India:  Compe--veness,  Opportuni-es  and  Strategies  for  Success  Dr.  Amit  Kapoor  

 

Ins$tute   for  Compe$$veness   (IFC),   India   is  an   independent,   interna-onal   ini-a-ve  centred   in   India,  dedicated  to  enlarging  and  dissemina-ng  the  body  of  research   and   knowledge   on   compe--on   and   strategy,   pioneered   over   the   last   25   years   by   Professor   M.E.   Porter   of   the   Ins-tute   for   Strategy   and  Compe--veness,  Harvard  Business  School  (ISC,  HBS),  USA.    IFC,  India  works  in  affilia-on  with  ISC,  HBS,  USA  to  offer  academic  &  execu-ve  courses,  conduct  indigenous  research  and  provide  advisory  services  to  corporate  and  Government  within  the  country.  The  ins-tute  studies  compe--on  and  its  implica-ons  for  company   strategy;   the   compe--veness   of   na-ons,   regions  &   ci-es;   suggests   and   provides   solu-ons   for   social   problems.     IFC,   India   brings   out   India   City  Compe--veness  Report,  India  State  Compe--veness  Report,  India  Economic  Quarterly,  Journal  of  Compe--veness  and  funds  academic  research  in  the  area  of  strategy  &  compe--veness.  To  know  more  about  the  ins-tute  write  to  us  at  info@compe--veness.in.    

1  

Agenda  

Macroeconomic  Trends  in  India  

Overview  of  Indian  Culture  

Strategizing  for  India  

Natural Endowments Population and GDP’s of the world

India

China USA

European Union

7%  of  the  Land  area,  5%  of  the  Popula-on,    23%  

of  the  GDP  

3%  of  the  Land  area,  7%  of  the  Popula-on,    26%  

of  the  GDP  

2%  of  the  Land  area,  17%  of  the  Popula-on,    3%  

of  the  GDP  

7%  of  the  Land  area,  20%  of  the  Popula-on,    9%  

of  the  GDP  

GDP over the years

Source: WDI and Institute for Competitiveness Analysis

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

European Union India China United States Rest of the World

39%  in  2010  

23%  in  2010  

9%  in  2010  

3%  in  2010  

26%  in  2010  

Macro  Economic  Trends  in  India  –  The  Big  Idea  

Opportuni-es  in  India   India  versus  Bharat  

Base  of  the  

Pyramid  

The  Indian  Middle  Class  

Factor  Condi-ons  

Demand  Condi-ons  

The  rural  and  the  urban  India  

The  Big  Idea  

Agriculture and Allied

Industry

Manufacturing

Services

Construction Transport, Storage & Communication

Finance, Business & Real Estate Services

Community and Personal Services

-10

-8

-6

-4

-2

0

2

4

6

8

10

-10 0 10 20 30 40 50 60

% C

hang

e in

the

Con

tribu

tion

to G

DP

(199

4-20

00)

Percentage Contribution in GDP (2000)

Structural shift in Indian Economy (1994-2000)

Ins-tute  for  compe--veness  Analysis  

Agriculture and Allied

Industry

Manufacturing

Electricity, Gas and Water Supply

Services

Construction Transport, Storage & Communication Finance, Business & Real Estate Services

Community and Personal Services

-15

-10

-5

0

5

10

15

-10 0 10 20 30 40 50 60 70

% c

hang

e in

con

tribu

tion

2000

-201

0)

Percenatge Contribution in GDP (2010)

Structural shift in Indian Economy (2000-2010)

Ins-tute  for  compe--veness  Analysis  

Income  Levels  

Income  Distribu-on  

Rich  

Consumers  

Climbers  Aspirants  

Des-tute  

McKinsey Global Institute: The “ Bird of Gold”: The Rise of India’s Consumer Market, May 2007.p.12

Share of population in each income bracket %millions of people

Household income brackets thousand, Indian rupees, 2000

100% 755 928 1,107 1,278 1,429

Global{>100} Strivers (500-1,000) Seekers (200-500)

Aspirers (90-200) Deprived (<90)

Middle class

6 18

41

43

36

1 2 4 19

32

0 0 1 1 9

0 0 0 1 2

1985 1995 2005E 2015F 2025F

India will see further reduction in poverty and growth of its middle class

Unequal  Distribu-on  of  Income  in  Urban  India.  

   

Source:  McKinsey  Report.  

Increase  in  the  Indian  Middle  Class  Households.    

   

Source:  McKinsey  Report.  

India  Climbs  the  Millionaire  Rankings    

   •  India  had  153,000  millionaires  at   the  end  of  2010,  

pudng  it  in  12th  posi-on  in  a  list  of  countries  with  the   most   millionaires,   according   to   a   report  released  this  week  by  Capgemini  and  Merrill  Lynch  Wealth   Management.   In   the   year   earlier,   India  ranked  14th.    

•  India’s  high  net-­‐worth  popula-on  (defined  as  those  having   investable   assets   of   $1   million   or   more,  excluding  primary  home,  collec-bles  and  consumer  durables)  expanded  nearly  21%  in  2010  from  a  year  earlier,   thanks   partly   to   the   country’s   booming  economy  and  robust  stock  markets.  

•  Asia   with   3.3   million   high   net   worth   indivisuals-­‐  overtook  Europe’s  3.1  million.  

•  Asia’s   rich   are   much   younger   than   those   in   the  West.  Around  41%  of  high  net-­‐worth   individuals   in  Asia  (excluding  Japan)  are  45  years  old  or  younger,  whereas   in  North  America,   68%  are   over   55   years  old.  

Source:  Wall  Street  Journal,  2011.  

The  Ageing  Popula-on  

Demographic  Dividend   Demographic  Burden  

Understanding  the  Demographic  Opportunity  

Stage  1    

Stage  2  Demographic  Window  of  Opportunity  

Stage  3  Popula-on  Ageing  The  Second  Opportunity  

India’s  Popula-on  Hits  1.21  billion.    

   Census  2011:    •  India   the   world’s   second   most   populous   na-on  

added  181  million  people  in  the  last  decade  to  reach  a  total  of  1.21  billion.  

•  The   na-on’s   popula-on   growth   rate   slowed   to  17.64%   in   the   past   10   years   from   21.54%   in   the  decade  to  2001.  

•  Male   popula-on   grew     at   a   rate   of   17.19%   and  Female  popula-on  grew  at  18.12  %.  

•  Literacy   increased   for   the   country   as   a   whole  climbing  to  74%  from  about  65%.  

•  Sex   Ra-o   among   children   upto   6   years   dropped   to  914  girls   for  each  1000  boys  from  927  a  decade  ago  showing   that   female   foe-cide   con-nues   to   be   a  regular   prac-ce   because   of   a   tradi-onal   preference  for  boys.  

•  Popula-on  density  increased  to  989  people  a  square  mile.   The   area   around   the   Na-onal   Capital   is   the  densest  with  around  29000  people  a  square  mile.  

Source:  Wall  Street  Journal,  2011  

Economic  Implica-on  of  the  Demographics  in  India.                

Economic  Implica$ons:  

•  The  “replacement”  fer-lity  rate  that  was  set  as  a  target  during  last  census  at  2.1  children  per  woman,  if  achieved  now  would  mean  that  India  would  stop  growing  before  the  middle  of  this  century.  Infact,  the  country  will  knock  China  from  the  spot  of  world’s  most  populous  na-on  far  sooner  than  2030.  

•  In,   India   the   demographic   trends   indicate   a   very   progressive   future.   Analyzing   the  dependency   ra-o   it   is   believed   that   in   addi-onal   15   years   from   now   every   10   people   of  working   age   in   India,   will   be   responsible   for   fewer   than   four   youngsters   and   one   elderly  person.  These  figures  are  lesser  than  the  present  sta-s-cs.  

•  The   lowering  of   dependency   ra-o   implies   that   this   bulge  of   future  workers  will   be   free   to  save   more.   And   those   savings   can   then   create   the   capital   to   invest   in   infrastructure,   in  research  and  in  technology.  

•  The  impact  of  lower  dependency  ra-o  on  the  economic  boom  is  evident  from  the  example  of  three  states  Gujarat,  Karnataka  and  Tamil  Nadu.  

•  The   improvements   in   the   literacy   rate   point   to   higher   GDP   and   lower   inequality.   On   an  average,   GDP   rises   by   2.5   –   3   percentage   points  with   an   increase   of   one   year   of   average  educa-on.  

Source:  Wall  Street  Journal,  Financial  Express,  2011.  

Educa-on:  Undereducated,  Employability  etc  

Traffic  Jams  and  Healthcare  

Popula-on  Served  per  Government  Hospital  Bed  in  India:  State-­‐wise.  

0  

5000  

10000  

15000  

20000  

25000  

30000  

35000  

Andh

ra  

Arun

achal  

Assam  

Bihar  

Chad

sgarh  

Goa  

Gujarat    

Haryana    

Himachal  

Jharkhand  

Karnataka    

Kerala    

Madhya  

Maharashtra  

Manipur    

Meghalaya  

Mizo

ram  

Nagaland  

Orissa  

Punjab  

Rajasthan    

Sikkim

 Tamil  Nadu  

Tripura  

Upar  Prade

sh  

Uparanchal  

West  B

engal  

A&N  Island

 Ch

andigarh  

D&N  Haveli  

Daman  &  Diu  

Delhi  

Lakshadw

eep  

Pond

iche

rry    

Popula$on  Served  Per  Govt.  Hospital  Bed  

Popula-on  served  per  Govt.  Hospital  Bed  

Urbaniza-on  in  India  

Ci-es  are  India’s  Future.    

   

•  The  urban  popula-on  in  India  is  expected  to  be  close  to  600  million  by  2031.  •  According  to  the  report  on  India’s  Urban  Awakening  by  McKinsey  Global  Ins-tute,  India  

will  have  68  ci-es  with  a  popula-on  of  more  than  1  million  in  next  20  years.  •  It   is  es-mated  that  91  million  urban  households  will  be  middle-­‐class  by  2030,  up  from  

22  million  today.  •  Present  dismal  state  of  public  services  and  inadequate  infrastructure  investment  pose  a  

challenge  to  growth  in  the  ci-es.  

Rec$fica$ons  Needed:    •  Improving  the  state  of  infrastructure  at  present  and  the  service  delivery.  •  Addressing   capital   investment   of   roughly   5   trillion   rupees   to   meet   the   projected  

infrastructure  demands  of  future  •  The   planned   investment   in   urban   infrastructure   will   increase   from   0.7%   of   GDP   in  

2011-­‐12  to  1.1%  of  GDP  in  2031-­‐32.  •  Improvement  in  Urban  Governance.  •  A  Na$onal  Manufacturing   policy  has   been   under   discussion   by   the   government  with  

the  industrial  establishments  that  envisages  crea$on  of  a  slew  of  industrial  townships  each  of  12,500  acres.  

•  Well  conceived  ci$es  will:    a)  Improve  Quality  of  life.                                                b)  Apract  Investment.  c)  Grow  Tax  Base.                                                                                  d)  Unlock  new  growth  markets.  e)  Create  a  stronger  and  larger  middle-­‐class.                                  f)  Boost  India’s  GDP.  g)  Generate  a  huge  increase  in  average  na-onal  income.  

Source:  Financial  Express,  Business  Standard,  2011  

India’s  Urbaniza-on  Trends    

   

Source:  McKinsey  Report.  

India’s  Urbaniza-on  Trends  in  Past    

   

Source:  McKinsey  Report.  

India’s  Urbaniza-on  Trends  in  Future    

   

Source:  McKinsey  Report.  

Urban  India’s  Contribu-on  to  Na-onal  Income  in  Future    

   

Source:  McKinsey  Report.  

Gainer  States    

   

Source:  McKinsey  Report.  

Strategic  Benefits  to  Sectors    

   

Source:  McKinsey  Report.  

Aspiring  India    Advent  of  Urbaniza-ons  -­‐  Some  Fast  Facts  

5 times GDP

by 2030 590 million people

living in cities, nearly twice the population

of the US today

270 million more people

to enter working-age

population

70 percent new

employment will be

generated in cities 91 million urban households will be middle class, up from 22 million today

68 cities will have population of 1 million

plus, up from 42 today; Europe has 35

today

USD 1.2 trillion capital investment is necessary to meet projected demand in India’s cities

700-900 million square

meters of commercial

and residential space

needs to be built – or a

new Chicago

every year

2.5 billion square

meters of roads will

have to be paved, 20

times the

capacity added in the

past decade

Urbaniza$on  

A Closer Look at India

Town Class Population Number of Towns

Class I 1,00,000 and above 423

Class II 50,000 – 99,999 498

Class III 20,000 – 49,999 1,386

Class IV 10,000 – 19,999 1,560

Class V 5,000 – 9,999 1,057

Class IV Less than 5,000 110

Total no. of towns 5,034

1mn + : 27 0.5mn – 1.0mn :42 0.1mn -0.5mn: 354

Source: MART

A Closer Look at Rural India

Population No. of Villages % of Total Villages

Less than 200 92,541 15.6

200- 500 1,27,054 21.4

501- 1,000 1,44,817 24.4

1,001 -2,000 1,29,662 21.9

2,001 – 5,000 80,313 13.5

More than 5,000 18,758 03.2

Total no of Villages* 5,93,145 100.0

*The Total number of villages includes uninhabited ones adds up to 6,38,365

Source : MART

The  States  in  India  

Country Equivalents

Source: Economist Intelligence Unit, National Statistics

State  Compe--veness  Report  2011  

© Institute for Competitiveness, India

The  State  Compe--veness  Report  

•  The   report   incorporates   hard   data   rather  

than   soq   data   such   as   execu-ve   opinion  

surveys,   etc.,   which   might   introduce  

sampling  errors  and  bias.    

•  The   hard   data   allows   a   more   correct  

assessment   of   compe--veness   ranking  

with   mapping   of   incremental   or   quantum  

changes  in  values  of  input  indicators.    

•  From   an   execu-on   and   policy   formula-on  

perspec-ve,   this   approach   provides   clarity  

to   the   choice   of   rela-vely   important  

indicators;   a   virtual   Pole   Star   for   those  

keen  to  enhance  compe--veness.  

Prosperity in India

Highly Productive and Prosperity Rising versus India

Andhra Pradesh

Arunachal Pradesh

Assam

Bihar

Chhattisgarh

Delhi

Goa

Gujarat

Haryana

Himachal Pradesh

Jammu & Kashmir Jharkhand

Karnataka

Kerala

Madhya Pradesh

Maharashtra

Manipur

Meghalaya Mizoram

Nagaland

Orissa

Punjab

Rajasthan

Sikkim

Tamil Nadu

Tripura

Uttar Pradesh

Uttarakhand West Bengal

0

20000

40000

60000

80000

100000

120000

140000

0 2 4 6 8 10 12 14 16

Gross Domestic Product per Capita CAGR rate, 2008-2010

High but declining versus India

Low and declining versus India Low but rising versus India

High and rising versus India

All  

India  

Avera

ge  

57.28  

Inde

x  Po

ints  

All India GSDP /Capita rate (CAGR) of 8.36 %

All  India  Average  of  46,836  Rupees/capita  

Gross  Dom

es$c  Produ

ct  per  Cap

ita,  201

0  

State Private Sector Wage Performance in India

Jammu & Kashmir

Himachal Pradesh

Punjub

Uttaranchal

Haryana

Delhi

Rajasthan

Uttar Pradesh

Bihar

Nagaland

Manipur

Tripura

Meghalaya

Assam

West Bengal

Jharkhand

Orissa

Chattisgarh Madhya Pradesh Gujarat

Maharashtra

Andhra Pradesh

Karnataka

Goa

Kerala Tamil Nadu

0

20000

40000

60000

80000

100000

120000

140000

160000

0 2 4 6 8 10 12 14 Wage Growth (CAGR), 2001 to 2008

Low and declining versus India Low but rising versus India

Average  Wages  in  India  :  Rupees  64,741  

Wage Growth rate in India 4.53%

Highly and rising wages relative to India

High but declining versus India

Average  Wages  in  Rup

ees  ,2008  

Source: State Profiling 2010, Institute for Competitiveness Analysis

POLICYTHE ECONOMIC TIMES ON SATURDAY MUMBAI 27 NOVEMBER 2010 *

SAWANT SINGH, SRIRAM RAMACHANDRAN &GAURAV SINGHI

ON MARCH 31, 2010, FOR THE FIRST TIME,the department of industrial policy andpromotion (DIPP) in the ministry of

commerce and industry put out a Consolidated FDIPolicy: Circular 1 of 2010 overriding the entire heapof press notes, circulars and clarifications issuedearlier in connection with foreign direct investment(FDI). The DIPP’s efforts in preparing Circular 1,which became effective from April 1, 2010, earnedplaudits from the industry at first, but on a closerlook, left India Inc and foreign investors high anddry, especially on issues relating to upfrontdetermination of price for capital instruments andnon-inclusion of partly-paid shares and warrantswithin the definition of ‘capital’.

To its credit, however, the DIPP has issued Consol-idated FDI Policy: Circular 2 of 2010 within sixmonths of Circular 1 and lived up to its promise byclarifying issues that had ruffled feathers in the FDIspace. We highlight a few key clarifications made inCircular 2.Death to warrants and life again: Circular 1 created animpression that there was a complete embargo on is-suance of warrants and partly-paid capitalinstruments to non-residents even if the ForeignInvestment Promotion Board (FIPB) approved it. Onthe contrary, as a matter of practice, the FIPB wasconsidering such proposals and granting approvalsafter factoring in the time limit for conversion of thewarrants and quantum of upfront consideration.

The DIPP clarified the matter in a note to thedefinition of ‘capital’ in Circular 2 by stating thatinstruments other than equity shares and fully, com-pulsorily and mandatorily convertible preferenceshares and debentures may be issued after obtainingprior government approval. This change will ensurethat, on one hand, there is some elbow room for ma-ture foreign financial investors to structure theirinvestments and, on the other, domesticundertakings need not hand over a pie of theirbusiness at a price that could potentially be higher ata future point.Soothing NBFCs: Circular 2 also partly settles the dustover downstream investment by foreign owned andcontrolled (FOCC) non-banking financial

companies (NBFCs). Reading the relevantprovisions of Circular 1 (reiterating what had beenstated in press note 4 issued in February, 2009) ledone to conclude that 100% wholly ownedsubsidiaries of the FOCC NBFCs must also meet theminimum capitalisation requirements of NBFCs.This would have made it commercially difficult forFOCC NBFCs to set up and operate differentsubsidiaries for separate activities like stock broking,housing finance etc. Much to the relief of 100%FOCC NBFCs, however, Circular 2 has explicitlystated that they will not be required to meetminimum capitalisation requirements. Speaking ofdownstream investments, there were concerns afterthe release of Circular 1 that downstreaminvestment by a FOCC could be done only through

funds from abroad and not by leveraging funds fromIndia. Fortunately, Circular 2 has stated with wellclarified that investment by internal accruals ispermitted as long as other conditions laid down inthe policy on downstream investments are fulfilled.Breather to retailers too: Since FDI in multi brand retailis prohibited, players in this market have often beenin the news for the wrong reasons, trying to use thewholesale cash-and-carry route, where100% FDI ispermitted, as a backdoor to enter the multi brand re-tail sector. In Circular 1, the government had comedown heavily on FDI in multi brand retail sectorstructure — where the ownership structure of theretail entity and the wholesale entity were keptdistinct but within the same groupcompanies/promoters and exclusive arrangementswere made between the two companies to realisecommercial value — by stating that only 25% of thetotal turnover could be traded by the wholesale enti-ty amongst the same group companies and for‘internal use’ only. However, after much cajoling,the government has provided a breather to theinfamous indirect structures by getting rid of the‘internal use’ rule.Conclusion: The DIPP deserves a pat on its back for itsexemplary efforts, some of which we have discussedabove. In recent months, the DIPP has published afew discussion papers on opening up prohibited sec-tors such as multi-brand retail and defence to FDI. Apaper has also been put up for discussion on issue ofshares for consideration other than cash, so farpermitted in certain cases such as conversion ofexternal commercial borrowings or royaltypayments). There are, nevertheless, otherambiguities in the FDI policy requiring the DIPP’s at-tention — the important ones being upfrontdetermination of price of capital instruments at thetime of issuance and treatment of FOCC Indian com-panies as non-resident entities, given the guidingprinciple in the FDI policy that downstreaminvestment by FOCC Indian companies are requiredto follow the same norms as a direct foreigninvestment. These issues have been the bones ofcontention in boardrooms and we can only hopethat they can grab the DIPP’s attention at the earliest.

(S Singh is partner, G Singhi is senior associate and SRamachandran is associate at Phoenix Legal)

9

NDIA is at the centre of the population-versus-growth debate. With the world’s second-largestpopulation at 1.2 billion, the country must fo-cus on turning this population into a benefitrather than a disadvantage. This month, welook at how states in India can use their popu-lation size and growth rate to improve theircompetitiveness.

TRADITIONAL economic thinking seespopulation as a drag on a nation’s eco-nomic growth. However, with the worldlooking towards India as a growing andvibrant market, her ‘demographic advan-tage’ is often touted as her biggest asset.

According to the theory of demograph-ic dividend, the rate of economic growthincreases due to a rising share of workingage people in a population. For India,falling fertility rates are resulting in a larg-

er chunk of working-age people, who cancontribute to the GDP and generate high-er output per capita.

In fact, the International Labour Orga-nization (ILO) has stated that India willaccount for the highest working age pop-ulation in the next 10 years, in a report re-leased recently. In the document preparedfor the G-20 Summit held earlier thismonth in Seoul, the ILO says that the G-20 nations will see their working age pop-ulation between 15 and 64 years increaseby 212 million in the period 2010-2020.Over 64% of this increase will occur in In-dia alone!

This month’s IFCIndia State DevelopmentBarometer takes a sharp look at what pop-ulation really means to the economicgrowth of India’s states and analyses howstates can use their demographic situationto improve their competitiveness, andhence, enhance their prosperity.

Rising stars among statesIt is widely accepted that growth among In-dian states is skewed, with some prosper-ous states bearing the burden of growth,while several other lag in terms of GDPgrowth and development parameters.

The average decadal GDP growth figuresshow that unexpected states such as Biharand Orissa, historically notorious for poorgrowth, have exhibited a sustained GDPgrowth rate. Bihar, specifically, is notablefor exhibiting a remarkable decadal growthrate of 10.83% while contributing on amodest population base. Bihar accountsfor 8.1% to the country’s population, asseen in the accompanying graph.

Meanwhile, states such as Maharash-tra, Goa, Punjab and Tamil Nadu, that areknown for their higher levels of industrial-isation, human development or agricul-tural prosperity seem to have slowed interms of GDP growth over the past decade.

Size does matterA large size of population appears to be aburden on the economy of states such asUttar Pradesh, Rajasthan, West Bengaland Madhya Pradesh. These states arealso usually characterised by low percapita income and higher disparities.Large population size is a major factor,

among several others, that is draggingdown the economic growth of relativelyaffluent states like Maharashtra, Kar-nataka and Tamil Nadu. Yet, a few statessuch as Bihar, Andhra Pradesh and Gu-jarat with large populations are exhibit-ing high GDP growth.

No burden on economic growthSixteen states in India have a GDP growthhigher than the national average. Ofthese, ten states show a populationgrowth rate higher than the national av-erage, while six other states have a popu-lation growth rate lower than the nation-al average.

Population growth, considered a bur-den to economic growth, seems to havelittle correlation with GDP growth (corre-lation = 0.24). Large states such as Bihar,for instance, have showed sustained GDPgrowth over the decade along with asteadily rising population, whereas statessuch as Punjab and Manipur with slowerpopulation increase are showing GDPgrowth rates that are lower than the na-tional average.

Population, a double-edged swordClearly, population is a double-edgedsword. On one hand, the data shows thatthere is no clear correlation betweengrowth in population and GDP. Yet, accord-ing to the demographic dividend theory, alarge working age population is an asset.

In order to be able to catapult theirgrowth rates, states need to look closelyat their competitiveness, which in turnis linked to their level of productivity.Improved competitiveness leads to im-proved incomes and better quality of lifeacross the board. When viewed fromthis standpoint, states will be able to de-velop strategies on how best to utilisetheir workforce — small or large, grow-ing slow or growing fast — to maximiseproductivity.Group 1: States with lower populationgrowth rates and high GDP growth rates,such as Kerala, Andhra Pradesh and Oris-sa need to look closely at the training lev-els of their workforce and create strategyto move towards high value sectors andindustries that need a more skilled work-

force, which are also correspondingly farmore productive.Group 2: States with healthy GDP andpopulation growth rates, such as Chandi-garh, Delhi, Haryana and Bihar must fo-cus on sectors where they are inherentlycompetitive because of the presence ofnatural resources or traditional skills andknowledge. These states should find waysto turn the availability of a large work-force in their favour by offering suitableeducation policies and opportunities. Set-ting the right priorities is critical to en-hance competitiveness for this band of In-dian states.Group 3: A number of states such as Kar-nataka, West Bengal, Rajasthan, TamilNadu and Mizoram are performing onlyslightly below India’s average GDPgrowth rate. These states can quickly cat-apult themselves into Group 2 with a fo-cused effort on productivity.Group 4: A roadmap for enhancing com-petitiveness is critical for poorly perform-ing states. Among these, states such as Ut-tar Pradesh and Madhya Pradesh withlarge and growing populations must con-trol the rate of population growththrough effective healthcare and out-reach efforts, as arresting populationgrowth takes time. They also need to har-ness their large growing workforce effec-tively and focus on promoting economicactivities that can employ and utilise alarge labour workforce, like certain typesof manufacturing.

Vision for the futureA look at the relationship between thepopulation and GDP growth serves tohighlight how states in various stages ofgrowth — both economic and demo-graphic — can harness their position inthe best possible manner. This is best doneby first ascertaining a state’s inherentcompetitive edge — these could be re-sources, sectors, human potential, etc —and then designing and implementingpolicy around this to achieve highly pro-ductive and efficient clusters that provideemployment, contribute to growing theGDP and bring prosperity as well.

Institute For Competitiveness

POST the crisis, the one common thread thatlinks advanced economies across the world,with perhaps the exception of the ever-prudentGermans, is the phenomenal increase in publicdebt, i.e., debt raised by governments strappedfor funds and desperate to kickstart the econo-my with stimulus packages.

Based on IMF forecasts, Eswar Prasad at Cor-nell University calculates that the level of aggre-

gate net government debt in the world will more than double from $23trillion — 44% of world GDP — in 2007 to $48 trillion — 65% of GDP— in 2015. Advanced economies account for much of this increase.

Prasad estimates the ratio of aggregate debt-to-aggregate GDP for ad-vanced economies will rise from 48% in 2007 to 71% in 2010, and fur-ther to 85% in 2015. In contrast, emerging markets (EMs) fare muchbetter. The corresponding ratios for the EM group are 30%, 30% and26% respectively. In 2007, EMs accounted for 24% of world nominalgross domestic product (GDP), in US dollars terms, and 17% of worlddebt. By 2015, they are expected to produce 35% of world output butaccount for just 14% of world debt. Thus, even as EMs increase theirshare in world GDP, their share in world debt is expected to come down.To put that more graphically, EMs will power their growth from inter-nal rather than borrowed resources.

This has two major consequences for EMs — both positive. One,they will be able to use more and more of their revenue for productivepurposes rather than for servicing debt, whether by way of interest costor repayment. Two, the distressing issue of inter-generational equitywhere succeeding generations end up paying for the profligacy of ear-lier generations will be resolved far more satisfactorily in EMs than inadvanced economies. Add to this the fact that EMs have a lower de-pendency ratio — read: larger share of population in the younger agegroup — and clearly, they are on a stronger wicket.

This is graphically brought home when the rise in debt is comparedwith the rise in GDP. EMs accounted for 10% of the rise in global debtlevels from 2007 to 2010, and could account for 13% of the rise from2010 to 2015. In contrast, their contributions to global GDP growthover these two periods are expected to be 70% and 54%, respectively.Average debt per capita in advanced economies was $19,400 in 2007,rose to $29,100 in 2010, according to the paper, and will go up to$41,000 in 2015. By 2015, the burden of debt for US citizens will rise to$48,000 per person. The debt burden for Japanese citizens will hit$75,900, the highest in the world. In contrast, China’s debt burden willbe just $1,200 in 2015. India’s, however, will be far higher at $2,013.

Among advanced economies, average debt per working-age personwill more than double from $31,700 in 2007 to $68,500 in 2015. Japantops the league tables by this measure while the US moves into secondposition by 2015 with debt per working-age person of $134,500 and$79,200, respectively.

Diehard optimists point to periods when public debt ballooned butfears of Doomsday proved ill-founded as a reason not to get perturbedabout the sharp rise in debt. But they could be living in cloud cuckooland! Borrowing like there is no tomorrow has serious — and unhappy— consequences for both their own as well as global financial stability.

The analysis paints a sobering picture of worsening public debt dyna-mics and a sharply-rising debt burden in advanced economies. It warnsthe worst is, perhaps, yet to come. First, these countries are experienc-ing little population growth. Second, they are facing rapidly aging pop-ulations. Third, their economies are likely to register slow growth, es-pecially relative to the EMs. Fourth, entitlement spending on health-care and pension could rise sharply due to unfavourable demographics.

The prescription: advanced economies had better get their fiscal acttogether once the recovery is better entrenched. It will take strong po-litical will to tackle near-term deficits and then to control the growth inentitlement spending. In the absence of decisive action, ballooningpublic debt in these economies could become a major threat to domes-tic and global financial stability.

http://www.brookings.edu/articles/2010/1101_government_debt_prasadMythili Bhusnurmath

mythili.bhusnurmath@timesgroup.com

Sins ofindulgence

The DIPP has clarified manycontentious issues regarding FDI,but ambiguity remains on subjectssuch as determination of pricing ofcapital instruments at issuance

THE EXPLOSION OF PUBLIC DEBT HASSERIOUS LONG-TERM REPERCUSSIONS

ANIMISHA

POLICIES THAT MAKE PRODUCTIVE USE OF AVAILABLE RESOURCES ARE CRITICAL

ARINDAM

I

INDIA

Source: IMF Fiscal Monitor, May 2010; IMF WEO, April 2010;ILO Economically-Active Population Estimates and Projections, 2009

DEBT BURDEN

Gross debt to GDP (%)Gross debt(US dollars in billions)Gross debt percapita (US dollars)Gross debt perworking-ageperson (US dollars)

79.01,080

888

1,638

77.81,164

945

1,728

70.31,400

1,092

1,954

2009 2010 2011 2014 201580.8999

833

1,548

67.31,471

1,132

2,013

ChandigarhDelhiUttarakhandHaryanaGujaratBiharChhattisgarhSikkimNagalandHimachal Pradesh

5.05

3.11

1.59

1.98

1.64

1.86

1.76

1.58

4.89

1.59

Populationgrowth ratesare HIGHERthan nationalaverage

Populationgrowth ratesare LOWERthan nationalaverage

GDP(India avg 7.99)State

Populationgrowth rate

(India avg 1.55)

13.1211.8611.8

11.6910.8

10.839.789.6

9.548.88

Andhra PradeshOrissaMeghalayaTripuraArunachal PradeshKerala

0.99

1.07

1.39

0.99

1.27

0.77

9.529.378.058.4

8.799.55

PEOPLE POWER

States contributing to India’s GDP growth(GDP growth higher than national average)

Population size vs GDP growth rate

Comparison of state population growth and GDP growth

0 500 1000Population size in lakhs

1500 2000 2500

14121086420

CH

GOTRMG

MZ

HP

JHPJ

MPAS

ANMNJK

PD

DLHRUK

SK CG KRORAR

NL

TN

APBR

KA RJWB

MH

UP

DL: DelhiCH: ChandigarhKR: KeralaTR: TripuraMG: MeghalayaPD: PuducherryKA: KarnatakaWB: West Bengal

AS: AssamNL: NagalandUK: UttarakhandHR: HaryanaGJ: GujaratCG: ChattisgarhSK: SikkimJH: Jharkhand

TN: Tamil NaduBR: BiharRJ: RajasthanGO: GoaMZ: MizoramPJ: PunjabMN: ManipurOR: Orissa

UP: Uttar PradeshAP: Andhra PradeshAR: Arunachal PradeshHP: Himachal PradeshJK: Jammu & KashmirMP: Madhya PradeshAN: Andaman & Nicobar IslandsMH: Maharashtra

0 1 2Population growth (%)

3 4 5

14121086420

AP

TR KR

WB

AS

TN

KR ORAR

MGMH

RJGO

AN

PD

JHPJJK

UPMN

MP

SK CGHP

GJ BR

UK HR DL CH

NL

GJ

MZ

JAYEETA

States can harness theirpopulation to grow

FDI policy needs some more weeding DILBERT by S Adams

POLICYTHE ECONOMIC TIMES ON SATURDAY MUMBAI 27 NOVEMBER 2010 *

SAWANT SINGH, SRIRAM RAMACHANDRAN &GAURAV SINGHI

ON MARCH 31, 2010, FOR THE FIRST TIME,the department of industrial policy andpromotion (DIPP) in the ministry of

commerce and industry put out a Consolidated FDIPolicy: Circular 1 of 2010 overriding the entire heapof press notes, circulars and clarifications issuedearlier in connection with foreign direct investment(FDI). The DIPP’s efforts in preparing Circular 1,which became effective from April 1, 2010, earnedplaudits from the industry at first, but on a closerlook, left India Inc and foreign investors high anddry, especially on issues relating to upfrontdetermination of price for capital instruments andnon-inclusion of partly-paid shares and warrantswithin the definition of ‘capital’.

To its credit, however, the DIPP has issued Consol-idated FDI Policy: Circular 2 of 2010 within sixmonths of Circular 1 and lived up to its promise byclarifying issues that had ruffled feathers in the FDIspace. We highlight a few key clarifications made inCircular 2.Death to warrants and life again: Circular 1 created animpression that there was a complete embargo on is-suance of warrants and partly-paid capitalinstruments to non-residents even if the ForeignInvestment Promotion Board (FIPB) approved it. Onthe contrary, as a matter of practice, the FIPB wasconsidering such proposals and granting approvalsafter factoring in the time limit for conversion of thewarrants and quantum of upfront consideration.

The DIPP clarified the matter in a note to thedefinition of ‘capital’ in Circular 2 by stating thatinstruments other than equity shares and fully, com-pulsorily and mandatorily convertible preferenceshares and debentures may be issued after obtainingprior government approval. This change will ensurethat, on one hand, there is some elbow room for ma-ture foreign financial investors to structure theirinvestments and, on the other, domesticundertakings need not hand over a pie of theirbusiness at a price that could potentially be higher ata future point.Soothing NBFCs: Circular 2 also partly settles the dustover downstream investment by foreign owned andcontrolled (FOCC) non-banking financial

companies (NBFCs). Reading the relevantprovisions of Circular 1 (reiterating what had beenstated in press note 4 issued in February, 2009) ledone to conclude that 100% wholly ownedsubsidiaries of the FOCC NBFCs must also meet theminimum capitalisation requirements of NBFCs.This would have made it commercially difficult forFOCC NBFCs to set up and operate differentsubsidiaries for separate activities like stock broking,housing finance etc. Much to the relief of 100%FOCC NBFCs, however, Circular 2 has explicitlystated that they will not be required to meetminimum capitalisation requirements. Speaking ofdownstream investments, there were concerns afterthe release of Circular 1 that downstreaminvestment by a FOCC could be done only through

funds from abroad and not by leveraging funds fromIndia. Fortunately, Circular 2 has stated with wellclarified that investment by internal accruals ispermitted as long as other conditions laid down inthe policy on downstream investments are fulfilled.Breather to retailers too: Since FDI in multi brand retailis prohibited, players in this market have often beenin the news for the wrong reasons, trying to use thewholesale cash-and-carry route, where100% FDI ispermitted, as a backdoor to enter the multi brand re-tail sector. In Circular 1, the government had comedown heavily on FDI in multi brand retail sectorstructure — where the ownership structure of theretail entity and the wholesale entity were keptdistinct but within the same groupcompanies/promoters and exclusive arrangementswere made between the two companies to realisecommercial value — by stating that only 25% of thetotal turnover could be traded by the wholesale enti-ty amongst the same group companies and for‘internal use’ only. However, after much cajoling,the government has provided a breather to theinfamous indirect structures by getting rid of the‘internal use’ rule.Conclusion: The DIPP deserves a pat on its back for itsexemplary efforts, some of which we have discussedabove. In recent months, the DIPP has published afew discussion papers on opening up prohibited sec-tors such as multi-brand retail and defence to FDI. Apaper has also been put up for discussion on issue ofshares for consideration other than cash, so farpermitted in certain cases such as conversion ofexternal commercial borrowings or royaltypayments). There are, nevertheless, otherambiguities in the FDI policy requiring the DIPP’s at-tention — the important ones being upfrontdetermination of price of capital instruments at thetime of issuance and treatment of FOCC Indian com-panies as non-resident entities, given the guidingprinciple in the FDI policy that downstreaminvestment by FOCC Indian companies are requiredto follow the same norms as a direct foreigninvestment. These issues have been the bones ofcontention in boardrooms and we can only hopethat they can grab the DIPP’s attention at the earliest.

(S Singh is partner, G Singhi is senior associate and SRamachandran is associate at Phoenix Legal)

9

NDIA is at the centre of the population-versus-growth debate. With the world’s second-largestpopulation at 1.2 billion, the country must fo-cus on turning this population into a benefitrather than a disadvantage. This month, welook at how states in India can use their popu-lation size and growth rate to improve theircompetitiveness.

TRADITIONAL economic thinking seespopulation as a drag on a nation’s eco-nomic growth. However, with the worldlooking towards India as a growing andvibrant market, her ‘demographic advan-tage’ is often touted as her biggest asset.

According to the theory of demograph-ic dividend, the rate of economic growthincreases due to a rising share of workingage people in a population. For India,falling fertility rates are resulting in a larg-

er chunk of working-age people, who cancontribute to the GDP and generate high-er output per capita.

In fact, the International Labour Orga-nization (ILO) has stated that India willaccount for the highest working age pop-ulation in the next 10 years, in a report re-leased recently. In the document preparedfor the G-20 Summit held earlier thismonth in Seoul, the ILO says that the G-20 nations will see their working age pop-ulation between 15 and 64 years increaseby 212 million in the period 2010-2020.Over 64% of this increase will occur in In-dia alone!

This month’s IFCIndia State DevelopmentBarometer takes a sharp look at what pop-ulation really means to the economicgrowth of India’s states and analyses howstates can use their demographic situationto improve their competitiveness, andhence, enhance their prosperity.

Rising stars among statesIt is widely accepted that growth among In-dian states is skewed, with some prosper-ous states bearing the burden of growth,while several other lag in terms of GDPgrowth and development parameters.

The average decadal GDP growth figuresshow that unexpected states such as Biharand Orissa, historically notorious for poorgrowth, have exhibited a sustained GDPgrowth rate. Bihar, specifically, is notablefor exhibiting a remarkable decadal growthrate of 10.83% while contributing on amodest population base. Bihar accountsfor 8.1% to the country’s population, asseen in the accompanying graph.

Meanwhile, states such as Maharash-tra, Goa, Punjab and Tamil Nadu, that areknown for their higher levels of industrial-isation, human development or agricul-tural prosperity seem to have slowed interms of GDP growth over the past decade.

Size does matterA large size of population appears to be aburden on the economy of states such asUttar Pradesh, Rajasthan, West Bengaland Madhya Pradesh. These states arealso usually characterised by low percapita income and higher disparities.Large population size is a major factor,

among several others, that is draggingdown the economic growth of relativelyaffluent states like Maharashtra, Kar-nataka and Tamil Nadu. Yet, a few statessuch as Bihar, Andhra Pradesh and Gu-jarat with large populations are exhibit-ing high GDP growth.

No burden on economic growthSixteen states in India have a GDP growthhigher than the national average. Ofthese, ten states show a populationgrowth rate higher than the national av-erage, while six other states have a popu-lation growth rate lower than the nation-al average.

Population growth, considered a bur-den to economic growth, seems to havelittle correlation with GDP growth (corre-lation = 0.24). Large states such as Bihar,for instance, have showed sustained GDPgrowth over the decade along with asteadily rising population, whereas statessuch as Punjab and Manipur with slowerpopulation increase are showing GDPgrowth rates that are lower than the na-tional average.

Population, a double-edged swordClearly, population is a double-edgedsword. On one hand, the data shows thatthere is no clear correlation betweengrowth in population and GDP. Yet, accord-ing to the demographic dividend theory, alarge working age population is an asset.

In order to be able to catapult theirgrowth rates, states need to look closelyat their competitiveness, which in turnis linked to their level of productivity.Improved competitiveness leads to im-proved incomes and better quality of lifeacross the board. When viewed fromthis standpoint, states will be able to de-velop strategies on how best to utilisetheir workforce — small or large, grow-ing slow or growing fast — to maximiseproductivity.Group 1: States with lower populationgrowth rates and high GDP growth rates,such as Kerala, Andhra Pradesh and Oris-sa need to look closely at the training lev-els of their workforce and create strategyto move towards high value sectors andindustries that need a more skilled work-

force, which are also correspondingly farmore productive.Group 2: States with healthy GDP andpopulation growth rates, such as Chandi-garh, Delhi, Haryana and Bihar must fo-cus on sectors where they are inherentlycompetitive because of the presence ofnatural resources or traditional skills andknowledge. These states should find waysto turn the availability of a large work-force in their favour by offering suitableeducation policies and opportunities. Set-ting the right priorities is critical to en-hance competitiveness for this band of In-dian states.Group 3: A number of states such as Kar-nataka, West Bengal, Rajasthan, TamilNadu and Mizoram are performing onlyslightly below India’s average GDPgrowth rate. These states can quickly cat-apult themselves into Group 2 with a fo-cused effort on productivity.Group 4: A roadmap for enhancing com-petitiveness is critical for poorly perform-ing states. Among these, states such as Ut-tar Pradesh and Madhya Pradesh withlarge and growing populations must con-trol the rate of population growththrough effective healthcare and out-reach efforts, as arresting populationgrowth takes time. They also need to har-ness their large growing workforce effec-tively and focus on promoting economicactivities that can employ and utilise alarge labour workforce, like certain typesof manufacturing.

Vision for the futureA look at the relationship between thepopulation and GDP growth serves tohighlight how states in various stages ofgrowth — both economic and demo-graphic — can harness their position inthe best possible manner. This is best doneby first ascertaining a state’s inherentcompetitive edge — these could be re-sources, sectors, human potential, etc —and then designing and implementingpolicy around this to achieve highly pro-ductive and efficient clusters that provideemployment, contribute to growing theGDP and bring prosperity as well.

Institute For Competitiveness

POST the crisis, the one common thread thatlinks advanced economies across the world,with perhaps the exception of the ever-prudentGermans, is the phenomenal increase in publicdebt, i.e., debt raised by governments strappedfor funds and desperate to kickstart the econo-my with stimulus packages.

Based on IMF forecasts, Eswar Prasad at Cor-nell University calculates that the level of aggre-

gate net government debt in the world will more than double from $23trillion — 44% of world GDP — in 2007 to $48 trillion — 65% of GDP— in 2015. Advanced economies account for much of this increase.

Prasad estimates the ratio of aggregate debt-to-aggregate GDP for ad-vanced economies will rise from 48% in 2007 to 71% in 2010, and fur-ther to 85% in 2015. In contrast, emerging markets (EMs) fare muchbetter. The corresponding ratios for the EM group are 30%, 30% and26% respectively. In 2007, EMs accounted for 24% of world nominalgross domestic product (GDP), in US dollars terms, and 17% of worlddebt. By 2015, they are expected to produce 35% of world output butaccount for just 14% of world debt. Thus, even as EMs increase theirshare in world GDP, their share in world debt is expected to come down.To put that more graphically, EMs will power their growth from inter-nal rather than borrowed resources.

This has two major consequences for EMs — both positive. One,they will be able to use more and more of their revenue for productivepurposes rather than for servicing debt, whether by way of interest costor repayment. Two, the distressing issue of inter-generational equitywhere succeeding generations end up paying for the profligacy of ear-lier generations will be resolved far more satisfactorily in EMs than inadvanced economies. Add to this the fact that EMs have a lower de-pendency ratio — read: larger share of population in the younger agegroup — and clearly, they are on a stronger wicket.

This is graphically brought home when the rise in debt is comparedwith the rise in GDP. EMs accounted for 10% of the rise in global debtlevels from 2007 to 2010, and could account for 13% of the rise from2010 to 2015. In contrast, their contributions to global GDP growthover these two periods are expected to be 70% and 54%, respectively.Average debt per capita in advanced economies was $19,400 in 2007,rose to $29,100 in 2010, according to the paper, and will go up to$41,000 in 2015. By 2015, the burden of debt for US citizens will rise to$48,000 per person. The debt burden for Japanese citizens will hit$75,900, the highest in the world. In contrast, China’s debt burden willbe just $1,200 in 2015. India’s, however, will be far higher at $2,013.

Among advanced economies, average debt per working-age personwill more than double from $31,700 in 2007 to $68,500 in 2015. Japantops the league tables by this measure while the US moves into secondposition by 2015 with debt per working-age person of $134,500 and$79,200, respectively.

Diehard optimists point to periods when public debt ballooned butfears of Doomsday proved ill-founded as a reason not to get perturbedabout the sharp rise in debt. But they could be living in cloud cuckooland! Borrowing like there is no tomorrow has serious — and unhappy— consequences for both their own as well as global financial stability.

The analysis paints a sobering picture of worsening public debt dyna-mics and a sharply-rising debt burden in advanced economies. It warnsthe worst is, perhaps, yet to come. First, these countries are experienc-ing little population growth. Second, they are facing rapidly aging pop-ulations. Third, their economies are likely to register slow growth, es-pecially relative to the EMs. Fourth, entitlement spending on health-care and pension could rise sharply due to unfavourable demographics.

The prescription: advanced economies had better get their fiscal acttogether once the recovery is better entrenched. It will take strong po-litical will to tackle near-term deficits and then to control the growth inentitlement spending. In the absence of decisive action, ballooningpublic debt in these economies could become a major threat to domes-tic and global financial stability.

http://www.brookings.edu/articles/2010/1101_government_debt_prasadMythili Bhusnurmath

mythili.bhusnurmath@timesgroup.com

Sins ofindulgence

The DIPP has clarified manycontentious issues regarding FDI,but ambiguity remains on subjectssuch as determination of pricing ofcapital instruments at issuance

THE EXPLOSION OF PUBLIC DEBT HASSERIOUS LONG-TERM REPERCUSSIONS

ANIMISHA

POLICIES THAT MAKE PRODUCTIVE USE OF AVAILABLE RESOURCES ARE CRITICAL

ARINDAM

I

INDIA

Source: IMF Fiscal Monitor, May 2010; IMF WEO, April 2010;ILO Economically-Active Population Estimates and Projections, 2009

DEBT BURDEN

Gross debt to GDP (%)Gross debt(US dollars in billions)Gross debt percapita (US dollars)Gross debt perworking-ageperson (US dollars)

79.01,080

888

1,638

77.81,164

945

1,728

70.31,400

1,092

1,954

2009 2010 2011 2014 201580.8999

833

1,548

67.31,471

1,132

2,013

ChandigarhDelhiUttarakhandHaryanaGujaratBiharChhattisgarhSikkimNagalandHimachal Pradesh

5.05

3.11

1.59

1.98

1.64

1.86

1.76

1.58

4.89

1.59

Populationgrowth ratesare HIGHERthan nationalaverage

Populationgrowth ratesare LOWERthan nationalaverage

GDP(India avg 7.99)State

Populationgrowth rate

(India avg 1.55)

13.1211.8611.8

11.6910.8

10.839.789.6

9.548.88

Andhra PradeshOrissaMeghalayaTripuraArunachal PradeshKerala

0.99

1.07

1.39

0.99

1.27

0.77

9.529.378.058.4

8.799.55

PEOPLE POWER

States contributing to India’s GDP growth(GDP growth higher than national average)

Population size vs GDP growth rate

Comparison of state population growth and GDP growth

0 500 1000Population size in lakhs

1500 2000 2500

14121086420

CH

GOTRMG

MZ

HP

JHPJ

MPAS

ANMNJK

PD

DLHRUK

SK CG KRORAR

NL

TN

APBR

KA RJWB

MH

UP

DL: DelhiCH: ChandigarhKR: KeralaTR: TripuraMG: MeghalayaPD: PuducherryKA: KarnatakaWB: West Bengal

AS: AssamNL: NagalandUK: UttarakhandHR: HaryanaGJ: GujaratCG: ChattisgarhSK: SikkimJH: Jharkhand

TN: Tamil NaduBR: BiharRJ: RajasthanGO: GoaMZ: MizoramPJ: PunjabMN: ManipurOR: Orissa

UP: Uttar PradeshAP: Andhra PradeshAR: Arunachal PradeshHP: Himachal PradeshJK: Jammu & KashmirMP: Madhya PradeshAN: Andaman & Nicobar IslandsMH: Maharashtra

0 1 2Population growth (%)

3 4 5

14121086420

AP

TR KR

WB

AS

TN

KR ORAR

MGMH

RJGO

AN

PD

JHPJJK

UPMN

MP

SK CGHP

GJ BR

UK HR DL CH

NL

GJ

MZ

JAYEETA

States can harness theirpopulation to grow

FDI policy needs some more weeding DILBERT by S Adams

POLICYTHE ECONOMIC TIMES ON SATURDAY MUMBAI 27 NOVEMBER 2010 *

SAWANT SINGH, SRIRAM RAMACHANDRAN &GAURAV SINGHI

ON MARCH 31, 2010, FOR THE FIRST TIME,the department of industrial policy andpromotion (DIPP) in the ministry of

commerce and industry put out a Consolidated FDIPolicy: Circular 1 of 2010 overriding the entire heapof press notes, circulars and clarifications issuedearlier in connection with foreign direct investment(FDI). The DIPP’s efforts in preparing Circular 1,which became effective from April 1, 2010, earnedplaudits from the industry at first, but on a closerlook, left India Inc and foreign investors high anddry, especially on issues relating to upfrontdetermination of price for capital instruments andnon-inclusion of partly-paid shares and warrantswithin the definition of ‘capital’.

To its credit, however, the DIPP has issued Consol-idated FDI Policy: Circular 2 of 2010 within sixmonths of Circular 1 and lived up to its promise byclarifying issues that had ruffled feathers in the FDIspace. We highlight a few key clarifications made inCircular 2.Death to warrants and life again: Circular 1 created animpression that there was a complete embargo on is-suance of warrants and partly-paid capitalinstruments to non-residents even if the ForeignInvestment Promotion Board (FIPB) approved it. Onthe contrary, as a matter of practice, the FIPB wasconsidering such proposals and granting approvalsafter factoring in the time limit for conversion of thewarrants and quantum of upfront consideration.

The DIPP clarified the matter in a note to thedefinition of ‘capital’ in Circular 2 by stating thatinstruments other than equity shares and fully, com-pulsorily and mandatorily convertible preferenceshares and debentures may be issued after obtainingprior government approval. This change will ensurethat, on one hand, there is some elbow room for ma-ture foreign financial investors to structure theirinvestments and, on the other, domesticundertakings need not hand over a pie of theirbusiness at a price that could potentially be higher ata future point.Soothing NBFCs: Circular 2 also partly settles the dustover downstream investment by foreign owned andcontrolled (FOCC) non-banking financial

companies (NBFCs). Reading the relevantprovisions of Circular 1 (reiterating what had beenstated in press note 4 issued in February, 2009) ledone to conclude that 100% wholly ownedsubsidiaries of the FOCC NBFCs must also meet theminimum capitalisation requirements of NBFCs.This would have made it commercially difficult forFOCC NBFCs to set up and operate differentsubsidiaries for separate activities like stock broking,housing finance etc. Much to the relief of 100%FOCC NBFCs, however, Circular 2 has explicitlystated that they will not be required to meetminimum capitalisation requirements. Speaking ofdownstream investments, there were concerns afterthe release of Circular 1 that downstreaminvestment by a FOCC could be done only through

funds from abroad and not by leveraging funds fromIndia. Fortunately, Circular 2 has stated with wellclarified that investment by internal accruals ispermitted as long as other conditions laid down inthe policy on downstream investments are fulfilled.Breather to retailers too: Since FDI in multi brand retailis prohibited, players in this market have often beenin the news for the wrong reasons, trying to use thewholesale cash-and-carry route, where100% FDI ispermitted, as a backdoor to enter the multi brand re-tail sector. In Circular 1, the government had comedown heavily on FDI in multi brand retail sectorstructure — where the ownership structure of theretail entity and the wholesale entity were keptdistinct but within the same groupcompanies/promoters and exclusive arrangementswere made between the two companies to realisecommercial value — by stating that only 25% of thetotal turnover could be traded by the wholesale enti-ty amongst the same group companies and for‘internal use’ only. However, after much cajoling,the government has provided a breather to theinfamous indirect structures by getting rid of the‘internal use’ rule.Conclusion: The DIPP deserves a pat on its back for itsexemplary efforts, some of which we have discussedabove. In recent months, the DIPP has published afew discussion papers on opening up prohibited sec-tors such as multi-brand retail and defence to FDI. Apaper has also been put up for discussion on issue ofshares for consideration other than cash, so farpermitted in certain cases such as conversion ofexternal commercial borrowings or royaltypayments). There are, nevertheless, otherambiguities in the FDI policy requiring the DIPP’s at-tention — the important ones being upfrontdetermination of price of capital instruments at thetime of issuance and treatment of FOCC Indian com-panies as non-resident entities, given the guidingprinciple in the FDI policy that downstreaminvestment by FOCC Indian companies are requiredto follow the same norms as a direct foreigninvestment. These issues have been the bones ofcontention in boardrooms and we can only hopethat they can grab the DIPP’s attention at the earliest.

(S Singh is partner, G Singhi is senior associate and SRamachandran is associate at Phoenix Legal)

9

NDIA is at the centre of the population-versus-growth debate. With the world’s second-largestpopulation at 1.2 billion, the country must fo-cus on turning this population into a benefitrather than a disadvantage. This month, welook at how states in India can use their popu-lation size and growth rate to improve theircompetitiveness.

TRADITIONAL economic thinking seespopulation as a drag on a nation’s eco-nomic growth. However, with the worldlooking towards India as a growing andvibrant market, her ‘demographic advan-tage’ is often touted as her biggest asset.

According to the theory of demograph-ic dividend, the rate of economic growthincreases due to a rising share of workingage people in a population. For India,falling fertility rates are resulting in a larg-

er chunk of working-age people, who cancontribute to the GDP and generate high-er output per capita.

In fact, the International Labour Orga-nization (ILO) has stated that India willaccount for the highest working age pop-ulation in the next 10 years, in a report re-leased recently. In the document preparedfor the G-20 Summit held earlier thismonth in Seoul, the ILO says that the G-20 nations will see their working age pop-ulation between 15 and 64 years increaseby 212 million in the period 2010-2020.Over 64% of this increase will occur in In-dia alone!

This month’s IFCIndia State DevelopmentBarometer takes a sharp look at what pop-ulation really means to the economicgrowth of India’s states and analyses howstates can use their demographic situationto improve their competitiveness, andhence, enhance their prosperity.

Rising stars among statesIt is widely accepted that growth among In-dian states is skewed, with some prosper-ous states bearing the burden of growth,while several other lag in terms of GDPgrowth and development parameters.

The average decadal GDP growth figuresshow that unexpected states such as Biharand Orissa, historically notorious for poorgrowth, have exhibited a sustained GDPgrowth rate. Bihar, specifically, is notablefor exhibiting a remarkable decadal growthrate of 10.83% while contributing on amodest population base. Bihar accountsfor 8.1% to the country’s population, asseen in the accompanying graph.

Meanwhile, states such as Maharash-tra, Goa, Punjab and Tamil Nadu, that areknown for their higher levels of industrial-isation, human development or agricul-tural prosperity seem to have slowed interms of GDP growth over the past decade.

Size does matterA large size of population appears to be aburden on the economy of states such asUttar Pradesh, Rajasthan, West Bengaland Madhya Pradesh. These states arealso usually characterised by low percapita income and higher disparities.Large population size is a major factor,

among several others, that is draggingdown the economic growth of relativelyaffluent states like Maharashtra, Kar-nataka and Tamil Nadu. Yet, a few statessuch as Bihar, Andhra Pradesh and Gu-jarat with large populations are exhibit-ing high GDP growth.

No burden on economic growthSixteen states in India have a GDP growthhigher than the national average. Ofthese, ten states show a populationgrowth rate higher than the national av-erage, while six other states have a popu-lation growth rate lower than the nation-al average.

Population growth, considered a bur-den to economic growth, seems to havelittle correlation with GDP growth (corre-lation = 0.24). Large states such as Bihar,for instance, have showed sustained GDPgrowth over the decade along with asteadily rising population, whereas statessuch as Punjab and Manipur with slowerpopulation increase are showing GDPgrowth rates that are lower than the na-tional average.

Population, a double-edged swordClearly, population is a double-edgedsword. On one hand, the data shows thatthere is no clear correlation betweengrowth in population and GDP. Yet, accord-ing to the demographic dividend theory, alarge working age population is an asset.

In order to be able to catapult theirgrowth rates, states need to look closelyat their competitiveness, which in turnis linked to their level of productivity.Improved competitiveness leads to im-proved incomes and better quality of lifeacross the board. When viewed fromthis standpoint, states will be able to de-velop strategies on how best to utilisetheir workforce — small or large, grow-ing slow or growing fast — to maximiseproductivity.Group 1: States with lower populationgrowth rates and high GDP growth rates,such as Kerala, Andhra Pradesh and Oris-sa need to look closely at the training lev-els of their workforce and create strategyto move towards high value sectors andindustries that need a more skilled work-

force, which are also correspondingly farmore productive.Group 2: States with healthy GDP andpopulation growth rates, such as Chandi-garh, Delhi, Haryana and Bihar must fo-cus on sectors where they are inherentlycompetitive because of the presence ofnatural resources or traditional skills andknowledge. These states should find waysto turn the availability of a large work-force in their favour by offering suitableeducation policies and opportunities. Set-ting the right priorities is critical to en-hance competitiveness for this band of In-dian states.Group 3: A number of states such as Kar-nataka, West Bengal, Rajasthan, TamilNadu and Mizoram are performing onlyslightly below India’s average GDPgrowth rate. These states can quickly cat-apult themselves into Group 2 with a fo-cused effort on productivity.Group 4: A roadmap for enhancing com-petitiveness is critical for poorly perform-ing states. Among these, states such as Ut-tar Pradesh and Madhya Pradesh withlarge and growing populations must con-trol the rate of population growththrough effective healthcare and out-reach efforts, as arresting populationgrowth takes time. They also need to har-ness their large growing workforce effec-tively and focus on promoting economicactivities that can employ and utilise alarge labour workforce, like certain typesof manufacturing.

Vision for the futureA look at the relationship between thepopulation and GDP growth serves tohighlight how states in various stages ofgrowth — both economic and demo-graphic — can harness their position inthe best possible manner. This is best doneby first ascertaining a state’s inherentcompetitive edge — these could be re-sources, sectors, human potential, etc —and then designing and implementingpolicy around this to achieve highly pro-ductive and efficient clusters that provideemployment, contribute to growing theGDP and bring prosperity as well.

Institute For Competitiveness

POST the crisis, the one common thread thatlinks advanced economies across the world,with perhaps the exception of the ever-prudentGermans, is the phenomenal increase in publicdebt, i.e., debt raised by governments strappedfor funds and desperate to kickstart the econo-my with stimulus packages.

Based on IMF forecasts, Eswar Prasad at Cor-nell University calculates that the level of aggre-

gate net government debt in the world will more than double from $23trillion — 44% of world GDP — in 2007 to $48 trillion — 65% of GDP— in 2015. Advanced economies account for much of this increase.

Prasad estimates the ratio of aggregate debt-to-aggregate GDP for ad-vanced economies will rise from 48% in 2007 to 71% in 2010, and fur-ther to 85% in 2015. In contrast, emerging markets (EMs) fare muchbetter. The corresponding ratios for the EM group are 30%, 30% and26% respectively. In 2007, EMs accounted for 24% of world nominalgross domestic product (GDP), in US dollars terms, and 17% of worlddebt. By 2015, they are expected to produce 35% of world output butaccount for just 14% of world debt. Thus, even as EMs increase theirshare in world GDP, their share in world debt is expected to come down.To put that more graphically, EMs will power their growth from inter-nal rather than borrowed resources.

This has two major consequences for EMs — both positive. One,they will be able to use more and more of their revenue for productivepurposes rather than for servicing debt, whether by way of interest costor repayment. Two, the distressing issue of inter-generational equitywhere succeeding generations end up paying for the profligacy of ear-lier generations will be resolved far more satisfactorily in EMs than inadvanced economies. Add to this the fact that EMs have a lower de-pendency ratio — read: larger share of population in the younger agegroup — and clearly, they are on a stronger wicket.

This is graphically brought home when the rise in debt is comparedwith the rise in GDP. EMs accounted for 10% of the rise in global debtlevels from 2007 to 2010, and could account for 13% of the rise from2010 to 2015. In contrast, their contributions to global GDP growthover these two periods are expected to be 70% and 54%, respectively.Average debt per capita in advanced economies was $19,400 in 2007,rose to $29,100 in 2010, according to the paper, and will go up to$41,000 in 2015. By 2015, the burden of debt for US citizens will rise to$48,000 per person. The debt burden for Japanese citizens will hit$75,900, the highest in the world. In contrast, China’s debt burden willbe just $1,200 in 2015. India’s, however, will be far higher at $2,013.

Among advanced economies, average debt per working-age personwill more than double from $31,700 in 2007 to $68,500 in 2015. Japantops the league tables by this measure while the US moves into secondposition by 2015 with debt per working-age person of $134,500 and$79,200, respectively.

Diehard optimists point to periods when public debt ballooned butfears of Doomsday proved ill-founded as a reason not to get perturbedabout the sharp rise in debt. But they could be living in cloud cuckooland! Borrowing like there is no tomorrow has serious — and unhappy— consequences for both their own as well as global financial stability.

The analysis paints a sobering picture of worsening public debt dyna-mics and a sharply-rising debt burden in advanced economies. It warnsthe worst is, perhaps, yet to come. First, these countries are experienc-ing little population growth. Second, they are facing rapidly aging pop-ulations. Third, their economies are likely to register slow growth, es-pecially relative to the EMs. Fourth, entitlement spending on health-care and pension could rise sharply due to unfavourable demographics.

The prescription: advanced economies had better get their fiscal acttogether once the recovery is better entrenched. It will take strong po-litical will to tackle near-term deficits and then to control the growth inentitlement spending. In the absence of decisive action, ballooningpublic debt in these economies could become a major threat to domes-tic and global financial stability.

http://www.brookings.edu/articles/2010/1101_government_debt_prasadMythili Bhusnurmath

mythili.bhusnurmath@timesgroup.com

Sins ofindulgence

The DIPP has clarified manycontentious issues regarding FDI,but ambiguity remains on subjectssuch as determination of pricing ofcapital instruments at issuance

THE EXPLOSION OF PUBLIC DEBT HASSERIOUS LONG-TERM REPERCUSSIONS

ANIMISHA

POLICIES THAT MAKE PRODUCTIVE USE OF AVAILABLE RESOURCES ARE CRITICAL

ARINDAM

I

INDIA

Source: IMF Fiscal Monitor, May 2010; IMF WEO, April 2010;ILO Economically-Active Population Estimates and Projections, 2009

DEBT BURDEN

Gross debt to GDP (%)Gross debt(US dollars in billions)Gross debt percapita (US dollars)Gross debt perworking-ageperson (US dollars)

79.01,080

888

1,638

77.81,164

945

1,728

70.31,400

1,092

1,954

2009 2010 2011 2014 201580.8999

833

1,548

67.31,471

1,132

2,013

ChandigarhDelhiUttarakhandHaryanaGujaratBiharChhattisgarhSikkimNagalandHimachal Pradesh

5.05

3.11

1.59

1.98

1.64

1.86

1.76

1.58

4.89

1.59

Populationgrowth ratesare HIGHERthan nationalaverage

Populationgrowth ratesare LOWERthan nationalaverage

GDP(India avg 7.99)State

Populationgrowth rate

(India avg 1.55)

13.1211.8611.8

11.6910.8

10.839.789.6

9.548.88

Andhra PradeshOrissaMeghalayaTripuraArunachal PradeshKerala

0.99

1.07

1.39

0.99

1.27

0.77

9.529.378.058.4

8.799.55

PEOPLE POWER

States contributing to India’s GDP growth(GDP growth higher than national average)

Population size vs GDP growth rate

Comparison of state population growth and GDP growth

0 500 1000Population size in lakhs

1500 2000 2500

14121086420

CH

GOTRMG

MZ

HP

JHPJ

MPAS

ANMNJK

PD

DLHRUK

SK CG KRORAR

NL

TN

APBR

KA RJWB

MH

UP

DL: DelhiCH: ChandigarhKR: KeralaTR: TripuraMG: MeghalayaPD: PuducherryKA: KarnatakaWB: West Bengal

AS: AssamNL: NagalandUK: UttarakhandHR: HaryanaGJ: GujaratCG: ChattisgarhSK: SikkimJH: Jharkhand

TN: Tamil NaduBR: BiharRJ: RajasthanGO: GoaMZ: MizoramPJ: PunjabMN: ManipurOR: Orissa

UP: Uttar PradeshAP: Andhra PradeshAR: Arunachal PradeshHP: Himachal PradeshJK: Jammu & KashmirMP: Madhya PradeshAN: Andaman & Nicobar IslandsMH: Maharashtra

0 1 2Population growth (%)

3 4 5

14121086420

AP

TR KR

WB

AS

TN

KR ORAR

MGMH

RJGO

AN

PD

JHPJJK

UPMN

MP

SK CGHP

GJ BR

UK HR DL CH

NL

GJ

MZ

JAYEETA

States can harness theirpopulation to grow

FDI policy needs some more weeding DILBERT by S Adams

Indian  Market  is  Highly  Regional  

Uneven  Papern  of  Wealth  Distribu-on  

Seasonality  

Cultures  &  Languages  

Strategizing  for  Success  in  India  

Is  it  an  easy  market  to  crack  

Where  should  we  focus  

Who  are  the  successful  players    

Why  is  India  so  Complex?  

•  India  is  good  at  resource  maximiza-on  

•  Indian  businesses  have  a  way  of  making  things  differently  and  with  minimal  resources  maybe  because  India  is  a  poor  country  

Innova$on  or  Ind’ova$on    

Ind’ova$on  commonly  know  in  Hindi  as  Jugaad  is  a  striking  feature  of  the  Indian  business  landscape.  It  indicates  the  ingenuity  to  achieve  results  by  out  of  box  thinking,  at  -mes  even  temporary  fixes.    

Doing  it  for  India  

Crea-ng  Unique  Business  Models  

Whitening  Creams  are  selling  like  hot  cakes.  

   

Source:  Wall  Street  Journal,  2011  

Disaggrega-on  of  Sales  

Local  Mom  and  Pop  Store  

How  many  bidis  are  sold  in  a  day  in  India  by  502  Pataka  Manufacturing  Company?  

100,000,000  

Indian  Culture  

How  we  look  at  things   Collec-vism  

Karma  The  

Concept  of  Time  

Varies  within  States  

India  Is  hierarchy  driven  

No-ceable  lack  of  privacy  &  importance  of  interpersonal  

contact  

The  Basic  Idea  

Thank  You