Unit 4 Macro: Focus on India - Supply Side Issues

The rapid growth of the India economy has been helped by her economy enjoying a number of supply-side advantages. That said there remain structural supply-side weaknesses that will limit her continued competitiveness and development. This blog looks at the plusses and the minuses.

Supply-side advantages for India

A fast-growing population of working age
This is widely regarded to be one of India’s trump cards in the years ahead. There are 700 million Indians under the age of 35 and the demographics look good for Indian growth in the next twenty years at least. India is India is experiencing demographic transition that has increased the share of the working-age population from 58 percent to 64 percent over the last two decades.

Language and institutions
India has a strong legal system and many English-language speakers – the latter factor has been a key to attracting much inward investment from business service companies such as those specialising in IT out-sourcing.

Labour cost advantages
Wage costs are low in India and India has made strides in recent years in closing some of the productivity gap between her and other countries at later stages of development. Note below the strong improvement in productivity in the India farm industry

Data from Timetric.

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Agriculture value added per worker (constant 2000 US$), India from Timetric

High Technology Clusters
India’s economy has successfully developed highly advanced and attractive clusters of businesses in the technology space – witness the rapid emergence of Bangalore as a hub for global software businesses. External economies of scale have deepened their competitive advantages in many related industries.

Data from Timetric.

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India: Exports of ICT equipment, Information and communications (… from Timetric

Now let us look at some of the underlying problems for India on the supply-side

Structural weaknesses within the India Economy

Poor Infrastructure

This is often cited as one of the key aspects that holds back India. Why does poor infrastructure hurt the Indian economy?

o Higher energy costs and irregular energy supplies for nearly every business and especially India emerging manufacturing sectors
o Most expensive to transport products across the country
o Delays at ports hamper export businesses and delays at airports which increases the cost of international freight. It makes India less attractive to inward FDI
o Poor infrastructure adds to the cost of living and limits the extent to which millions of India’s lowest income families can escape absolute poverty
o Damages India’s tourism industry
o Supply-constraints in a fast-growing economy drives inflation higher (>9%)

In a Business Week article published in 2007, development economist Professor Jagdish Bhagwati, a professor at Columbia University, estimated that Indian gross domestic product growth would run two percentage points higher if the country had decent roads, railways, and power. India wants to build $1 trillion worth of infrastructure in the five years to 2017 but the government expects the private sector to fund half of it – this is unlikely!

Skills shortages
What impact will skills shortages have on the Indian economy?
o Pressure for wages to rise
o Makes India less attractive to inward investment especially in IT outsourcing
o Might hamper the rate at which the economy can innovate
• Extract refers to geographical mobility between rural and urban areas
• Many young Indians go overseas to continue or complete their studies, a lot return but others may choose not to. Limited places at India’s top universities have led to thousands of Indians applying to European and US universities if they cannot get into their chosen Indian faculty.

Data from Timetric.

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Life expectancy at birth, total (years), India from Timetric

Malnutrition and economic development

Malnutrition has been called by economists at the World Bank as the “non-human face” of poverty. High rates of malnutrition can severely impair development and bring untold human misery. In 2006, around 40% of Indian children under the age of five were undernourished. Progress in reducing this has been painfully slow.

Malnutrition
• Impairs brain development among the young
• Is responsible for nearly half of all child deaths
• Increases the risks of HIV infection and cuts the numbers of children and mothers who survive malaria
• Malnourished children are more likely to drop out of school and suffer reductions in their lifetime incomes

According to the World Bank, “the effects of this early damage on health, brain development, educability, and productivity caused by malnutrition are largely irreversible.” The surge in global food prices has had a terrible effect on the risk of malnutrition in many of the world’s poorest countries. It has certainly led to a sharp rise in premature deaths and severe illnesses linked to poor nutrition in countries such as India.

Policies to reduce malnutrition

1. Schemes to promote health and nutrition education plus direct provision of micro-nutrient supplements and fortified foods

2. Growth monitoring schemes for the newly born and infants supplemented with vitamin provision from community organisations

3. Targeting cultural norms – in some countries, young girls are often allowed to eat only after their brothers

4. Cash transfers – i.e. direct consumer subsidies that can be spent on certain foods

5. Government subsidies for grain prices and export bans on domestically produced foods

6. Better food prices paid to small-scale farmers

7. Opening up retail markets to international supermarkets where food prices might come down through economies of scale and increased competition

8. Infrastructure spending to improve access to sanitation and clean water supplies

India and retail reforms (a supply-side strategy)

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