Unit 4 Macro: Prospects for the Indian Economy

We are exceptionally grateful to Bob Hindle for making available the notes and presentation from a superb talk given by Roopa Purushothaman from Everstone Capital at the Oberoi International School, 3rd September 2013. This is a fantastic resource for students and teachers who are focusing on India as part of their work on growth, development and macro polices to manage the economy. Check below for full details.

Prospects for the Indian economy: Roopa Purushothaman, Everstone Capital, Oberoi International School, 3rd September 2013

One of the central questions in economics is why some countries and rich and why some are poor. A key variable around this topic is how the major changes in population impact on the world economy, notably when these changes take place in the BRIC economies.

The media sees India’s key problem as the falling value of the Rupee. A widening current account deficit is hard to finance when hot money is leaving the country in search of the safer havens of the US and Eurozone. India, like the UK, has relied upon FDI over the past few years- it has also had the benefit of remittances from non-resident Indians abroad sending money back to their country of origin. Perversely, India has sufficient stocks of natural resources to use for power generation but is a net importer of coal. Gold and oil alone make up 30% of India’s imports. Indians still tend to save in assets such as gold and property- this doesn’t help the banks, who have shortages of funds to lend.

India is now entering a period of lower economic growth. The government foresaw this to some extent- the Retail Liberalisation Act of 2011 opened the domestic market to foreign firms, but red tape such as the Land Requisition Act means it takes time for new companies to set up.

The Food Security Bill guarantees basic foodstuffs to the poor at low prices but costs the equivalent of US$17-18bn. At the moment it is unclear where the money to finance this is coming from. This is a particular issue given India has a growing budget deficit. High inflation in excess of 7% has eaten into the real incomes of the poor and the Congress government faces elections in 2014. The government and the Reserve Bank of India have done little to anchor inflation expectations.

Investment is low as a percentage of GDP. It has allowed its manufacturing sector to be destroyed by foreign competition and by weak management. Research suggests higher rates of growth are fuelled by manufacturing. India relies on consumption for 60% of its GDP, versus 34% in China. The government ends up stepping into the gap and has announced plans to develop infrastructure spending, but this will take time to feed through to the economy. The monsoon, however, has been good- this helps consumer and business confidence (rebuilding ‘animal spirits’) as much as keeping the price of agricultural goods down.

The solutions to the country’s problems is not one of developing ideas but of their execution

India’s greatest asset is its young population. 50% are under the age of 25 and represent a huge potential market to sell to. It also helps boost productivity- research suggests younger workers have a higher productivity rate and that this increases as they add to their skill set. However, the country’s supply chain problems mean domestic firms cannot produce enough to meet domestic demand, hence imports are sucked in. Poor transport infrastructure and storage facilities mean 25% of India’s agricultural production goes to waste before it hits the market.

400 million workers will be added to urban areas in India over the next 30 years. States such as Kerala have low rates of fertility; those such as Nagaland and Assam have much higher rates- these future workers need jobs. These cross-country movements need managing, to avoid a stark contrast not only between India’s core and periphery but also to prevent a repeat of China’s ‘ghost villages’ which all of the young people have left. Huge economies of scale are possible once resources such as labour shift to core areas and production costs fall. We are likely to see smaller cities develop on the fringes of mega cities such as Mumbai. 60 million Indians will be added to the global middle class over the next 30 years, second only to China in terms of numbers. India will contribute the largest increase to the global labour force during this period.

There will be a huge increase in the proportion of women who gain degree and postgraduate qualifications- not all of them, however, will enter the labour force. The labour participation rate for females is in the mid 30%s, well below the OECD average. This drags down dependency ratios and means funding care for the elderly is tougher as tax eceipts are lower than they could potentially be. It also reduces domestic consumption, as well as productivity growth.

This dynamic presents a real opportunity for India, which could see 30 years of growth and rising tax receipts. Can these be spent on a pension system (India’s dependency ratio is high by Asian standards) and how much will be invested in improving education and infrastructure? Can government deregulate markets sufficiently? Key questions for the next government.

Q&A afterword (notes from Cara Pereira):

The attitude of investors toward the emerging economies and the developed economies has switched - less interest in investment in the emerging markets when there is a pick up in growth as well as security in the investment in a developed economy. Besides, in the early 2000's people doubted the potential of the emerging markets until the growth rate surged. Similarly people are doing that now with the developed and emerging economies. Perhaps the emerging economies have reached closer to their potential and will have to implement more sustainable, and viable policies to achieve growth as before.

China's 1 child policy - effect on the labour force and the productivity (where a job the required 2 people must be filled by 1 person - implications on the efficiency and education of workers required?)

Data used for these projections - how accurate? How is it acquired? Why isn't there sufficient data? - Data modelled using statistics of present day India and projections are modelled against Korea (which is similar in terms of composition of AD,etc). How is the culture difference (say the willingness of a family to let the wife work) affect these projections?

However, the data isn't accurate. There are values that don't make sense/don't add up as well as the huge black market whose size can't be determined. India determines income per household by spending and consumption in an area. How accurate can this method be?

Most of the data was collected from the UN's statistics.

If data accuracy is a major problem, how can policy decisions be made when so much of it depends on this statistical data?

Is there a better indicator of the average income than the GDP per capita, especially in countries with such a huge income disparity? - Gini co-efficient can be used. However, there can never be an incredibly accurate value or a standard deviation of the income.

If there is such a huge labour force why isn't more employment being created using supply side policies? - there isn't a huge need for employment at this point - no clamouring labourers demanding jobs. The point about the need for employment was in relation to the future - the increase in labour force due to birth rates and more women willing to work. If there isn't an increase in the employment, there will be an increase in the dependency ratios.

In the long run, with increases in income and standard of living, won't the MPC also decrease after a certain point and the AD ratio (60%based on consumption) have to change?

Why was India categorised as an emerging market in the first place? - there were high rates of malnutrition, and other such indicators of bad human development, so why was it put in the same category as Brazil, China, and Russia? - The BRIC's countries were categorised solely on their potential and high economic growth.

Download the presentation here

everstone_copy.pdf