Monday, June 16, 2008

The 10 top challenges for India

India could be 40 times bigger by 2050, and may also have the potential to be larger than the US by that time. To achieve this, however, India needs to implement many changes.

These are the findings of a global research report on ‘Ten Things for India to Achieve its 2050 Potential’, brought out by Jim O’Neill, Head Global Research at Goldman Sachs, and Tushar Poddar, V-P Research, Asia Economic Research Team at Goldman Sachs India.

The reports lists a number of things for India to do, such as improving its governance, controlling inflation, introducing credible fiscal policy, liberalising financial markets and increasing trade with its neighbours. “Delivery of all these and more would ensure strong, persistent, medium-to-long-term growth, allowing India to reach its amazing potential,” it says. Here are the 10 top challenges for India: 1) Improve governance

Without better governance, delivery systems and effective implementation, India will find it difficult to educate its citizens, build its infrastructure, increase agricultural productivity and ensure that the fruits of economic growth are well established.

Governance problems stem from the increasing inability of the government and public institutions to deliver public services in the face of rising expectations. A large gap between physical access to services and the quality of services provided is leading to a citizen satisfaction gap.

2) Raise educational achievement

Among more micro factors, raising India’s educational achievement is a major requirement to help achieve the nation’s potential. According to the basic indicators, a vast number of India’s young people receive no (or only the most basic) education. A major effort to boost basic education is needed. A number of initiatives, such as a continued expansion of Pratham and the introduction of Teach First, for example, should be pursued.

3) Increase quality and quantity of universities

There is also significant need for better higher education. The likely numbers seeking higher education can be expected to grow by three of four times by 2020 from the current number of around 10 mn. The National Knowledge Commission has proposed an increase in the number of universities from 350 today to 1,500 by 2016. It has also proposed an increase in the 18-24 age group—to be educated to university level from 7 to 15 per cent. 4) Control inflation

For a nation that is rightly proud of its democracy and has a history of reasonable stability in terms of inflation, formal Inflation Targeting (IT) should become a centrepiece of a clearer, more defined and credible medium-term framework for macroeconomic stability. As part of this, greater independence for the Reserve Bank of India and the abolishment of all FX controls are recommended.

We are well aware of some of the difficulties, both real and perceived, for India to adopt these choices, but it is in India’s best long-term interests to undertake these steps. IT has given major benefits to a broad variety of countries, ranging from ‘developed’ countries (such as New Zealand, Sweden and the UK) to ‘developing’ ones (such as Brazil, Korea and South Africa). For India, there are probably broader powerful benefits.

5) Introduce a credible fiscal policy

India’s gross fiscal deficit remains one of the highest in the world and, recently, government liabilities have been increasing at an alarming rate. The overall government deficit stood at just under 6 per cent in FY2008. In FY2009, this may accelerate to above 7 per cent, due to a large debt-waiver for farmers, a big wage hike for civil servants, increasing fertiliser and oil subsidies, and higher exemptions on income tax. At such high levels, government borrowing crowds out private-sector credit, keeps interest rates high, adds to already high government debt, and becomes a key source of macro vulnerability.

Further, the composition of spending is undesirable. Expenditures are directed less towards productive investment—especially in much-needed areas such as health, education and infrastructure, which could enhance growth—but rather on wages and subsidies. A medium-term strategy for fiscal policy, which reduces the overall deficit to a sustainable level, is critical for India.

6) Liberalise financial markets

India’s financial sector remains small and underdeveloped. The state still dominates the sector, holding 70 per cent of banking assets, a majority of insurance funds and the entire pension sector. Additionally, markets are lacking in corporate debt, currency and derivatives. This leads to a lack of credit and low financial savings. Total credit, at 50 per cent of GDP remains well below that of its Asian neighbours (an average of over 100% of GDP) and especially compared with China (111% of GDP).

Within this, consumer credit remains abysmally low (at 11% of GDP) compared with an Asian average of over 40% of GDP. Household savings tend to be in physical assets and gold, and risk diversification channels are not available.

To meet its growth potential, India needs to pursue financial reforms to channel savings effectively into investment, meet funding requirements for infrastructure and enhance financial stability.

7) Increase trade with neighbours

In the past decade or so, Indian trade with the rest of the world has ballooned. Lower tariff barriers encouraged by Indian authorities have been key, as has booming world trade. This impressive development needs to be kept in perspective, however, as it has come from an exceptionally low base.

India currently accounts for no more than 1.5% of global trade. India still ranks below the average of all developing countries. India’s trade with China is rising sharply, and China now ties with the US as India’s biggest trading partner. Again, however, it is important to recognise that trade with China remains very low. India takes just 1.93% of China’s exports and provides just 1.46% of its imports. Total trade with the US in 2007 was just $42bn. For comparison, total US trade with China in 2007 was $405bn. Similarly, total Indian trade with China was just $37bn.

If India can be encouraged to think increasingly ‘global’, the virtuous benefits of trade with other emerging giants with large populations could be a source of considerable upside surprise for India. 8) Increase agricultural productivity

Increasing agricultural growth is critical not only for India to sustain high growth rates, but also to move millions out of poverty. Currently, 60% of the labour force is employed in agriculture, which contributes less than 1% of overall growth. India’s agricultural yields are a fraction of those of its more dynamic Asian neighbours. For instance, rice yields are a third of China’s and half of Vietnam’s.

Agriculture, especially in these times of rising prices, should be a great opportunity for India. Better specific and defined plans for increasing productivity in agriculture are essential, and could allow India to benefit from the BRIC-related global thirst for better-quality food.

9) Improve infrastructure

India's constraints in infrastructure are obvious to first-time visitors or long-term residents. The problems of clogged airports, poor roads, inadequate power, delays in ports have been well-recognised as impeding growth. Indian companies on average lose 30 days in obtaining an electricity connection, 15 days in clearing exports through customs, and lose 7% of the value of their sales due to power outages.

Incremental demand for infrastructure will continue to increase due to economic growth and urbanisation. The impact on infrastructure demand will be enormous, from demand for inner-city transport, water and sewerage to low-income housing. The Planning Commission estimates that India needs almost to double its ports, roads, power, airports and telecom in the next five years to sustain growth.

10) Improve environmental quality

India's high population density, extreme climate and economic dependence on its natural resource base make environmental sustainability critical in maintaining its development path. History is replete with instances of societies that have depleted their natural resources in the course of their development, thereby leading to severe loss of growth, and in some spectacular cases (e.g., Easter Island) a complete collapse of the civilization. Although such dire prognostications are premature, urbanisation, industrialisation and ongoing global climate change will take a heavy toll on India’s environment, if not managed better.

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