Indian Economy Update June 22,2007 Isher Judge Ahluwalia June 22,2007 Isher Judge Ahluwalia 1

Emerging Economies : Growing Contribution 2 Emerging economies contribution to global economy is increasing rapidly Their share of world exports has increased from 20 per cent in 1970 to 43 per cent in 2005 Their GDP growth at 7 per cent is three times that of mature market economies at 2.3 per cent

GDP 2005 PPP (at 2003 Constant Billion USD) India:4 th Largest Economy in PPP terms Source: World Bank, WDI In real per capita terms, India is 9 years behind China.

Demographic Dividend % of Population aged Hence the importance of generating employment and equipping the youth with good quality education. Or, else, the demographic dividend could become a demographic liability. Source: UN, Population Statistics 4

Indian Economy on an Upward Growth Path GDP growth at constant prices (% per annum) Source: Central Statistical Organization 5

Inflation Rate (%) WPICPI Source: Central Statistical Organization 6

Declining Poverty Source: NSS Full Sample Surveys UNIFORM REFERENCE PERIODMIXED REFERENCE PERIOD 7

Changing Income Distribution Gini Coefficient IndiaChinaBrazil Source: World Bank, WDI 2005, NSS Full Sample Surveys 8

1. The decline in poverty is largely a contribution of sustained growth at moderate inflation rates. 2. It is important to raise the bar as expectations rise in a vibrant democracy. 3. Income inequality record in India is better than in China and Brazil. But between 1992 and 2000, Brazil has done better. Comments on Poverty and Income Distribution 9

Social Indicators :1 Life Expectancy (Years) Literacy Rate (% of population) Source: Census of India, National Family Health Survey-I,II,III 10

Social Indicators :2 Infant Mortality Rate (per 1,000 live births) Maternal Mortality Rate (per 10,000 live births) Source: Census of India, Sample Registration System (SRS) Estimates, National Family Health Survey-I,II,III 11

Social Indicators :3 Population Growth Rate (%) Birth Rate Birth per 1000 population Fertility Rate Avg lifetime births per women Source: Census of India, Sample Registration System (SRS) Estimates, National Family Health Survey-I,II,III 12

Social Indicators :4 Access to Safe Drinking Water (% of households ) Access to Sanitation Facility (% of households) ) Source: Census of India 13

Social Indicators :5 For children under three years of age. The nutritional status (weight-for age) is measured as percentage below 2 SD from the median of the International Reference Period. Source: National Family Health Survey-I,II,III Underweight Children (%)Net Enrolment Rate (%) Source: Ministry of Human Resource Development 14

Gross Domestic Saving (% of GDP) Source: Central Statistical Organization 15

Gross Investment (% of GDP) Source: Central Statistical Organization 16

Trade in Goods and Services (% of GDP) 17 Source: Reserve Bank of India

Exports & Imports of Goods and Services (% of GDP) 18 Source: Reserve Bank of India

Growth of Goods Exports (%) Source: Reserve Bank of India; Directorate General of Commercial Intelligence and Statistics (DGCI&S), Ministry of Commerce, Government of India 19

Growth of Services Exports (%) Source: Reserve Bank of India 20

Index of Real Effective Exchange Rate 21 Source: Reserve Bank of India

Share of Indias Merchandise Trade in World (%) Source: 22

Current Account Deficit (% of GDP) Source: Reserve Bank of India 23

Foreign Exchange Reserves (US $ Billion) Source: Reserve Bank of India 24

Foreign Investment Flows (US $ Billion) Source: RBI, India 25

Structural Change over time GDP by Major Sectors: India and China India China Agriculture Industry Manufacturing 25 (17) 27 (17) 27 (16) 47 (40) 42 (33) 46 (37) Services Source: World Bank, WDI

27 Import Weighted Average Import Duty Rates in India Agriculture Mining Consumer Goods Intermediate Goods Capital Goods All Commodities

India Inc on a buying spree CompanyAcquisitionPrice (million $) Reliance IndustriesFlag Telecom, Bermuda Trevira, Germany Tata MotorsDaewoo, Korea118.0 Infosys TechnologiesExpert Information Services, Australia 3.1 WockhardtCP Pharmaceuticals, UK18.0 Cadila HealthAlpharma SAS, France5.7 HindalcoStraits Ply, Australia56.4 WiproNerveWire Inc, US18.5 Aditya BirlaDashiqiao Chem, China8.5 United PhosphorusOryzalin Herbicide, US21.3 Source: Wall Street Journal; IBEF Research 28

Top 10 overseas acquisitions InvestorInvesteePrice ($) Tata SteelCorus, UK8.04 bn HindalcoNovelis6.00 bn Videocon IndustriesDaewoo Electronics, Korea695 mn Tata TeaEnergy Brands Inc., US677 mn Suzlon EnergyHansen Transmissions, Belgium570 mn Tata SteelNatSteel, Singapore486 mn Tata TeaTetley,UK407 mn Tata SteelMillennium Steel, Thailand404 mn RanbaxyTerapia Romania324 mn VSNLTeleglobe, Canada239 mn Source: Economic Times, IBEF Research 29

Factors driving the global acquisition spree Access to historically cheap capital, with Indian interest rates falling to around half the level a decade ago Deregulation, that has enabled cheap overseas borrowings Buoyant stock market provides a favorable climate to raise money locally 30

Challenges 1. Infrastructure Government has estimated that it would need at least $350 billion for infrastructure development –primarily railways, roads, ports and power projects- in 11 th Plan ( ). This is just to maintain the current level of economic growth. Public-private partnerships (PPP) can play a vital role to achieve the same. 31

Challenges 2. Human Capital India has youngest labour force in the world India has some 22 million graduates, including 6 million science graduates, 1.2 million with engineering degrees and 600,000 doctors. Annually about 4 lakh engineers graduate from Universities, contributing to the booming IT sector which boasts of Wipro, Infosys and Tata Consultancy as world class enterprises. The key to long-term sustainable growth can be the quality of human capital. 32

2. Human Capital (contd.) Employment of 71 million additional persons has to be created in next five years. Working age population is likely to be 800 million by This will pose enormous challenges in terms of providing adequate education and employment opportunities. In the long term, India will face challenge of inadequate pension system which could become a fiscal and social problem. The pace of change poses significant adjustment costs and risks to the economy (e.g. it took 120 years for the 69 + population to double from 7 % to 14 % in France versus 25 years in India), particularly given fiscal constraints (consolidated fiscal deficit was 7.7% of GDP in ) 33

Thank You 34