India’s Growth Challenge
“Many years ago people used to doubt whether we knew how to grow fast. Now the question is can we make growth inclusive.”
Montek S. Ahluwalia, Deputy Chairman, Planning Commission, India
“The demand for people is just going through the roof. Many industries are simply competing for the same pool of labour.”
Nandan M. Nilekani, President, Chief Executive Officer and Managing Director, Infosys Technologies, India; Co-Chair, India Economic Summit 2006
“If you want to develop the agricultural sector, one of the preconditions is a proper supply chain. It is still very difficult to move food and vegetables from one state to another. There should be a focus on the supply chain to secure future growth.”
Hans-Joachim Körber, Chairman and Chief Executive Officer, Metro, Germany
India’s economy grew by 9.2% in the third quarter of 2006, the sixth time in the past seven quarters in which GDP growth has surpassed 8%. The economy is clearly climbing to a higher altitude. “Our overall macroeconomic position is very strong,” said Montek S. Ahluwalia, Deputy Chairman of India’s Planning Commission. “The external position is very strong; Indian business has gained a lot of self-confidence; and international perceptions of India are better than they were four years ago.” The good news has prompted Ahluwalia and his team to target 9% growth for the first three years of the next five-year plan to be launched in 2007 and then aim for 10% for the remaining time covered by the blueprint. Achievable goals – but is such growth sustainable?
The trouble is that as India manages its growth higher, the going will only get tougher. Constraints such as poor infrastructure, the underperformance of the agriculture sector, and the shortage of skills will make it more difficult to sustain the fast pace unless significant progress is made in resolving bottleneck problems. It will be even more difficult to ensure that growth is equitable, the top priority for India’s leaders. “Many years ago people used to doubt whether we knew how to grow fast,” Ahluwalia observed. “Now the question is can we make growth inclusive.”
It will take strong partnerships between the public and private sectors and better political and corporate governance to address the drags and disparities that could spoil India’s ambitions. “Industry will do what is necessary to achieve the targets we set provided we do what we can to provide them a decent level of infrastructure,” Ahluwalia reckoned. But the government alone cannot come up with the US$ 350 billion in investment needed over the next five years to construct or upgrade the airports, ports, bridges, roads, ports and other facilities it needs to support 10% growth. Public-private partnerships and significant private investment are essential.
Another critical factor is agriculture, which still employs 70% of the population. The sector has slowed down since the mid-1990s and is currently growing at just 2%. For the economy to achieve 10% growth, agriculture will have to grow by at least 4%. “The agriculture sector will be India’s powerhouse,” predicted Indian Member of Parliament Jyotiraditya Scindia, But for this to come true will require significant restructuring. The sector must diversify beyond traditional cereal production into more high-value businesses such as horticulture, floriculture and fisheries. But this will involve the production, distribution and marketing of perishable products. Rural supply chains today are highly inefficient. About 40% of Indian produce is wasted due to insufficient transport, storage and handling facilities. “If you want to develop the agricultural sector, one of the preconditions is a proper supply chain,” said Hans-Joachim Körber, Chairman and Chief Executive Officer, Metro, Germany. “It is still very difficult to move food and vegetables from one state to another. There should be a focus on the supply chain to secure future growth.”
A further constraint on growth is human resources. Pay increases in IT are running at a staggering 20%, indicating how tight the labour market is in India’s flagship services sector. Companies complain of inadequate talent among graduates and difficulties retaining personnel after spending money and resources on their training. If manufacturing and agriculture are to expand, if the retail sector is to modernize to cater to the expanding ranks of middle-class consumers and to the untapped rural market, if the infrastructure the nation badly needs is to be built, if the health and education facilities and programmes the country requires are to push ahead, and if the economy’s knowledge base is to widen, what India needs are workers with the skills to carry out this ambitious growth agenda. “The demand for people is just going through the roof,” said India Economic Summit 2006 Co-Chair Nandan M. Nilekani, President, Chief Executive Officer and Managing Director, Infosys Technologies, India. “Many industries are simply competing for the same pool of labour.”
The onus is on the education sector, particularly India’s universities. “You can’t have rapid growth or inclusive growth unless the education system is providing enough expansion of the relative skills,” explained Ahluwalia. “As we move towards 9% or 10% growth, the constraint in terms of available skills will become marked in certain areas.” Added Sunil Kant Munjal, Chairman, Hero Corporate Service, India: “For India, innovation will be the key to moving forward. Our labour costs are already not that low when you compare them to some other nations. The supply of people is large, but what matters is our ability to train people. It’s not just formal education; it’s all manner of skills and vocational education.”
Again, the participation of the private sector will be vital. At the closing plenary, Indian Minister of Commerce and Industry Kamal Nath announced that the Cabinet is moving to introduce legislation to allow foreign educational institutions to set up in India. The twin aims: to boost the quality of education by opening the market to foreign competition, and to attract accomplished Indian educators at universities abroad to come home.
This landmark measure is the sort of bold decision that the government has to make to eliminate or at least reduce the obstacles to sustaining 10% growth and to ensure that the benefits of high growth are fairly shared. “There are many countries that use education as an excuse for an underperforming economy,” said Graham Mackay, Chief Executive, SABMiller, United Kingdom, who was also a Summit Co-Chair. “Most of the time the question is whether there is an enabling environment for growth. Is there a business-friendly enabling environment?” The key is good governance, Mackay argued.
Unfortunately, India’s record so far is patchy, he reckoned. India can do better. The battle to get the economy in shape to sustain 10% growth is inextricably linked to the drive to improve state and national competitiveness. While making workhorse sectors work better and more efficiently, India needs to find new sources of growth. This means making it easier for companies to access capital and encouraging capable enterprises to go global to hone their competitiveness. It means further reform of the financial services sector, including the deepening of the bond markets. It means modernizing the retail sector to trigger a consumer revolution with the participation of international players such as Wal-Mart and Metro in partnership with local firms. It means letting the private sector step forward and promoting a wide range of public-private partnerships. “The private entrepreneurial spirit that has come out of economic reforms is a genie that has been let out of the bottle and is impossible to put back in,” said Rajiv Kumar, Chief Executive and Director of the Indian Council for Research on International Economic Relations (ICRIER).
India, to be sure, is in “a new growth trajectory,” Kumar concluded. “While 10% growth is very possible, anyone who assumes that it is a given is being complacent.” In managing the growth of this large, sprawling economy of over a billion people, there is certainly no room for complacency.
Montek S. Ahluwalia, Deputy Chairman, Planning Commission, India
“The demand for people is just going through the roof. Many industries are simply competing for the same pool of labour.”
Nandan M. Nilekani, President, Chief Executive Officer and Managing Director, Infosys Technologies, India; Co-Chair, India Economic Summit 2006
“If you want to develop the agricultural sector, one of the preconditions is a proper supply chain. It is still very difficult to move food and vegetables from one state to another. There should be a focus on the supply chain to secure future growth.”
Hans-Joachim Körber, Chairman and Chief Executive Officer, Metro, Germany
India’s economy grew by 9.2% in the third quarter of 2006, the sixth time in the past seven quarters in which GDP growth has surpassed 8%. The economy is clearly climbing to a higher altitude. “Our overall macroeconomic position is very strong,” said Montek S. Ahluwalia, Deputy Chairman of India’s Planning Commission. “The external position is very strong; Indian business has gained a lot of self-confidence; and international perceptions of India are better than they were four years ago.” The good news has prompted Ahluwalia and his team to target 9% growth for the first three years of the next five-year plan to be launched in 2007 and then aim for 10% for the remaining time covered by the blueprint. Achievable goals – but is such growth sustainable?
The trouble is that as India manages its growth higher, the going will only get tougher. Constraints such as poor infrastructure, the underperformance of the agriculture sector, and the shortage of skills will make it more difficult to sustain the fast pace unless significant progress is made in resolving bottleneck problems. It will be even more difficult to ensure that growth is equitable, the top priority for India’s leaders. “Many years ago people used to doubt whether we knew how to grow fast,” Ahluwalia observed. “Now the question is can we make growth inclusive.”
It will take strong partnerships between the public and private sectors and better political and corporate governance to address the drags and disparities that could spoil India’s ambitions. “Industry will do what is necessary to achieve the targets we set provided we do what we can to provide them a decent level of infrastructure,” Ahluwalia reckoned. But the government alone cannot come up with the US$ 350 billion in investment needed over the next five years to construct or upgrade the airports, ports, bridges, roads, ports and other facilities it needs to support 10% growth. Public-private partnerships and significant private investment are essential.
Another critical factor is agriculture, which still employs 70% of the population. The sector has slowed down since the mid-1990s and is currently growing at just 2%. For the economy to achieve 10% growth, agriculture will have to grow by at least 4%. “The agriculture sector will be India’s powerhouse,” predicted Indian Member of Parliament Jyotiraditya Scindia, But for this to come true will require significant restructuring. The sector must diversify beyond traditional cereal production into more high-value businesses such as horticulture, floriculture and fisheries. But this will involve the production, distribution and marketing of perishable products. Rural supply chains today are highly inefficient. About 40% of Indian produce is wasted due to insufficient transport, storage and handling facilities. “If you want to develop the agricultural sector, one of the preconditions is a proper supply chain,” said Hans-Joachim Körber, Chairman and Chief Executive Officer, Metro, Germany. “It is still very difficult to move food and vegetables from one state to another. There should be a focus on the supply chain to secure future growth.”
A further constraint on growth is human resources. Pay increases in IT are running at a staggering 20%, indicating how tight the labour market is in India’s flagship services sector. Companies complain of inadequate talent among graduates and difficulties retaining personnel after spending money and resources on their training. If manufacturing and agriculture are to expand, if the retail sector is to modernize to cater to the expanding ranks of middle-class consumers and to the untapped rural market, if the infrastructure the nation badly needs is to be built, if the health and education facilities and programmes the country requires are to push ahead, and if the economy’s knowledge base is to widen, what India needs are workers with the skills to carry out this ambitious growth agenda. “The demand for people is just going through the roof,” said India Economic Summit 2006 Co-Chair Nandan M. Nilekani, President, Chief Executive Officer and Managing Director, Infosys Technologies, India. “Many industries are simply competing for the same pool of labour.”
The onus is on the education sector, particularly India’s universities. “You can’t have rapid growth or inclusive growth unless the education system is providing enough expansion of the relative skills,” explained Ahluwalia. “As we move towards 9% or 10% growth, the constraint in terms of available skills will become marked in certain areas.” Added Sunil Kant Munjal, Chairman, Hero Corporate Service, India: “For India, innovation will be the key to moving forward. Our labour costs are already not that low when you compare them to some other nations. The supply of people is large, but what matters is our ability to train people. It’s not just formal education; it’s all manner of skills and vocational education.”
Again, the participation of the private sector will be vital. At the closing plenary, Indian Minister of Commerce and Industry Kamal Nath announced that the Cabinet is moving to introduce legislation to allow foreign educational institutions to set up in India. The twin aims: to boost the quality of education by opening the market to foreign competition, and to attract accomplished Indian educators at universities abroad to come home.
This landmark measure is the sort of bold decision that the government has to make to eliminate or at least reduce the obstacles to sustaining 10% growth and to ensure that the benefits of high growth are fairly shared. “There are many countries that use education as an excuse for an underperforming economy,” said Graham Mackay, Chief Executive, SABMiller, United Kingdom, who was also a Summit Co-Chair. “Most of the time the question is whether there is an enabling environment for growth. Is there a business-friendly enabling environment?” The key is good governance, Mackay argued.
Unfortunately, India’s record so far is patchy, he reckoned. India can do better. The battle to get the economy in shape to sustain 10% growth is inextricably linked to the drive to improve state and national competitiveness. While making workhorse sectors work better and more efficiently, India needs to find new sources of growth. This means making it easier for companies to access capital and encouraging capable enterprises to go global to hone their competitiveness. It means further reform of the financial services sector, including the deepening of the bond markets. It means modernizing the retail sector to trigger a consumer revolution with the participation of international players such as Wal-Mart and Metro in partnership with local firms. It means letting the private sector step forward and promoting a wide range of public-private partnerships. “The private entrepreneurial spirit that has come out of economic reforms is a genie that has been let out of the bottle and is impossible to put back in,” said Rajiv Kumar, Chief Executive and Director of the Indian Council for Research on International Economic Relations (ICRIER).
India, to be sure, is in “a new growth trajectory,” Kumar concluded. “While 10% growth is very possible, anyone who assumes that it is a given is being complacent.” In managing the growth of this large, sprawling economy of over a billion people, there is certainly no room for complacency.
posted by globophobe at 12.12.06
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