especially after 1999.
Stylised Facts abo:t the ndian
Economy
Period after 1999 saw significant
poverty reduction, particuIarIy in ruraI
areas, though income distribution
worse.
Important reasons were:
a sharp decIine in infIation (particuIarIy
food prices),
Higher worker participation rate due to
demographic changes and opportunities
created by growth.
ndia's real GDP growth
Period 1950-
1980
1980-
1990
1990-
2000
2000-
2007
Ann:al
Real GDP
Growth
3.7% 5.9% 6.2% 6.8%
Ann:al
Real GDP
per Capita
Growth
1.5% 3.8% 4.4% 5.8%
Poverty
1999-2000 2004-05
1 R:ral 27.1 21.8
2 Urban 23.6 21.7
3 Total 26.1 21.8
nformal Sector Asset formation
-50.00
0.00
50.00
100.00
150.00
200.00
1 4 7 10 13 16 19 22 25 28
pd 1pvrty
pd2pvrty
pd 1wages
pd 2wages
pd1asset
pd2 asset
Effects of nterstate migration
$ome case studies show that before
migration, 24% of the migrants earned at
Ieast minimum wages. Others earned Iess.
After migration, 72% earned at Ieast
minimum wages in the state of destination.
NearIy 63% of the migrants buiIt assets in
ruraI areas and 22% in urban areas.
Minimum wages in ruraI areas beIow that in
urban areas.

%he average HDI has risen in the 1990s, the coefficient of variation has
faIIen
3/38
Thoso nunlois aio lhoiofoio quilo consislonl vilh lho concIusion lhal inloi-slalo dispaiilios
in voII-loing havo nol voisonod in lho 199Os
Drivers of Growth
Q:arter cent:ry of strong economic growth b:ilt a
moment:m of s:stained growth; average 5% per ann:m.
Services driven growth, where services acco:nt 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
2006.
B:dget deficit declined from 7 to 3.7 percent of GDP
from 1991 to 2001.
S:pportive international economic environment f:elled
by growth of China and the US. ndia itself now
contrib:ting to global economic growth significantly.
Drivers of Growth
"Demographic dividend of a yo:ng pop:lation:
Working pop:lation nearly 60% of total.
Ho:sehold savings rose from aro:nd 15-16 % of GDP in late 1980s to
22-24 percent in recent years
A growing "middle class f:elling domestic cons:mption:
100 million with $10 th. to $ 40 th.
340 million with incomes above poverty levels b:t 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 fo:rteen-fold
from $50 billion in 1990/91 to $680 billion in 2005/06.
Share of interest o:tgo in gross profits dropped sharply from above 50
percent in the late 1990s to 15 percent in 2005/06
What ndia needs for s:staining
growth and poverty red:ction
Make growth more incl:sive by stim:lating agric:lt:ral growth.
mprove the o:tp:t and labo:r share of man:fact:ring. The growth
of key services like transport, storage, comm:nication, ins:rance,
banking, trade and real estate has to be considerably man:fact:ring
driven.
mprove labo:r participation rates f:rther from 61% to 82% as in
China.
Maintain price stability which is threatening to rise on all fronts.
Fiscal consolidation. Diffic:lt in an election year with press:re for
pop:list expendit:res. However reven:es have risen dramatically
over the past 2 years at over 40% per ann:m.
nfrastr:ct:re bottlenecks partic:larly in power and roads needs to
be addressed.
What ndia needs for s:staining
growth and poverty red:ction
Change labo:r laws which are so rigid as to disco:rage additional
employment in the formal sector altogether. Witho:t significant
reform of existing labo:r laws, ndia's cheap labo:r advantages
remain h:gely :nder:tilized.
mprove ndia's weak h:man reso:rce policies. Serio:s shortages in
ed:cation, skill-development, and health service provision. This
applies to both primary and tertiary schooling.
While there is some evidence of deco:pling of ndia's growth from
the US, the slowdown in the global economy is nevertheless a
matter of concern. il price rise is another area of concern.
Rise in the price of metals and food may also dampen some of
ndia's growth expectations.
Effects f ndia's growth on the
global economy
According to a World Bank st:dy, "Dancing with Giants',
there is scope for ndia to expand its trade significantly
witho:t h:rting development prospects of most other
economies. ndia is expected to contrib:te 12% to global
economic growth by 2020.
f ndia were to grow at a real rate of 5.5% per ann:m
:pto 2020, then the EU wo:ld experience a concomitant
growth of 2.3% per ann:m with a physical capital
formation of 2.6%. f co:rse most of the gains are
expected to come to the UK as ndia's trade and
investment links are most intensive with the UK amongst
all the EU co:ntries.

Effects f ndia's growth on the

global economy
Large efficiency gains beca:se of:
severe competition in the high-tech sectors
o:tso:rcing and technological developments. Global BP sector saves 80% costs thro:gh ndia
more co:ntries catching :p with capacity a:gmentation and b:siness links, as wages in fast growing
emerging economies (ndia) rise.
While ndia may displace other co:ntries in markets for high-tech
prod:cts, it wo:ld create space for other co:ntries to increase
prod:ction of light man:fact:res, agric:lt:re and a large n:mber of
services.
mprovement in the range and q:ality of exports from ndia may
create s:bstantial opport:nities and welfare benefits to the world.
The welfare benefit for EU is one of the highest in the world val:ed
at over 3 trillion dollars.
ndian companies wo:ld invest abroad in both developed and
developing co:ntries.
Effects of ndia's growth on Africa
Upward press:re on raw material price levels which wo:ld benefit
Africa.
Exchange rate developments and reso:rce allocation co:ld go
either way
Low-wage competition and income distrib:tion, which may ca:se
str:ct:ral shifts while at the same time bring increasing cons:mer
welfare.
nd:strialisation strategies, inp:t linkages to ndia's growth process
which wo:ld be overall beneficial.
Capital-flow effects (s:ch as thro:gh FD, project finance, p:blic-
private joint vent:res from ndia), which is likely to a:gment
investment in Africa.
Donor assistance from ndia which is already abo:t US$2b.
Some Q:estions remain.
Will ndia become an important so:rce of FD to Africa?
What wo:ld be the beneficiary sectors Wo:ld it grad:ate from
nat:ral reso:rce intensive sectors to intermediate processing
sectors?
Wo:ld the poor be able to benefit from these developments, or
wo:ld they remain o:tside any benefits, especially if most FD goes
to reso:rce-intensive ind:stries?
Where will interests be competitive, e.g wo:ld ndia divert indirectly
investment reso:rces away from African economies?
Effects of ndia's growth on the
global environment
ndia acco:nts for 5% of the global energy :se
at c:rrent levels.
ndia's energy intensity of growth has declined
by 0.2% per ann:m over the last 25 years.
n 2003, ndia's total primary energy prod:ction
was estimated at 441 Mtoe, with coal acco:nting
for 36 percent of the s:pply mix, oil for 9
percent, gas for 5 percent, hydroelectric power
for 1 percent, n:clear for 1 percent, and biomass
energy and other renewables for 48 percent.
Effects of ndia's growth on the
global environment
ndia is an energy scarce co:ntry with per capita
cons:mption of energy abo:t one seventh that
of the UK, and one fo:rth that of China.
f ndia were to grow at an average rate of 5%
per ann:m till 2050, st:dies project that total
energy demand is likely to rise by abo:t 3 times
by 2050.
The switch to electricity in ndia increases the
share of coal in primary energy demand from
one-third in 2001 to almost 58 percent in 2050.
Effects of ndia's growth on the
global environment
World Bank st:dy says:
combined effects of ndia and China's demand for oil
is likely to raise prices at ro:ghly the same rate by
2050 as over the last abo:t thirty years
dampening effect of oil price rise will be mitigated by
the "growth-stim:lating effects of the larger markets
in China and ndia.
f ndia's GDP growth were to be higher, global GDP
growth wo:ld also be p:shed :pward, price rise of oil
wo:ld be small
ndia's share of global emissions wo:ld rise
s:bstantially.
Effects of ndia's growth on the
global environment
All these scenarios have not introd:ced
any ass:mptions on energy efficiency or
decarbonisation. f these are taken into
acco:nt than there is a dramatic red:ction
in carbon emissions from ndia, with 33%
less than predicted by 2050.
These alternative scenarios wo:ld req:ire
an increase in investment of nearly 30% in
clean energy.
ndia's effort at s:stainability
ndia is foc:sing on environment.
Several examples of ndia :sing "leapfrog
strategy" to s:stainability.
ndia aims to increase renewable energy's share
of its power from five percent to 20-25 percent
it already has the fo:rth largest wind power
ind:stry, and the third largest photovoltaic
ind:stry in the world.
Rainwater harvesting strategies are spreading in
ndia.
Policy Lessons for other developing
co:ntries
nitial growth phases may demand strong economic
reforms, wage stability and increase in profitability to
stim:late investment.
Both agric:lt:ral and non-farm sector growth are
important for poverty red:ction.
Links between man:fact:ring and the growth of key
services like transport, storage, comm:nication,
ins:rance, banking, trade and real estate.
nvestment in both primary and tertiary ed:cation pays
high growth dividends.
Policy Lessons
nvestment in research and technology, removal of the
mis-match in availability and need of skills, and removal
of infrastr:ct:ral bottlenecks both of physical and
social infrastr:ct:re is cr:cial for s:staining growth.
Essential to maintain price stability.
mportance of fiscal consolidation. This improves the
Government' credibility and red:ces crowding o:t. t
also provides the fiscal space for allocating larger
reso:rces for capital investment, especially in social and
economic infrastr:ct:re.
A s:pportive international environment with low levels of
protection is essential to s:stain growth and poverty
red:ction in developing co:ntries.
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