Indian Economy, 5th edition (51 page)

(c)
As a result of all this, all emerging economies with a little ability to organise their workspace and impart skills to their workers are now capable of taking advantage of this windfall. The bottom end of the skilled-labour spectrum in the US and Europe now faces competition from the top end of the skilled labour band of India, China, the Philippines, Indonesia, and several other emerging economies. This has energised large corporations in rich and poor countries and caused booms in various regions, like
Silicon Valley
in the United States. But this is also causing inequality to rise in both industrialised nations and emerging economies.

(d)
A recent paper
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highlights how this process is one of the causes of growth and employment trends, within the US economy diverging and inequality rising. And ‘the major emerging economies are becoming more competitive in areas in which the U.S. economy has historically been dominant, such as the design and manufacture of semi-conductors, pharmaceuticals and information technology services’. By the same argument the skilled end of the labour markets in India and China is competing with its counterparts in industrialised nations and, as a consequence, its salaries are rising, resulting in growing inequality in these countries.

Inter-country tensions have been building up in the other domains, too, disparities in
savings rates
across nations have often led to acrimonious debate and search for first cause. It has been suggested
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that China’s huge savings rate may not be entirely because of domestic structural factors in China but a response to the fact that the savings rate in the U S dropped sharply between 1960 and 2010.

The above-discussed adjustments/changes/shifts give rise to economic turmoil and crisis and, in addition, are politically sensitive matters that can lead to protectionism, which can do more harm than good. It is important for us to recognize that none of these structural shifts are caused by the actions of any one individual or nation. Millions of little actions and thousands of scientific discoveries over decades and human inventiveness in general have given rise to globalization and we have inherited the world we have. It is for us to take the givens as given and use collective bodies such as the G-20 to ensure that we do not fall victim to
protectionism.
It is important to remember that through all this turmoil the global pie/opportunities
(basically, due to the ongoing process of globalisation about which even the developing nations have no doubt who questioned its very rationale while the WTO was in the process of emergence, i.e. 1985-1994)
is expanding. Hence, by having effective coordinated action, it is possible to convert what appears at first as adversity into advantage.

Presently, we see very high levels of private consumption and government expenditures (in relation to their GDPs) among the advanced economies. In such case, a
prolonged slowdown
could place further pressure on their budgetary balances and household savings (that are already low) and adversely impact investment and their potential growth. Thus the possibility of low growth setting off a vicious cycle of
higher debt
and
low growth
cannot be ruled out.

This is why, even when the emerging economies (including India) witnessed a slowdown in growth in 2011 due to the renewed bouts of uncertainty in the global economy, there are reasons to suggest that the growth prospects of most of these economies remain robust in the medium to long run – due to various factors that drive growth such as
17
:

(i)
demographics,

(ii)
size of the domestic market,

(iii)
high investment rate, and

(iv)
high saving rate.

In 2011, out of 184 countries listed in the IMF’s WEO, there were only 26 with a population of at least 10 million and growth rate of over 6 per cent. Most, if not all, are the so called emerging markets. Quite understandably, the dim view about the growth prospects of advanced economies has put the spotlight on emerging and developing economies as the new
growth drivers
of the global economy.

The underlying shift in global economic setting raises the question as to whether future changes in the world economy would unravel in a smooth manner, or be disruptive. Needless to say
India,
even while carefully responding to the immediate economic challenges emanating from domestic and global sources, will also have to craft and calibrate its policies keeping both outcomes in view.

Presently, the global situation is marked by volatility in world financial markets, uncertain growth in the advanced economies, and possible disruptions in supplies of energy apart from other
geopolitical tensions.
There is contradiction between the short-term need for growth and maintaining demand and the need for fiscal consolidation that marks the current policy environment. But even as the world economy, three years after the global financial crisis of 2008, continues to move from one uncertainty to another, there have been continuing efforts in multilateral fora such as the G-20 to bring about greater understanding and coordination in dealing with global imbalances and addressing the weaknesses that might have led to the global crisis, to arrive at measures to revive global growth.

LOCATING INDIA

Over the years, India has become a more open economy. The total share of imports and exports accounts for close to 50 per cent of GDP while that of capital inflows and outflows measures up to 54 per cent of GDP. Yet economic outcomes and their impact on growth and development arising from the interaction between the domestic and external economies are contingent on a large number of factors. Though economic outcomes are to some extent contingent on choosing policies appropriate to the conditions characterizing an economy, the relative position of an economy vis-à-vis other countries in a global setting could facilitate (or even constrain) policy choices. A few features that characterize India that may be relevant in its further engagement with the global economy as also for its future development have been discussed as below:

1.
Moved up the Ranks but the poorest of G-20:
India has emerged as the
fourth largest
economy (at PPP) globally with a high growth rate and has also improved its global ranking in terms of per capita income (as mentioned earlier). Yet the fact remains that its per capita income continues to be quite low (at current US $ 1527 in 2011). Addressing this is perhaps the
most visible challenge.
Though, India has a diverse set of factors, domestic as well as external, that could drive growth well into the future.

2.
Demographics:
With over 1.2 billion people, India accounts for nearly
one-sixth
of global population. While the rate of growth of population has consistently declined, India’s population increased by nearly 180 million persons during 2001-11 (
the highest
in the world in absolute terms). However, India is also passing through a phase when its dependency ratio will decline from an estimated 74.8 in 2001 to 55.6 in 2026 with a corresponding increase in the share of persons in working-age group. With labour being a key factor of production, a
demographic dividend
is a clear positive for growth. It has, however, been pointed out that much of the growth in population will occur in states that are currently poor. Therefore, for this dividend to accrue, it will be necessary to build human capital in adequate measure.

On this count, India has shown some improvement in terms of its human development index (HDI). The UNDP’s HDI, which captures the progress of a country in terms of economic indicators as well as education and health indicators increased from
0.344
in 1980 to
0.547
in 2011. India moved up from a rank of 82 in 1980 to
72
in 2011 (in a group of 100 countries for which HDI is available for these points of time). Even though India’s score has improved, her HDI rank has not moved very significantly. A possible
reason
could be that some other countries may have registered faster improvement in these indices. India, therefore, needs to benchmark her achievements (on various fronts) not only in absolute terms but also in relation to other countries
(Economic Survey 2011-12, pp. 301-303).

3.
Exports and External Demand:
The process of globalization has been marked by a rising share of exports (as also imports) that reached 27.9 per cent for the world as a whole in 2010, with some countries showing much higher dependence of exports. The Database of the World Bank show that the so called
East Asian Miracle Economies
was that an export-led, investment-fuelled strategy propelled growth and helped them acquire manufacturing capabilities. This strategy was supported by a favourable exchange rate, cheap credit, and relatively low wages which helped to gain competitive advantage. Global demand for goods, particularly in the advanced markets, lent support to this growth strategy. As a result, these economies moved up the value chain in manufacturing. This leads to the question of how far export can be a driver of growth for India at this point of time – we may see it in
three
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steps:

(i)
Due to slowdown in advanced economies, the prospect of their growth fuelling demand for imports (i.e. exports from other countries), seems somewhat bleak at this juncture.

(ii)
The large build-up of capacity in some countries (including China) suggests that they
might
act as barriers to new entrants for some time.

(iii)
The costs of energy are rising and there are growing concerns about climate change.

In this regard, India’s export (of goods and services) to GDP ratio increased from 6.2 per cent in 1990 to 21.5 per cent in 2010. Yet, India accounts for only
1.5
per cent of world exports. India’s exports are also evenly balanced between merchandise and
services.
Moreover, the change in direction of exports suggests that India has been diversifying the destination of its exports away from traditional markets
(Economic Survey 2011-12, p. 349
and
Economic Survey 2012-13, p.158).

Therefore, there is some scope for exports to grow, particularly to the fast growing economies, many of which are in Asia and Africa and to some extent Latin America, while some of the mature markets may remain important, however with declining shares on the whole for the group. Moreover, the main advantage of a presence in the global market is of being able to benchmark to global standards and therefore worth pursuing in its own right. Additionally, the advantage of having the twin engines of domestic and export demand is that it lends the economy greater resilience to fluctuations in global demand – for which India must keep striving.

4.
Research & Development:
‘Unleashing India’s Innovation’ (2007)
, a World Bank Study
observed that India had increasingly become a top global innovator in high-tech products and services. Yet the country is underperforming in terms of its
innovation
potential. India spends less than
0.9
per cent of its GDP in the area of R&D, which covers basic research, applied research, and experimental development. This fact emerges from the
OECD Fact Book 2010
that lists 41 countries with Israel
topping
the list on this count and most developed countries spending over
2
per cent of their GDP on R&D. While more resources into R&D would be needed, equally critical would be to harness existing institutions and organisations set up for formal R&D and also to encourage grass-roots level innovation
19
.

At a point of time when there is an increasing acceptance of the fact that
land, water,
and
energy
are likely to be in short supply and environment a major concern, India is well placed to advance through the route of frugal innovation and devising of specific applications suited to the bottom of the pyramid that would not only open new market segments within India but also in other countries in the developing world. That apart, with regard to frontier areas, India is well placed to take advantage of its vast
diaspora
to jump-start its R&D efforts. Strategically positioning India as a hub for FDI in R&D may well be a way for it to leapfrog into the next generation of technologies and products.

5.
Energy Security:
India is characterized by a relatively
lower energy intensity
of GDP as compared to China, South Africa, and Russia but higher than that of Brazil. Advanced countries, in particular EU countries and Japan, have been witnessing a decline in the energy intensity of GDP, apart from technological improvements, due to various factors, the main one being a shift in the structure of their economies towards services
(World Bank Database).

India’ energy dependence on imported energy sources, appears modest at 25.7 per cent in terms of total energy usage.
(World Bank Database).
However, this masks the fact that around
80 per cent of the crude oil consumed is imported,
whereas the bulk of coal is domestically produced. Even with respect to coal, the country is importing on the margin to meet domestic demand. On the other side, there is a large fraction of population that has little or no access to commercial sources of energy and depends on traditional sources.

Rise in the
price of oil
in international markets has been the main source of high current account deficit. High international prices of fossil fuels also result in a higher import bill, which either gets passed on to the consumers, or results in higher subsidy thereby affecting fiscal health. That apart, the growing tensions in many oil-producing economies are a source of vulnerability for the energy security of India. In this
one area,
the
strategic advantage
for India would lie in diversifying its energy sources.