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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 [email protected].
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
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
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
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