Economic

EXMBA 2012-14 Sem-2 Economic Environment of Business
Faculty : Ms Simirit Kaur

Project Report on

Major obstacles to India s growth

Submitted By: Harish Kumar (S-25) Manoj Paweria (S-36) Kumar Sikander (S-76)

ACKNOWLEDGEMENT

We owe a great many thanks to a great many people who helped and supported me during assignment . Our deepest thanks to professor, Ms. Simrit Kaur for assisting us at every stage of this project from the objectives, techniques and analysis to fine-tuning our entire findings. We owe a great many thanks to a great many people who helped and supported us during field assignment .

We also extend our heartfelt thanks to our family and well wishers.

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CONTENTS
~Acknowledgements~ _________________________________ 2 ~Objectives of this project~ ____________________________ 4 ~ Brief detail about factor effecting India s growth ~ ________ 5 ~ Q1 - Infrastructure Shortages effects ~ __________________ 6 ~ Key Initiatives / Information ~ _________________________ 6 ~ Q-2 - Large Fiscal Deficit ~ ___________________________ 10 ~ The Indian scenario ~ _______________________________ 12 ~ Bibliography ~ _____________________________________ 16

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~Objectives of this project~
India s economy has grown very rapidly in recent years. Since 1991 it has been among the top 10% of the world s countries in terms of economic growth. The primary challenge for India is to sustain this growth while spreading its benefits more widely. This requires continuous effort as international experience shows that growth slows down unless reforms are pushed through when growth is high. To study major obstacles to India s growth are:

1. 2. 3. 4.

Infrastructure Shortages Large Fiscal Deficit Restrictive Labor Regulations Unreformed Financial Sector

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Brief detail about factor effecting India s growth
We will concentrate and explain first two major factor or points and how they are becoming major hurdle of Indian Growth. · Crippling infrastructure shortages are the leading constraint to rapid growth as well as in spreading this growth more widely. These shortages have resulted in a skewed pattern of growth that is not sustainable.While the high skill services sector that employs the better educated among India s work force has flourished, the growth of more labor-intensive manufacturing that generates jobs for low and semi-skilled workers has remained constrained. Infrastructure shortages have particularly hindered the growth of export oriented manufacturing and value-added agriculture that integrate into global supply chains, and need good roads, ports, airports, and railways as well as reliable power and water to prosper.

· The country s consolidated fiscal deficit has been persistently large for many years. While recent efforts to tackle the deficit have paid off in substantial progress, it remains a continuing concern.

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Q1. How Infrastructure Shortages is effecting India s growth Challenges:
· India needs to invest 3-4% more of its GDP on infrastructure to sustain 8% growth. · The private sector can play an important role in investing in infrastructure, including through public private partnerships. · Improving the country s capacity to implement infrastructure projects will be as important as increasing the amount of investment available. · Investments should improve the delivery of services, and service providers need to be made more accountable to consumers. · Emphasis should be placed on maintaining existing assets. · Reforms need to be accelerated in all sectors. Difficult issues such as rationalizing user fees for services need to be faced. India is one of the fastest growing economies in the world. Consequently, the need for infrastructure facilities is ever growing, across sectors. The development of adequate infrastructure has been identified as the most critical prerequisite for sustaining the current growth momentum of the economy and to ensure inclusiveness of the growth process. The Eleventh Five Year Plan envisages a total investment of US$ 514 billion in infrastructure sector for bridging the infrastructure deficit and for sustaining a growth momentum of 9 per cent per annum. This ambitious target requires 30 per cent of the total investment, i.e. US$ 154.17 billion, through private sector participation.
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Over a period of time, the Government of India has taken several initiatives to accommodate and accelerate private investments in the infrastructure sector. These include sector specific policies, providing incentives and tax holidays to attract private investments, permission of 100% FDI in the infrastructure sector, special provision of Viability Gap Funding (VGF) and PPP approach. While infrastructure development is one of the top priorities of the nation, the pace of growth in infrastructure has not been commensurate to the demands and it continues to pose a major bottleneck and a challenge for the country. Through its National Council on Infrastructure and Sectoral Committees, CII is deeply engaged in building a robust infrastructure sector; and in addressing specific issues on behalf of the industry with regard to specific areas of Roads & Highways; Airports & Aviation; Railways; Ports & Shipping; and Urban Infrastructure & Housing. CII Infrastructure Division engages the central & state governments; the industry and other stakeholders to work towards making Public Private Partnerships PPPs as one of the important ways to increasing investments in Indian infrastructure.

Key Initiatives / Information
Reigniting Bonds Of Friendship The India-ASEAN Car Rally highlights the evolving partnership potential of the two sides. Indian industry must take advantage of the regional FTAs for cooperation in manufacturing, services, and infrastructure. We Need a Better Land Law The bill on land acquisition and resettlement and rehabilitation is welcome. It must enable government to acquire land for development, balance compensation for affected families with costs, and look into land zoning.
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Necessary For Growth A body such as the National Investment Board is an absolute necessity if India is to rapidly scale up its infrastructure. CII has estimated that fast-tracking of some 50 large projects could unlock demand for as many as 100 industry sectors up and down the value chain Consumer Guide to Property Purchase Developers and buyers are two sides of the same coin. However, in the Indian markets, for various reasons pertaining to lack of regulation, structured market practices, mandatory statistical back-up etc, the positions have very often not been symbiotic. However, the consumer gets the real estate products because of the developer and vice-versa. So what can CII Real estate, an industry body do to bridge this gap? We thought deeply and decided that mandatory or otherwise, the first step towards bridging this gap was to make more information available to consumers to serve as a guide during the most important and probably the most expensive buy of your life. This document is a step in this direction. Read this document that is backed by real-time information gathered by our members from different segments of the real estate space. These are online annexures that add depth to the printed document you have received. We would welcome feedback and queries. These would be answered by our industry experts to the best of our abilities. Together we can make a difference. Getting Growth Back The article dwells upon the immediate steps to get growth back include further reduction in interest rates by 100 bps, deregulating oil prices, progress on disinvestment, fast-tracking major infra projects, and encouraging FDI. Tax reforms will also boost growth in the medium term.. Hope Springs Eternal West Bengal, historically at the forefront of India s industrial growth and social change, enjoys major benefits of outstanding natural and human resources. With a strong industrial base, it can transform into a manufacturing and employment-generating hub of eastern India and
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emerge as a central player in India s vibrant growth story, given the right investment climate and proactive policies. Expenditure Cuts Needed Just as the government is making efforts at enhancing revenue collection, there must be measures to control expenses. Subsidies must be controlled, and an empowered body created to monitor expenditure. Measures aimed at revival in growth and moderation in inflation must be strengthened. Budget must spur private investment The fiscal deficit has limited the government 's ability to rev up a slowing economy. Hence, the Budget should focus on encouraging private participation in key sectors, such as infrastructure, education and healthcare. Power Sector Needs Holistic Reform The problems in the power sector are multifarious, relating to fuel shortages, lack of adequate finance, poor financial health of distribution utilities, absence of cost-reflective tariffs and peaking power shortages. In addition, land acquisition, environmental clearances, and administrative delays too discourage investments. CII recommends multiple interventions to reform the sector and ensure 24/7 power supply to the nation. Budget Must Stimulate Growth In its pre-Budget recommendations, CII has stressed that to revive growth momentum, new avenues must be devised to augment investment. Private investments need to be incentivised in critical areas of the economy. A reforms oriented budget is needed to instill confidence among investors.

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Q2. How Large Fiscal Deficit is effecting India s growth Challenges:
· The existing deficit leaves no fiscal space for new government spending on areas of high social priority. Initiatives in rural and urban infrastructure, employment, education, and rural health will have to be financed with some combination of higher taxes or user charges, or by cutting existing expenditures. · Large deficits and an unreformed banking sector reduce the private sector s ability to obtain bank financing. Government deficit is possibly the most dominating issue in the global financial markets these days. While the euro zone is under constant threat of falling apart because of large accumulated debt and high fiscal deficit in a number of countries, lawmakers in the US do not see eye to eye on any deficit reduction plan. As a result, the country is on the verge of witnessing forced reduction in government spending, which can lead to a recession in the US economy with global consequences and also cause significant volatility in the financial market. The situation in India is not very different. India faces the serious threat of being downgraded to junk status if the deficit is not quickly brought under control; the government is targeting a fiscal deficit of 5.3% of the gross domestic product (GDP) in the current fiscal. But why is high deficit such a big problem? Theoretically, there is not much agreement among economists on whether the issue of financing government expenditure by running a
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deficit is good or bad. Any standard text on the subject will typically take you through three schools of thoughts. First, the Keynesian view, which favours large government expenditure through deficit financing in order to employ unused resources. Second, the Ricardian view, which basically argues that it doesn t make a difference as consumers cut expenditure in anticipation of higher taxes that will be levied later in order to pay off the debt. Third is the neo-classical school of thought, which has been a dominating view on the subject in the way it has been approached in the recent years. The neo-classical economists principally argue that high government expenditure has a negative impact on savings, which affects growth. A high government deficit leaves little for the private sector for investment and puts upward pressure on interest rates also referred as crowding out. But in an open economy, the country can always import capital to naturalize the impact of reduced saving because of higher deficit. But, again, import of foreign capital would result in appreciation of the currency, affecting exports and growth. Interestingly, a 2003 paper, The Economic Effects of Long-Term Fiscal Discipline, written by William G. Gale and Peter R. Orszag, analyzing the situation in the US concluded that if the budget deficit increase by 1% of the GDP, the long-term interest rates go up by 50-100 basis points. But things can change quite dramatically. The US is currently running a record deficit and enjoys record low interest rates. Therefore, variables can always respond differently in different circumstances. Do not forget that the Federal Reserve is determined to keep interest rates low and the US dollar remains the unchallenged reserve currency.

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The Indian scenario The conditions in the US and India are not comparable, except for the fact that both are running unsustainable levels of deficit. However, the ill effects of running high deficit are far more visible in India and the need for correction is a lot more urgent here. Apart from the threat of a ratings downgrade, high fiscal deficit is the source of most of the problems that the Indian economy is facing today. Higher deficit since FY09 and higher borrowing has resulted in lower savings and lower growth in the economy. In FY09, at the gross level, fiscal deficit jumped to about 6% of the GDP compared with 2.5% in the previous year. In absolute terms, the deficit went up by about 2.6 times and has grown significantly since then and crossed Rs.5 trillion levels in the last financial year. Let us assume that the government deficit was contained at around Rs.2 trillion, leaving Rs.3 trillion in the banking system to lend to the productive sector. Naturally, the cost of money would have been lower and production and growth would have been higher. It is no coincidence that high growth years, up till FY08, saw lower deficit, which even declined in absolute terms. Higher deficit, as argued by neo-classical economists, also results in decline in savings rate the gross domestic savings has declined from the level of 36.8% of the GDP in FY08 to 32% in FY12. Inflation has also been sticky and has remained way above the comfort level, simply because of the demand push being generated by higher government expenditure. Further, higher demand is getting leaked to the outside world and is not allowing imports to adjust the way exports do in response to the shift in global trade. As a result, in the last fiscal, the current account deficit (CAD) swelled to a record high level of $78 billion and is not expected to come down in a
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hurry. CAD of this magnitude poses serious financing challenges and creates enormous uncertainty on the external front. Therefore, for a country like India with so much downside risk, it is important that government finances are kept under control.

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The following figure-1 traces the trends in deficits of central government over the past four decades. The gross fiscal deficit as a percent of Gross Domestic Product (GDP) increased from 3.04 percent of GDP in 1970-71 to the peak of 8.37 percent in 1986-87 and then declined to 4.84percent in 1996-97. It was around 7 percent of GDP during 1987-88 to 1990-91. During the1990s the average fiscal deficit as a percent of GDP was 5.67 percent. Howe ever, after 2003-04 central governments contained the fiscal deficit from 4.48 percent of GDP to its all time minimum of 2.54 percent in the year 2007-08. Then it increased to 6.48 percent in 2009-10 and declined to 5.89 percent. Similarly primary deficit, which is fiscal deficit excluding interest payment has increased from 1.74 percent in 1970-71 to a peak of 5.43 percent in 1986-87 and declined to 0.53 percent of GDP in 1996-97. Primary deficit was dissolved from the year 2003-04 to the year 2007-08 except the year 2005-06. It was 2.78 percent during the year 2011-12. After 1991-92, primary deficit has declined much due to the rising interest payment and to some extent a decline in fiscal deficit. Revenue deficit was incurred in the period 1971-72 and 1972-73. It was 0.57 percent in 1979-80, after that it increased to 3.26 percent in 1990-91. It reached maximum of 5.25 percent of GDP in 2009-10. The average of revenue deficit as a percentage ofGDP in 1980s, 1990s and 2000s has been 1.72 percent, 3.02 percent and 3.40 percent respectively. It was 4.46 percent of GDP during theperiod 2011-12.

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Far more than the impact captured through numbers, it is the impact on the business confidence that further affects investments. Delay in fiscal adjustment does not reflect well on the government s economic management abilities. It also reduces the capacity of the state to lend any support to the economy in case growth slips. Therefore, bringing down the deficit should be the top priority of the government and at no point should comfort be drawn from the fact that higher deficit is a global phenomenon. Indian conditions are different and comparisons on this subject are unwarranted.

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PPT 'S
Objectivesn

Q1. How Infrastructure Shortages is effecting India s growth
India needs to invest 3-4% more of its GDP on infrastructure to sustain 8% growth n Improving the country s capacity to implement infrastructure projects will be as important as increasing the amount of investment available. n To study major obstacles to India s growth are
Infrastructure Shortages Large Fiscal Deficit Restrictive Labor Regulations Unreformed Financial Sector

Q2. How Large Fiscal Deficit is effecting India s growth n Traces the trends in deficits of central government over the past four decades

n

The existing deficit leaves no fiscal space for new government spending on areas of high social priority. Initiatives in rural and urban infrastructure, employment, education, and rural health will have to be financed with some combination of higher taxes or user charges, or by cutting existing expenditures. Large deficits and an unreformed banking sector reduce the private sector s ability to obtain bank financing.

Bringing down the deficit should be the top priority of the government and at no point should comfort be drawn from the fact that higher deficit is a global phenomenon. Indian conditions are different and comparisons on this subject are unwarranted.

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~Bibliography~
Adam, C. S., and D. L. Bevan, (2005), Fiscal Deficits and Growth in Developing Countries , Journal of Public Economics, Vol.89, pp: 571 597, available at http://www.economics.ox.ac.uk/Research/wp/pdf/paper120.pdf India 's Economic Reforms and Development by Isher Judge Ahluwalia & IMD Little Second Edition updated as part of Oxford India Perennial Series, April 14, 2012 Fiscal Deficit-Economic Growth Nexus in India: A Cointegration analysis Ranjan Kumar Mohanty The Romanian Economic Journal Fiscal Deficit and Inflation: An empirical analysis for India , Aviral Kumar Tiwari, A. P. Tiwari http://www.livemint.com/Money/Z1jHNObQTDNPcYibMBSdaM/The-damages-of-high-fiscaldeficit.html www.cii.in/Sectors.aspx?SectorID=S000000045 http:/dbie.rbi.org.in

Indian infrastructure growth at its pinnacle, Ankineedu Maganti, Director, Soma Enterprise Ltd, May 19-25, 2008 http://www.icrier.org/page.asp?MenuID=24&SubCatId=177&SubSubCatId=308

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Bibliography: Adam, C. S., and D. L. Bevan, (2005), Fiscal Deficits and Growth in Developing Countries , Journal of Public Economics, Vol.89, pp: 571 597, available at http://www.economics.ox.ac.uk/Research/wp/pdf/paper120.pdf India 's Economic Reforms and Development by Isher Judge Ahluwalia & IMD Little Second Edition updated as part of Oxford India Perennial Series, April 14, 2012 Fiscal Deficit-Economic Growth Nexus in India: A Cointegration analysis Ranjan Kumar Mohanty The Romanian Economic Journal Fiscal Deficit and Inflation: An empirical analysis for India , Aviral Kumar Tiwari, A. P. Tiwari http://www.livemint.com/Money/Z1jHNObQTDNPcYibMBSdaM/The-damages-of-high-fiscaldeficit.html www.cii.in/Sectors.aspx?SectorID=S000000045 http:/dbie.rbi.org.in Indian infrastructure growth at its pinnacle, Ankineedu Maganti, Director, Soma Enterprise Ltd, May 19-25, 2008 http://www.icrier.org/page.asp?MenuID=24&SubCatId=177&SubSubCatId=308 17