Sunday, April 20, 2008

Socio-economic impediments – the next challenge !!

------------ State of the present Indian Economy – A snapshot

Vigorous growth of Indian Economy with strong economic fundamentals like 9.4 % GDP growth was observed during the 2006-07. High growth in the manufacturing sector like automobile, steel and the services sector, like banking & IT has been the hallmark of the economic boom. As the overall macroeconomic fundamentals have been robust with the reforms process in place, Indian has been attracting a lot of foreign direct investments, with many foreign companies investing in India. There are many examples of large multinational like IBM, Microsoft, LG, Samsung setting up offices and making large investments in our country, which has also resulted in greater employment and overall development of the country. However, on the flip side there are many weaknesses too, which needs to be addressed by the government. The following paragraphs give a brief outline of the same.

Macroeconomic overview

Take a look at the National Picture :

India is one of the fastest growing major economy in the world, with a GDP growth rate of 9.4% for the fiscal year 2006–2007 and is only next to China. India has a large foreign exchange reserves of over US$ 222 billion, A booming capital market- were investor put money
Foreign Direct Investment of US$ 15.5 billion in the current year . More than 20 per cent growth in exports to foreign countries. Some of the reasons for the GDP growth for 2006-07 have been manufacturing sector, which grew by 12.3 per cent and the services sector like trade, hotels, transport and communications sector, which grew by 13 per cent during the previous year.
The Indian economy has seen a large transformation from its position just after independence when compared to today. If one looks at the sectoral contribution to the Indian in two different stages , we find the following broad changes: the table below shows the broad share of GDP
Sector ---------- 1951 -------------2007
1. Primary sector – 54 % ----------18 %
2 Secondary ---- 25 % -----------27 %
3. Tertiary sector –21 %----------56 %
This clearly shows that the services sector and the manufacturing sector boom have largely contributed to the development of the Indian economy.

India followed a socialist-inspired approach for most of its independent history, with strict government control over private sector participation, foreign trade, and foreign direct investment. However, since the early 1990s, India has gradually opened up its markets through economic reforms by reducing government controls on foreign trade and investment. The privatisation of publicly owned industries and the opening up of certain sectors to private and foreign interests has proceeded slowly amid political debate. These reforms has laed to the accelerated growth of the Indian economy.

Agriculture in India is one of the most prominent sectors in its economy. Agriculture and allied sectors like forestry, logging and fishing accounted for 18.6% of the GDP in 2005 and employed 60% of the country's population. It accounts for 8.56 % of India’s exports. About 43 % of India's geographical area is used for agricultural activity. Despite a steady decline of its share in the GDP, agriculture is still the largest economic sector and plays a significant role in the overall socio-economic development of India. The monsoons play a critical role in the Indian sub-continent's agriculture in determining whether the harvest will be bountiful, average, or poor in any given year. The entire rainfall in the sub-continent is concentrated in the few monsoon months.

Industry :
India is fourteenth in the world in factory output. They together account for 27.6% of the GDP and employ 17% of the total workforce. Economic reforms brought foreign competition, led to privatisation of certain public sector industries, opened up sectors hitherto reserved for the public sector and led to an expansion in the production of fast-moving consumer goods. Post-liberalisation, the Indian private sector, which was usually run by oligopolies of old family firms and required political connections to prosper was faced with foreign competition, including the threat of cheaper Chinese imports. It has since handled the change by squeezing costs, revamping management, focusing on designing new products and relying on low labour costs and technology.

Services :
India is fifteenth in services output. It provides employment to 23% of work force, and it is growing fast, growth rate 7.5% in 1991–2000 up from 4.5% in 1951–80. It has the largest share in the GDP, accounting for 56 % in 2005 up from 20 % in 1950. Business services (information technology, information technology enabled services, business process outsourcing) are among the fastest growing sectors contributing to one third of the total output of services in 2000. The growth in the IT sector is attributed to increased specialisation, availability of a large pool of low cost, but highly skilled, educated and fluent English-speaking workers (a legacy of British Colonialism) on the supply side and on the demand side, increased demand from foreign consumers interested in India's service exports or those looking to outsource their operations. India's IT industry, despite contributing significantly to its balance of payments, accounted for only about 1% of the total GDP or 1/50th of the total services

Constraining factors
Notwithstanding a rosy picture of the Indian economy now and in the years to come painted by the government , there are a number perturbing aspects, glossed over by the media.

Poverty :
Poverty is fairly uneven, with the top 10% of income groups earning 33% of the income. While poverty in India has reduced significantly, 17.59% (over 230 million) of Indians still live below the national poverty line. A 2007 report by the state-run National Commission for Enterprises in the Unorganised Sector (NCEUS) found that 77% of Indians, or 836 million people, lived on less than 20 rupees per day (USD 0.50), with most working in "informal labour sector with no job or social security, living in abject poverty."[65]
In August 2005, the Indian parliament passed the Rural Employment Guarantee Bill, the largest programme of this type in terms of cost and coverage, which promises 100 days of minimum wage employment to every rural household in 200 of India's 600 districts. The question of whether economic reforms have reduced poverty or not has fuelled debates without generating any clear cut answers and has also put political pressure on further economic reforms, especially those involving the downsizing of labour and cutting agricultural subsidies.
Other socio-economic impediments
1. Corruption
Has been one of the pervasive problems (present everywhere)affecting India. It takes the form of bribes, evasion of tax and exchange controls, embezzlement, etc. The economic reforms of 1991 reduced the red tape, bureaucracy and the Licence Raj that had strangled private enterprise and was blamed for the corruption and inefficiencies. Yet, a 2005 study by Transparency International (TI) India found that more than half of those surveyed had firsthand experience of paying bribe or peddling influence to get a job done in a public office. Infact , practical experience suggests that more the growth , greater is the level of corruption. Corruption is higher levels have tended to far exceed the numbers , unlike the low level corruptions , which seems to ease as excessive governmental controls has been removed .

2. Unemployment :
Agricultural and allied sectors accounted for about 57% of the total workforce. While agriculture has faced stagnation in growth, services have seen a steady growth. Of the total workforce, 8% is in the organised sector, two-thirds of which are in the public sector. The NSSO survey estimated that in 1999–2000, 106 million, nearly 10% of the population were unemployed and the overall unemployment rate was 7.32%, with rural areas doing marginally better (7.21%) than urban areas (7.65%). Unemployment in India is characterised by chronic underemployment or disguised unemployment. Government schemes that target eradication of both poverty and unemployment, (Which in recent decades has sent millions of poor and unskilled people into urban areas in search of livelihoods.) attempt to solve the problem, by providing financial assistance for setting up businesses, skill honing, setting up public sector enterprises, reservations in governments, etc. The decreased role of the public sector after liberalisation has further underlined the need for focusing on better education and has also put political pressure on further reforms

3. Regional imbalance
One of the critical problems facing India's economy is the sharp and growing regional variations among India's different states and territories in terms of per capita income, poverty, availability of infrastructure and socio-economic development. There very rich states and regions like Punjab, haryana etc and very poor states like Bihar, Jharkhand , orissa (the so-called BIMARU states (viz. Bihar Madhya Pradesh, Rajasthan and Uttar Pradesh)has lead to regional disparities and lessening of economic inequalities fared particularly badly.?

The five-year plans have attempted to reduce regional disparities by encouraging industrial development in the interior regions, but industries still tend to concentrate around urban areas and port cities.

Similarly there is also the Urban- Rural divide- almost 72 per cent of households live in rural areas and account for 75 per cent of the population of the country. In other words, only 25 per cent people live in urban areas. The urban-rural gap has been increasing because most of the attention of the government and of the media is concentrated largely on the cities and towns

4 Poor infrastructure / health and education

India has a very weak infrastructure , roads , poor supply of electricity and transport mechanism , which has also adversely affected the performance of the industry.

5 Human development, poverty and inclusiveness

The real goal of inclusive growth can be achieved only through effective government intervention in the areas of education, health and support to the needy. However, access to financial services itself a great challenge, despite all the measures taken by the Government, the BoP clients are still excluded. The level of financial exclusion ranges between 20-40 % , even after 4 decades of social and priority sector banking efforts by the Government.

Where do stand as far as other indicators are concerned…., let us look at what the global Human Development Report (HDR) of the United Nations . According to it, from the point of view of human development index (HDI) India is ranked 124 among 177 countries. This has not shown any improvement despite all the growth that is recorded.
So far as the health sector is concerned, a comparison with neighbouring countries reveals the shameful state of affairs in India. Life expectancy( how long an average person lives) at birth in India is 63 years as against 71 years in China and 74 years in Sri Lanka. In other words, an average Chinese or Sri Lankan hopes to live much longer than an average Indian. Similarly, in the matter of infant mortality rate( new born kids dying) India is far behind these two neighbours. The mortality rate per 1,000 live births is 87 in India as against 37 in China, 15 in Sri Lanka, 69 in Bangladesh.

No comments:

Works at NABARD for poor HH / was Research Affiliate at CDS, Tvm / was Visiting Faculty on microFinance for MBA students NMIMS, Mumbai.