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India on the Growth Turnpike

“By the end of the next decade we will be the world’s largest nation. We already are the world’s largest multi-cultural, multi-religious, multi-ethnic, multi-linguistic democracy. The success of the Indian experiment in nation building and in the social and economic empowerment of a billion people is vital for the very future of mankind in the 21st century.”

Manmohan Singh
Prime Minister of India
Shankar Acharya

The story of a rising India has not only surprised the world but also captured its imagination. It is said that no other democracy has ever achieved levels of sustained economic growth comparable to India’s over the last two decades.

“Our recognition as a high-growth country has only happened in the last five years. What is, however, less appreciated is that we have grown at an average of more than 6 per cent for the last 30 years, not five years or seven year or ten years. This 30-year period will soon exceed the period when we had the so-called Hindu rate of growth. More importantly, all the reform process initiated since 1991 have really empowered the private sector. And, what is very important to all of us involved in that process is the incredible amount of change that has taken place in the country in the last 20 years,” says Rakesh Mohan, former Reserve Bank Deputy Governor and now a Consulting Professor at Stanford Centre for International Development.

Discerning a dramatic shift in the world’s economic balance of power, a US think-tank has projected that by 2050, India will become one of the three largest economies of the world along with the US and China.

“The knowledge and skill of our workforce will be a major determinant of India’s future rate of economic growth as well as the type and number of jobs we create.”

Shankar Acharya
Honorary Professor and Member, Board of Governors, ICRIER

Growing at a projected rate of 6.19 per cent between 2009 and 2050, India will grow most rapidly among the G-20 group of world’s leading economies making the Indian economy 97 per cent as large that of the US in terms of Purchasing Power Parity (PPP), say experts at the Carnegie Endowment for International Peace. In an article on “The G-20 in 2050?,” in the November 2009 issue of the International Economic Bulletin of the think-tank, they noted that in dollar terms, India’s GDP is expected to increase by 16 times from the current $1.1 trillion to $17.8 trillion by 2050.

As Vijay L Kelkar, former petroleum secretary and chairman of the 13th Finance Commission, said in a lecture in August 2009: “India is going to be the ‘next growth miracle’ of the global economy, and I do see that in the next decade or so, with ‘better governance and appropriate policies’, it can, in fact, become the fastest growing economy in the world.”

Changing Development Paradigm

Nandan Nilekani
Chairman, UIDAI

Today, India has a population of 1,162 million, projected to be 1,341 million by 2020. Will India’s true potential now be weighed down by the challenges it faces? The economics of need often dominates development debates. One of three Indians today cannot afford two square meals. Many are yet to be enrolled in a school or have dropped out. Poverty remains persistent and acute in large areas, confining India to the category of low-income economy. Transforming India into a developed nation implies that every citizen of the country lives well above the poverty line, their education and health is of a high standard, national security is assured, and its core competence in certain major areas enable production as well as export of quality goods competitively, bringing prosperity for all.

An essential requirement for envisioning India’s future in the coming decade is to recognise that the parameters which determine national development have changed in recent years and will change further in future. This will open up greater possibilities than ever before.

“The Unique Identification Number will bring in mobility, choice, transparency and accountability at the doorsteps of the common man.”

Nandan Nilekani, Chairman, UIDAI

A powerful set of forces is accelerating the speed of social change. They include a rapid rise in levels of education, high rates of technological innovation and application, ever faster and cheaper communication that dissolves physical and social barriers, greater availability and easier access to information, and the further opening up of markets.

These trends are representative of a relative shift in the engines that drive development from manufacturing to the services sector and from capital resources to human and knowledge resources. Technology, organisation, information, education and productive skills will, therefore, play a critically decisive role in governing the future course of development. For instance, the Unique Identification Number will bring in mobility, choice, transparency and accountability at the doorsteps of the common man, as UIDAI Chairman Nandan Nilekani says.

The growing influence of these factors, acting on the foundation of India’s increasingly dynamic and vibrant economic base, lend credence to the view that India can achieve and sustain higher than historical rates of economic growth in the coming decades. Finance minister Pranab Mukherjee said on the sidelines of the RBI-OECD workshop in Bangaluru recently that in line with the Central Statistical Organisation (CSO) projections, India is expected to grow between 8.25 per cent and 8.75 per cent during 2010- 2011. His optimism about India’s growth was also echoed by RBI Deputy Governor K C Chakrabarty, who said inflationary pressure would ease if two key factors – monsoon and global crude prices – are reasonably favourable.

Years between 2003 and 2008 saw the fastest period for any five year period in India’s history. The economy grew at close to 9 per cent, 8.8 per cent, in those five years before the global crisis, concurs Shankar Acharya, Honorary Professor and Member, Board of Governors, ICRIER.

R Chandrashekhar
Secretary, Department of Information Technology

The compounded effect of achieving the targeted annual GDP growth rate of 8 to 9 per cent over the next 10 years will result in a quadrupling of the real per capita income and almost eliminating the percentage of Indians living below the poverty line. This will raise India’s rank from around 11th in 2002 to 4th from the top in 2020 among 207 countries given in the World Development Report in terms of GDP. Further, in terms of per capita GDP measured in PPP, India’s rank will rise by a minimum of 53 ranks from 153 in 2002 to 100 by the year 2020. This means that India will move from a low income country to an upper middle income country. This is a very real possibility for us to seize upon and realise.

Arvind Panagariya, Professor of Economics at Columbia University recently wrote that while the shift to double-digit or even higher growth has so far not happened, something very close to it has indeed taken place. India clocked a steady annual average growth of 8.5 per cent for six years beginning in 2003-04 and ending in 2008-09. Even during the crisis year of 2008-09, the country pulled off an impressive 6.7 per cent growth and recovered in the second quarter of 2009- 10-the latest quarter for which we have the data-to 7.9 per cent. The country is almost certain to perform even better in the remaining two quarters of the financial year 2009-10.

“The role of information technology in areas like health and education is going to be one of the deciding factors of the decade.”

R Chandrashekhar
Secretary, Department of Information Technology

An important aspect of this impressive growth story is the phenomenal growth that some of the poorest states have experienced in recent years, argues Panagariya. Three of the bottom six states among the larger states have grown 8 per cent or more annually during 2003-04 to 2008-09. Rajasthan and Orissa have grown 9.4 per cent each and Bihar 8.4 per cent. Likewise, all three of the newest states, which were carved out of three of the poorest four larger states have grown at rates exceeding 9 per cent. India is not only pushing ahead full-speed on the growth turnpike but also carry all its partsbig and small and rich and poor-with it, says Panagariya.

A powerful set of forces is accelerating the speed of social change. They include a rapid rise in levels of education, high rates of technological innovation and application, ever faster and cheaper communication that dissolves physical and social barriers, greater availability and easier access to information, and the further opening up of markets.

Strengthen Social Linkages

But, there can be no sustained economic development without strong successes in both human development and economic growth. Development strategy therefore requires major public commitments to social sectors (especially health and education) and to improvements in the business environment in order to promote large-scale private investments needed for economic growth.

It is not difficult to identify the key challenges before us. What is disappointing is that the list given ahead is probably similar to that drawn up 10 years before, and 10 before. The challenge actually lies in the deliverables. But for the sake of record, the list is:

  • A targeted approach to bring millions of families above the poverty line.
  • Generation of nearly ten million of new employment opportunities per annum, especially for those in the lower income groups.
  • Eradication of illiteracy.
  • A concerted effort to raise primary and secondary enrolment rates and minimise dropouts.
  • Improved public health to reduce infant mortality and child malnutrition.
  • Massive investment in power generation, telecommunications and other physical and social infrastructure.
  • Accelerated acquisition of technology capabilities to raise productivity in agriculture, industry and services.
  • Becoming a more important player in the world economy in terms of both trade and investments.

With an upsurge in investment and robust macroeconomic fundamentals, the future outlook for India is distinctly upbeat. According to many commentators, India can unleash its full potential, provided it improves the infrastructure facilities, which are at present not sufficient to meet the growing demand of the economy. Failing to improve the country’s infrastructure will slow down India’s growth process. Therefore, a priority is rising to the challenge of maintaining and managing high growth through investment in infrastructure sector, among others.

Prime Minister’s Economic Advisor and former RBI Governor, C Rangarajan stresses the need to focus on increasing agriculture output and improving infrastructure, especially power, adding that what China adds in one year, India adds in five years. He also adds that in the coming years, we need to focus more on the governance, what can also be referred as reform of the government.

Rajan Swaroop
Executive Director, Enterprise Services, Bharti Airtel

In the last one-and-a-half decade, the software part of India’s physical infrastructure (like telecom, air and port services) has performed well, and this has not only helped the country to maintain a faster growth but also integrated the economy with the world market at a faster pace. At the same time, the hardware component of the country’s physical infrastructure (e.g. road, rail, power) grew comparatively slowly, thus negating the country’s development process.

Rajan Swaroop, Executive Director, Enterprise Services, Bharti Airtel, points that infrastructural development should maximise socio-economic contributions, and Public Private Partnerships (PPPs) have capability to bring in this contribution. “As such, PPPs should be designed to seek maximum output. Focus on the outcomes of a project has to be much wider and government should see benefits beyond the direct impact.”

India is building 20 km of road a day, which is 7,000 km a year and represents $50 billion worth of work in progress. The country also has the largest PPP programme in the world, in which it plans to invest $9 billion to improve airports, $12 billion to modernise ports and $130 billion in the power sector including transmission and distribution. But, let us not look only at physical infrastructure but at the social infrastructure as well. Whilst India celebrates its booming economy, the country also remains one of the most malnourished in the world today. According to a recent World Bank study on undernourished children in South Asia, neither economic growth nor food security is likely to be sufficient to lower the prevalence of malnutrition.

Infrastructural development should maximise socio-economic contributions, and publicprivate partnerships (PPPs) have capability to bring in this contribution.

Rajan Swaroop
Executive Director, Enterprise Services, Bharti Airtel

Stating that the level of malnutrition in India is nearly double that reported in sub- Saharan Africa, the World Bank said it is unlikely that the United Nations’ Millennium Development Goal of halving the incidence of underweight by 2015 will be met. Malnourishment rates are highest among scheduled tribes and scheduled castes. Child malnutrition in rural areas is also much higher.

Since 1980, the average living standards of Chinese and Indians have experienced a sustained and rapid rise. In one generation, India’s GDP per head rose by 230 per cent – a trend rate of 4 per cent a year. Martin Wolf, Chief Economic Commentator, Financial Times, (July 8, 2009) says this would seem a fine accomplishment if China’s had not increased by 1,090 percent – a trend rate of 8.7 percent. “Yet, even if India has lagged behind, the change has been large enough for aspiration to replace resignation as the ethos of a large and rising proportion of Indians.”

The compounded effect of achieving the targeted annual GDP growth rate of 8 to 9 per cent over the next 10 years will result in a quadrupling of the real per capita income and almost eliminating the percentage of Indians living below the poverty line. This will mean that India will move from a low income country to an upper middle income country. This is a very real possibility for us to seize upon and realise.

“The recent past offers at least four further reasons for optimism. First, the rate of growth has been accelerating: over the five years up to and including 2008, the average annual rate of economic growth was 8.7 per cent, up from 6.5 per cent in 1999. Second, gross domestic savings is up to 38 per cent of GDP in the financial year 2007-08. Third, India’s economy has globalised, with the ratio of trade in goods and services up to 51 per cent of GDP in the last quarter of 2008. This is not far behind China’s 59 per cent of GDP. Finally, the democratic political system, for all its frailties, works. Indian democracy is a wonder of the political world. The reelection of a Congress-led government is widely believed that this reflects a choice of competence over caste and secularism over sect,” writes Wolf.

“But if this country is to prosper it must create infrastructure, provide services, promote competition, protect property and offer justice.”

Take Technology to the Grassroots

In this context, the proposed Unique Identification Number or UID will play a key role. Nilekani says the UID will be a critical requirement for enabling identification of the marginalised. The UID would increase efficiency of spending in the social programmes as it will remove duplicates and ghost beneficiaries from the system. With more and more use of technology, all citizens will have same level of opportunities.

Importantly, as Nilekani highlighted, the UID is a national number and it will make authentication of a person possible across the length and breadth of the country. Thus, a migrant worker would find it easy to get identified and work anywhere in the country. For, employment or livelihood security is an essential and inseparable element of a comprehensive strategy for national food security.

Conversely, food security is an essential requirement for raising the productivity of India’s workforce to international levels. Major changes in economic policy and strategy will be needed to eliminate the current backlog of million unemployed jobseekers and assure employment opportunities for all additions to the labour force. At the same time, the total proportion of the workforce involved in agriculture is likely to decline, thus increasing the pressure for rapid multiplication of nonfarm employment opportunities.

High Employment Potential Sectors

  • Commercial Agriculture
  • Agro-Industry & Agri-Business
  • Afforestation for Pulp, Fuel & Power
  • Retail and Wholesale Trade
  • Tourism
  • Housing
  • Construction
  • Garment Industry
  • Other Small Scale & Medium Industries
  • IT & IT Enabled Services
  • Education
  • Health
  • Financial Services
  • Transport
  • Communications
  • Community Services

N K Singh, Rajya Sabha MP, emphasises that, “Therefore, agriculture needs to have much better linkages between farmers, prevent wastes, improve shelf life of the products; providing better penetration of retail to rural areas”.

The largest number of new jobs will be created by small and medium enterprises (SMEs), which contribute the vast majority of private sector jobs in more advanced economies such as the USA, Japan and Korea. International experience confirms that SMEs are better insulated from the external shocks, more resistant to the stresses, and more responsive to the demands of the fast-changing technology adoption, globalisation and entrepreneurial development. Employment has nearly tripled in India’s small and medium sector over the past 20 years. A repetition of this performance will generate an additional 150-200 million jobs by 2020. A comprehensive package of venture capital, credit, liberalisation of controls, technology, training, marketing and management measures is needed to ensure continuous expansion of this sector.

Education & Building Skills

Ravi Parthasarathy

Clearly, education has come up as the sector that could make or break India. India’s expected demographic dividend could rapidly turn into a demographic nightmare unless the country promptly addresses the many structural and systemic problems in its education and training system. And few would disagree that in order to continually clock a 9 per cent growth rate, India must dramatically improve both the quantity and quality of its skilled worker base. Strategies exist to exploit the demographic window of opportunity that India has today. But they need to be adopted and implemented. By 2025, India’s window of opportunity will close and a reversal might begin. Rising life expectancy and declining fertility will cause an almost threefold increase in the proportion of elderly by 2050.

The knowledge and skill of our workforce will be a major determinant of India’s future rate of economic growth as well as the type and number of jobs we create. “Skill building of the population is important. Then, there has to be demand for the skills,” said Shankar Acharya. A comprehensive strategy is needed to enhance the nation’s employable skills, including a cataloguing of the entire range of vocational skills required to support development, expansion of the nation’s system of vocational training institutes, widening of the range of vocational skills taught, and active involvement of the private sector in skill delivery.

Migration is a reality with 150 million migrating to urban centres every year. Thus there is a need to develop several smaller townships.

Ravi Parthasarathy
Chairman, IL&FS

Citing the example of IL&FS, Ravi Parthasarathy said that seeing the immense opportunity and need to train the Indian population, IL&FS opened 30 centres for skill development across the country. “These centres mainly aim to train the people living below poverty line. This initiative was started with the apparel industry and curriculum is also prepared and provided by the industry. As a result, the industry is taking interest in the whole process of skill development and guaranteeing jobs while also bearing the cost of the training,” he explained. The aim, he said, was to increase the numbers in the formal workforce of the country.

Education Scenarios in 2020
1980 Actual2000 Estimated2020 Business as-Usual2020 Best-case Scenario
Primary Enrolment (1-5)80%89%100%100%
Elementary Enrolment (1-8)77%79%85%100%
Secondary Enrolment (9-12)30%58%75%100%
Drop-out Rate (1-5)54%40%20%0%
Drop-out Rate (1-8)73%54%35%0%
Source: Garry Jacobs ” Vision 2020: Towards a Knowledge Society”, paper prepared for Planning Commission.

Expanding educational infrastructure, creating more centres of educational excellence and tapping into India’s rural economy is an obvious way forward. But in India the complexities go well beyond adequacy of resources. “The embedded social and equity considerations need to be resolved in a way that harmonises excellence with the compulsions of social inclusiveness,” says N K Singh.

The knowledge and skill of our workforce will be a major determinant of India’s future rate of economic growth as well as the type and number of jobs we create. Achieving 100 per cent enrolment of all children in the 6-14 year age group is an ambitious but achievable goal for 2020. This must be coupled with efforts to increase the quality and relevance of school curriculum to equip students not only with academic knowledge but also with the values and practical knowledge needed for success in life.

Achieving 100 per cent enrolment of all children in the 6 to 14 year age group is an ambitious but achievable goal for 2020. This must be coupled with efforts to increase the quality and relevance of school curriculum to equip students not only with academic knowledge but also with the values and practical knowledge needed for success in life.

Concurring with the need to focus on education, Ravi Venkatesan, Chairman, Microsoft Corporation India, also pointed to the need for greater technological intervention in the field of education so as to harness the demographic dividend the country has today.

The Urban-Rural Continuum

N K Singh
Member, Rajya Sabha

India’s urban population is expected to rise to 40 per cent of the total population by 2020, placing increasing strain on the country’s urban infrastructure. Future growth is likely to concentrate in and around 60 to 70 large cities having a population of one million or more. Decentralisation of municipal governance and greater reliance on institutional financing and capital markets for resource mobilisation are likely to increase the disparity between the larger and smaller urban centres. A satisfying outcome will depend on the formulation of effective public policies to accelerate all-round development of smaller urban centres and to refashion the role of the state as an effective facilitator to compensate for the deficiencies of market mechanisms in the delivery of public goods.

Today, India is one of the emerging urban economies in the world with a specific shift in terms of contribution to GDP from agriculture to tertiary and manufacturing sectors, thus bringing urban areas to the centrestage of the development process. Recognising the importance of tapping the energy of our urban centres as engines of economic and social development, the Central Government has embarked on one of the most significant development projects, which will only bear fruit in the coming decade, setting the stage for its further upscaling to cover all urban centres in the country, says M Ramachandran, Secretary, Ministry of Urban Development. The Jawaharlal Nehru National Urban Renewal Mission (JNNURM) is initially targeted at 63 urban centres, focusing on developments within the formally delineated territories of individual cities.

The embedded social and equity considerations need to be resolved in a way that harmonises excellence with the compulsions of social inclusiveness.

N K Singh
Member, Rajya Sabha

Increasing population combined with continued urbanisation will fuel the explosive growth of personal vehicle movement in cities, which can only be curtailed by massive investment in mass transport services. Specific plans need to be formulated by each urban authority, starting with the provision of bus services, developing intermediate public transport and identifying corridors for future growth, including reserving land for such activity. In the long run, rail-based mass transport systems appear to be the only viable solution to the problems of urban transport in India’s major metropolitan areas.

Unless bold steps are taken to promote a geographically more dispersed and equitable development paradigm, widening disparities between rural and urban centres will accelerate the migration to cities and the rapid expansion of urban slum areas.

Simultaneous efforts are needed to strengthen the rural infrastructure relating to education, healthcare, transport, telecom, power and water. Unless bold steps are taken to promote a geographically more dispersed and equitable development paradigm, widening disparities between rural and urban centres will accelerate the migration to cities and the rapid expansion of urban slum areas.

A key component of rural development is the provision of roads for connectivity, access being essential for social and economic well-being. Families residing alongside roads benefit from better health and greater educational opportunities compared to the families living in remote villages. All villages with more than 500 inhabitants should be connected by allweather roads within the next decade.

Ramchand Karunakaran, CEO, IL&FS Transportation Networks points out that “even though roads in many portions of India have been developed but not public transport carriers. Earlier, it used to take eight hours for a person living in the rural belt to go to a town and from there it would take another three hours by bus to get to the city. The amenities of the city life were not available to the rural areas. With the development of roads, the health of people in rural belts has improved. Ambulances are willing to come to the villages as they now have proper roads. The farmers are also getting a better price for their produce. However, the connectivity through roads also leads to heavy traffic bypassing through the villages. Mobility needs to be addressed as much as connectivity.”

Inclusive Policies

R Gopalan
Secretary (Financial Services), Ministry of Finance

Inclusive growth as a strategy of economic development received attention owing to a rising concern that the benefits of economic growth have not been equitably shared. The onus of making financial inclusion happen is on policymakers, Vijay L Kelkar said in his N P Sen Memorial Lecture at Hyderabad in January 2008) and that financial inclusion is a quasi-public good.

Financial inclusion is going to be one of the prime strategies for the inclusive growth. Out of 600,000 habitats in the country, only 7000 are banked and the north-eastern states remain very much under banked. Thus, there lies lot of scope and opportunity of expanding financial products and services to all, says R Gopalan, Secretary (Financial Services), Ministry of Finance.

Securities and Exchange Board of India Chairman C B Bhave, laying down his vision for financial education and responsible inclusion, said “the path to financial inclusion starts with investor education.”

In the country only 40 per cent have bank accounts, 10 per cent have some insurance cover and only 0.5 per cent of the population has non-life insurance cover. “There is need to augment smart cards, Kisan Credit Cards, and financial literacy among farmers for their financial inclusion,” says R Gopalan. All the banks must come out with a roadmap to achieve financial inclusion. Simultaneously, the Reserve Bank of India is also encouraging the banks to cover all villages, having population of 2,000 or more, by March 2011.

“Growth of the country has to be inclusive of everyone. Financial inclusion is going to be one of the prime strategies for the inclusive growth.”

R Gopalan
Secretary (Financial Services), Ministry of Finance

“Financial literacy can be promoted by bringing in wider section of public within the institutional literacy framework. Such institutional initiatives would largely focus on improving literacy standards,” says Chakrabarty. Also, all financial service providers have a moral responsibility to bring in a fair degree of transparency and fairness, more so those engaged in selling financial products and financial counselling and the ethical grid within which they are supposed to work. This initiative is no less challenging than propagating financial literacy to the members of the public, he adds.

Encashing Demographics

Demographics will be a major determinant in the coming deade. This is often cited as one of the key catalytic factors for India being on the growth turnpike today. Demographics is also going to play an important part in the India versus China relationship. China for the past 20 years has been at the sweet spot of the demographic cycle, where the population is working and saving money. They have savings, and then they invest it; their investments leads to growth. But China is now becoming a rapidly ageing population. This is a consequence of the one-child policy. This makes China unique amongst all developing countries. They are a developing country, which has the demographics of a developed country, with a rapidly aging population.

It is entering the sour part of the demographic cycle, where its population is looking to save its income and to spend that through retirement rather than spend it now. This is going to slow China’s growth. Also, it’s not easy to switch from an exportdriven economy to a domestically driven economy quickly, which China is trying to do. The second decade of the 21st century is India’s decade, and India would be able to consistently outperform China in terms of growth.

Niall Ferguson, arguably one of the most influential historians of our time, was recently in India and is quoted to have said that “comparisons between India and China often don’t make sense. It’s not that this race began at the same moment. If India had had reforms since 1978, it would be a very different country. I say, give India time. Allow the benefits of a relatively free society, of the rule of law, of democracy, to play out. On the basis of my historical understanding, these institutions give India an advantage over China.”

Transform Governance

Rakesh Mohan
Consulting Professor, Stanford Centre for International Development

Talking about making governance efficient, N K Singh says “Making the Parliament and the executive work in sync is going to be a very critical challenge in the next 10 years. If we are able to overcome that then we will be able to overcome some of the key issues which are facing us in terms of the governance because it is not at all obvious that development necessarily leads to policies which makes governments become more electable.”

India’s economic and technological transition will also have to be accompanied by a multifaceted political transformation that will have profound impact on the functioning of government. This transformation will foster decentralisation and devolution of power to local bodies, including financial devolution and financial responsibility; increasing direct participation of people in setting grassroot priorities for distribution of resources, and building and managing local projects; and greater efficiency, transparency, and accountability in government agencies at all levels.

Jairaj Phatak, Additional Secretary, Panchayati Raj, who was until recently Commissioner, Municipal Corporation of Greater Mumbai explains how the egovernment initiatives of the MCGM are designed to help the citizens to request for services in an easier and faster manner, thus resulting in significant savings in cost and time. As a result, the MCGM is now in a better position to service its citizens, better monitor and control its activities in tangible and visible increase in the quality of the average citizen.

Our recognition as a high-growth country has only happened in the last five years. What is, however, less appreciated is that we have grown at an average of more than 6 per cent for the last 30 years.

Rakesh Mohan
Consulting Professor, Stanford Centre for International Development

E-governance has the potential, if fully harnessed and rightly utilised, to radically improve the speed, convenience, quality and transparency of public administrative services, while enhancing the ability of individual citizens to express and exercise their democratic rights.

Plans and projects already being implemented by various state governments within the country suggest that e-governance has the potential, if fully harnessed and rightly utilised, to radically improve the speed, convenience, quality and transparency of public administrative services, while enhancing the ability of individual citizens to express and exercise their democratic rights.

Many of the people we interviewed felt that information technology is going to play important role in the next decade. But, as R Chandrashekhar, Secretary, Department of Information Technology, said the key is that IT should be accessible and reach all the billion Indians. “Its role in the areas like health and education is going to be one of the deciding factors of the decade,” he said, adding that the digital divide needs to be dealt with effectively for all the regions to experience fruits of growth.

Acharya feels that the decade ahead is going to be very uncertain. ‘There is going to be shift of power centre from the West to Asia and India is going to play important role in that.”

K C Chakrabarty
Deputy Governor, Reserve Bank of India

The current debates in India about the goals of development and about the appropriate models for growth are good for enabling the alignment that we need to accelerate economic growth. Invariably, there are comparisons between India and China. India has not grown as fast as China, but it appears as if India might grow faster over the next decade. There are two key differences in the growth of these two nations. First, China has seen significant investment in infrastructure and FDI, while India’s growth has been without any meaningful investment in infrastructure and FDI. Second, India’s growth has emerged through an era of capital deficiency, while China’s growth been the result of flinging increasing amounts of capital at it.

Hari Sankaran, MD & CEO of Il&FS says that the case for using Public Private Partnership (PPP) as a delivery mechanism in infrastructure is well supported by both domestic and international experience. For India, the next phase of infrastructure development will require a more holistic, integrated, and strategic approach to PPP, to scale up its initial efforts in this regard. With its legislative and policy framework largely in place, the focus now needs to shift to enabling genuine partnerships that build institutional capacity across sectors. The response of the private sector to projects offered till date would certainly appear to suggest their willingness to support such a drive.

“Financial literacy can be promoted by bringing in wider section of public within the institutional literacy framework. Such institutional initiatives would largely focus on improving literacy standards.”

K C Chakrabarty
Deputy Governor, Reserve Bank of India

In power, telecom, and to some extent roads/highways and ports, India appears to be addressing the issue of infrastructure. On FDI too, foreign ownership is now less of an issue except in a few sensitive sectors. As infrastructure expands, so will the India’s growth. So far it was restricted to a handful of sectors such as IT and pharma, which were relatively less affected by lack of infrastructure. Thus, India now appears set for multisector growth. Though unlike the past decade which was led by services, the next 10 years may see India being driven by growth in manufacturing.

“As the world economy slowly takes to the upswing, we must be ahead of the curve in terms of growth and value creation so that we are able to supplement the domestic growth momentum with the global push when it comes,” says Arvind Subramanian, Senior Research Professor at John Hopkins University. Kelkar with his firm belief that India is on the Growth Turnpike, says – “It is true that there will be imbalance of infrastructure but our growth is far more capital efficient growth unlike China. There is enough demand from below for higher growth and our political system will surely churn out policies which will keep India progressing on the growth turnpike”.

Post the global recession, the world has woken up to India’s crucial role as the largest democracy and as a dynamic economy, if still a low-income one on the average. The new technologies (especially information technology and biotechnology) give new opportunities for economic and social development. What is needed is a broadbased programme of economic and social actions for pushing through equitable growth. For, only then in 2020, we can look back and say this was truly the Indian decade.

Creating Safer Cities

Cities are the centres of our economic development and they should be safe and secure so that every citizen can earn livelihood peacefully. No wonder, Home Minister P Chidambaram has decided to turn major cities like Delhi, Mumbai, Kolkata, Bengaluru, Hyderabad into “safe cities” that have round-the-clock aerial and ground surveillance to prevent terrorist attacks. The move is a part of the major overhaul of the security and intelligence-gathering apparatus following the Mumbai attacks.

Home secretary G K Pillai says the security challenges are multi faceted. Addressing the 22nd Skoch Summit in New Delhi, he said the fundamental problem to all these challenges is that the entire police system needs to be revamped. There has not been any significant improvement over the last 50-60 years.

“The first need is to understand the problem and bring it up front. We should make police recruitments transparent they should be based on merit of an applicant. Approximately, Rs 200 billion has been recommended by the 13th Finance Commission for police modernisation, re-skilling, re-training and capacity building measures,” he said. Unveiling the new security architecture plan, the home minister had recently spelt out the need for his ministry to concentrate on its core job – “to ensure that cities, towns and villages are safe”. The safe city concept includes deployment of NSG teams in major cities to tackle situation evolving out of a terror strike or anti-hijack operations. The ”safe city” concept also envisages providing helicopters to major cities for aerial surveillance like in London and New York. This besides installing CCTVs for electronic monitoring of major markets and borders of the state capitals.

The move assumes significance in the wake of the recent hijack alert issued by the home ministry causing beefing up of security measures at airports and flights and terror alerts in December 2009 following intelligence inputs that terrorists had sneaked into big cities to target vital installations.

As Capt Raghu Raman, CEO & Secretary, National Intelligence Grid, Ministry of Home Affairs said, “You cannot design for a disaster. You design for better security.”

The proposed police modernisation will go a long way in making our cities safer. Thomas Mathew, Deputy Director General, Institute for Defence Studies and Analyses, informed that India has 129 policemen per 100,000 people. The United Nations norm is 220 per 100,000 people. “To deal with the threats that India will face, it is essential for us to have an integrated security mechanism because we do not need turf wars between the police and the security organisations.”

“When a sudden threat comes up, how are the policemen expected to deal with them without commando training? There should be at least one or two constables in every police station who have been trained as commandoes.”

The main objective is capacity building in matters of crime prevention for the benefit of local governments and community organisations. Through specific projects’ implementation at city level, it strengthens the capacity of municipalities to face insecurity, to make everyone responsible for reducing crime and to develop a culture of prevention.

Harald Jung, Head of Business Segment Civil & National Security, Siemens, explains how cities are often easy targets. “If you try to control a population of over 1.3 billion people at one point of time, it will not happen. 26/11 was an example of making people in the city fearful. Terrorists are smart people who move very quickly. Destroying the power or water supply of a city is far more dangerous than planting a single bomb. In the case of an earthquake, provisions have to be made to feed the people and provide medical facility.”

Security of critical resources and amenities like power supply, water supply, etc., is therefore very important as they can be soft targets. To make our cities safer and better, some fundamental steps include evolving a national ID like the UID for every resident Indian, data mining by networking and linking of databases across the country and seamless movement of information would help in effective management and deterrence of crimes. For secure and safe cities, it is important to bring all the technological know-how under one umbrella. Secure IT systems should be established to counter cyber attacks.

The effect to change the spectrum of crime will take five to ten years, said Sandeep Sudan, Regional Head-North India, Mahindra Special Services Group. Corporates will have to fall back on themselves for security and create a robust security architecture comprising pre-emption, deterrence, prevention, detection, reaction and damage minimalisation.

As Mathew said, the most important component on which security grid rests on the citizen’s ability and awareness to protect themselves, which is then supported by the government.

Building Information Infrastructure

Mahesh Chandra

Building information infrastructure to improve governance and delivery of services poses a big challenge before the government in the coming decade.

N Vijayaditya, Controller of Certifying Authorities, says that “one of the most basic challenges we face is making communication channels available to the people and in any language. This involves ensuring availability of frequencies and security measures. We need to create data centres that can sustain the number of feeds that the connection will generate. Finally, we need to identify and authenticate the identity of a person. We also want to ensure that the data and information being stored in every unique project should not be modified.”

India’s infrastructure and educational levels lag behind not just its East Asian neighbours, but even other poor countries. For all its expertise in business process outsourcing and software coding, India ranks 83rd in information infrastructure, and 107th in bandwidth. Even India’s fast growth in mobile telephony does not look as impressive against its vast population with no connectivity. With 29.3 cellphones per 100 people, India ranks 116th in teledensity.

To unleash the potential of the available information infrastructure in the country and further augment the same, there is a need to have 1) reliability of services, 2) robust computing infrastructure, 3) unique identity of the user, and 4) content integrity.

There has been lot of improvement and there are many case studies to this effect. Mahesh Chandra, Deputy Director General, National Informatics Centre, explained how a bottoms-up approach was adopted to computerise Regional Transport Offices (RTOs) across the country. “Our journey started in 1992 when we computed one RTO. In the next 10 years we struggled with other states and got three or four other states to computerise their services. In 2002, we started putting concentrated efforts and the NIC helped us devise a system to link and interlink the RTOs. Till then, interaction between the vendor and the operator was not possible with the smartcard. Now there is 100 per cent coverage in South India and the BIMARU states while the North-East states have 90 per cent coverage so far.” Over 900 sites have the software installed in them and none will have to roll back to the manual stage.

The NIC is now planning to launch learner’s license from school. Papers wills be issued directly through NGOs and dealers. From July 1, 2010 all vehicles seeking a national permit can collect it from the website. It is a 12-digit number that can be reissued by SMS. Earlier the national permit was restricted to some states but now a national permit will be made available throughout the country.

But, if India is to sustain its growth pattern and emerge as a developed society, it is imperative that new technologies are explored and are utilised to their potential. Cloud computing may be one such development.

Neeta Verma
Milan Rao

E-governance can make governance more efficient and more effective by improving governmental processes (e-administration), connecting citizens (e-citizens and e-services) and building external interactions (e-society). Going forward, mobile governance is going to play much greater role. It has provided some turnkey solutions in areas like PDS, NREGA, police and Health. Setting up robust Information Infrastructure can provide set of hosted solutions like voice-based services, web/ email support, MIS and data reporting, said Milan Rao of Bharti Airtel.

Rao says the use of G2C services should increase, it should be supported by good architecture. “There should be no silos of services to the same customer. We need better outcome models and these should be outcome oriented.” However, as Neeta Verma, Senior Technical Director, National Informatics Centre, pointed out we need to look into issues of trust and security in more detail. “Our continued focus is that all projects have to be citizen centric and provide access to all.”

Deepak Phatak of IIT Bombay stressed that there is also need to unleash the potential of information technology and infrastructure in the field of education. “Teachers should become change agents of the society and for this to be a success, information technology has to be harnessed,” he said. In this regard, the National Knowledge Network was a step in the right direction as it aims to connect the information infrastructure of all universities, R&D laboratories, agricultural research, health research, and libraries.

Public-private-partnerships are the way forward to create better information infrastructure. A judicious use of information technology can reduce the capital investment, and the time required for infrastructure planning. Importantly, large-scale broadband network infrastructures can substitute for distance thereby connecting the length and breadth of the country in a seamless fashion.

The 13th Finance Commission’s Recommendations

Bibek Debroy

The Finance Commission isn’t the only channel for fund transfers to States. The Planning Commission also exists, as do innumerable Centrally Sponsored Schemes (CSSs). Constitutionally, the Finance Commission is the only recognized body and as the TOR (terms of reference) of the Finance Commission was executively diluted in the late- 1960s, the importance of Planning Commission and CSS-s increased. There is a case for unifying the system and scrapping artificial distinctions between Plan/Non-Plan and Revenue/Capital expenditure.

But that’s a broader issue and outside Thirteenth Finance Commission’s (TFC) TOR, though it recommends pruning of CSS-s and restoration of Plan fund transfers on the basis of Planning Commission’s recommendations.

First, there are broad fiscal consolidation targets TFC recommends. The combined (Centre plus State) debt/GDP ratio is 82 per cent in 2009-10, higher than 75 per cent recommended by Twelfth Finance Commission. This should be reduced to 68 per cent by 2014-15, with a breakup of 45 per cent for Centre and 25 per cent for States. (This doesn’t add up to 68 per cent, because of net loans by the Centre.) The revenue deficit/GDP ratio of 4.8 per cent should become a revenue surplus of 0.5 per cent in 2014-15, allowing a capital expenditure/GDP ratio of 3.5 per cent. There was retreat from fiscal consolidation in 2008-09 and 2009-10. After consolidation in 2010-11, one needs to resume fiscal reform from 2011-12, with prescribed fiscal deficit/GDP ratios of 4.8 per cent in 2011-12, 4.2 per cent in 2012-13, 3.0 per cent in 2013-14 and 3.0 per cent in 2014-15. Similarly, States with zero revenue deficits or revenue surpluses shouldn’t have any revenue deficits from 2011-12, while other States should do this by 2014-15. And the first set of States (those of general category) should have a fiscal deficit/GDP ratio of 3 per cent by 2011-12, while other States can do so by 2013- 14. Other than these targeted numbers, points are also made about transparency in information disclosure, including the treatment of offbudget items.

Second, a traditional Finance Commission recommendation has always been vertical transfer from Centre to States. TFC recommends a State share in the net proceeds of shareable Central taxes of 32 per cent, a marginal increase over the 30.5 per cent recommended by the Twelfth Finance Commission. Some States had wanted a higher share, even as high as 50 per cent, though one must remember that the Finance Commission isn’t the only source of Centre-State transfers.

Third, yet another traditional Finance Commission recommendation have always been horizontal transfer of the aggregate that is to be distributed to States. This is a function of the variables used and weights attached to them. Whatever be the weights, there is always an argument about rewarding equity versus rewarding efficiency. All Finance Commissions use more or less the same variables (though weights differ) and there is a table in the TFC report which shows that except for the Eleventh Finance Commission, the shares haven’t changed significantly. TFC weights are 25 per cent on population (1971) Census, 10 per cent on area (with special treatment for States that account for less than 2 per cent of area), 47.5 per cent on fiscal capacity and cost disability (the cost disability part is new and there is special treatment of special category States) and 17.5 per cent on fiscal discipline. Therefore, in broad terms, all special category States gain, compared to the Twelfth Finance Commission, whether the calculation is with or without the inclusion of service sector taxation. (J&K is an exception for service sector taxation, because it doesn’t tax services.)

Fourth, there are the GST (goods and service tax) proposals, incorporating complete abolition of all taxes, including stamp duties, motor vehicle taxation, electricity, entry and entertainment taxes. The only items where there can be additional levies are petroleum products and alcohol and the only exemptions permitted are for unprocessed food, public services, health and education. Because of this complete abolition, the revenue neutral rate is lower than what had been earlier expected – 5 per cent for the Centre and 7 per cent for States. To incentivise this transition, described as a Grand Bargain, Rs 50,000 crores has been proposed for States, in case there are revenue losses.

Fifth, there are grants-in-aid proposals – non-plan revenue deficit grants to special category States, disaster management, elementary education, environment, forests, grid for renewable energy, water management, UID, health (infant mortality), administration of justice, employees and pensioners’ data base, roads and bridges and so on.

Sixth, 2.28 per cent of the divisible pool is to be transferred to local bodies, with a basic component and a performance-based component.

Seventh, reforms are proposed – PSUs, user charges (such as the power sector), subsidies, pensions, SFCs (State Finance Commissions) and so on. Of all these recommendations, this seventh is the least likely to occur.

Towards Double Digit Growth

C Rangarajan

Indian economy has done well in the four years period beginning 2005-06, average rate of the growth being 8.9 per cent. This includes the crises affected year of 2008-09 but there had been no four year period in which Indian economy has done as well as this. This has been a period in which per capita income grew at about 7.2 per cent. This growth of India raises many questions and challenges – there are three important challenges before the Indian economy.

First, India needs to grow in a sustainable way, perhaps even to raise the rate of growth. It also needs to ensure that the growth is poverty reducing, which means that growth should be inclusive. This process of inclusive growth will surely be helped by an accelerated economic growth. It will provide necessary impetus to handle some of the existing socio-economic issues. Second, the need is also to ensure that resources are spent judicially in such a way that they encompass all the sections of the society and regions of the country. Third, urgent need to work on the social indicators because we still rank in the bottom one third of the League of Nations as far as Human Development Index is concerned. Therefore, emphasis on social infrastructure which has focus on primary health and education is very important.

“As part of the development process, there is need to focus on increasing agriculture output and improving infrastructure, especially power.”

C Rangarajan

Year 1991 has been the watershed year for the Indian economy. An important landmark post independent economic history of the country. Reforms were initiated but they were not really done in a pattern, which led to something very significant. What happened in 1991 and since then is a break with past in a significant way, it contributed in accelerating the rate of economic growth of the country. Then onwards private sector has been provided greater space in which to operate, some of the sectors of the economy, which were exclusively reserved for the public sector like aviation, are opened to the private sector. Therefore the thrust of the economic policy is to improve the productivity and the efficiency of the system by incorporating a greater element of competition in the Indian economy.

An important question in front of the Indian economy is that -can India sustain this 9 per cent rate of growth or go beyond this in the coming period? In this regard, need is to assess the following- first is whether India has potential to grow at this rate and second, what is the policy framework. These are the two critical questions in this regard. India grew at 9 per cent per annum for three consecutive years but for the fact that international situation turned adverse, India would have grown at 9 per cent even for another year. Country had reached the savings rate of about 36 per cent and two years ago, the investment rate was 37 per cent. Using the simple arithmetic of the incremental capital output rate ratio of 4:1 – would depict that country’s savings and investment potential is adequate to sustain the rate of growth of Indian economy.

The question of policy framework also needs to be looked into diligently. It is conducive to achieve the targeted growth or not. As mentioned earlier, lot many steps have been taken since 1992-93 but there still remain areas which need some urgent attention like financial sector or a labour market. Various decisions which have been taken in foreign trade, foreign investment, and financial sector/ policy are conducive enough to be able to push us forward in sustaining a rate of growth of 9 per cent. Also due to increase in the public savings, the saving rate of 36 per cent has been reached. In fact the decline in the savings rate in subsequent years is because of the higher fiscal deficit. Thus, Fiscal consolidation is one important aspect of the supporting mechanism that country needs in order to achieve the growth rate of 9 per cent.

As far as policy framework is concerned, there are areas in which reforms are required but by and large the gamut of the total set of reforms, which have taken place in the country is sufficiently large in order to be able to push the economy to high rate of growth. Having said this – there are two constraints, which are holding back economic growth from the sectoral perspective. One is agriculture and another is Infrastructure and particularly Power sector.

The 11th five year plan set a target of growing at 4 per cent for agriculture but it has not been achieved. For two consecutive years it did grow at about per cent but then in 2008-09 it became 1.9 per cent and in the current year it will be negative. Despite the fact that agriculture contributes 18 per cent to the total GDP, it nearly supports two third or almost 60 per cent of the population living in rural areas; need is to ensure that it grows at 4 per cent consistently.

Inflation is another worrying factor which India is dealing with in the current year. This is mainly because of the failure of agriculture. Inflation on the food prices in disproportionate to what has happened to the decline in agricultural output. Thus, it is extremely important to focus on agriculture.

Coming on to Infrastructure and particularly Power sector, even in the 11th five year plan – the first two years the capacity creation in the power sector has fallen short of the target. In the third year, which is the current year, the target might be achieved but then it will be on the remaining two years of the 11the five-year plan to add 50,000 MW of power.

To get the desired output from all the sectors and those mentioned above, governance is going to be the key more than reforms. It needs greater attention; it can be called part of the reform ‘reform of the government’. Therefore, it becomes extremely important in order to sustain rate of growth of 9 per cent over a decade or more.

India on the Growth Turnpike

Vijay L Kelkar

India’s growth story has been a miraculous happening of the recent times. It surprised many, what was once considered a bread basket has now become one of the high performing economies of the world. There are many factors behind this big turnaround but the key determinants of this transformation are India’s democracy and federalism. While mentioning democracy, it is not only about elections but also about institutions and leaders; it has enabled India to frame policies to promote both growth and social justice.

Institutions and incentives have been the main stay of India’s democratic traditions. Institutions such as Supreme Court, Election Commission, UPSC and Finance Commission have played critical role in maintaining and accelerating India’s growth performance.

Also, ours is a unique federalism. It has been one of the pillars of country’s growth. Indian economy is now $ 1.5 Trillion and is well placed amongst the largest economies of the world; India is also part of G-20. We are emerging as a growing power but still there is a long way to go. Therefore, in coming years, need is to design our incentives and institutions in such a way that they remain in tune with the needs of growing India, the India on the growth turnpike. The three very important points in this regard are discussed below:

“India is going to be the next growth miracle of the global economy. With better governance and appropriate policies, it can, in fact, become the fastest growing economy in the world.”

Vijay L Kelkar

First is the need of fund reforms for both incentives and institutions by giving fiscal base to the third tier of the government. For strong growing India, we require fiscally strong centre, state and third tier -Panchayati Raj institutions and Urban Local Bodies. The 13th Finance commission report has made some recommendations but there is more work to be done for creating new fiscal institution architecture.

Second area of improvement is fiscal governance. Largely to improve upon what was done by C Rangarajan’s 12th Finance Commission report. Need is of a new framework for fiscal management at centre as well as state level; 12th Finance Commission report proved that incentives do matter and states should respond to Incentives. Thus, new architecture for fiscal responsibility is much required. 13th Finance commission report has made recommendation for creating Fiscal Councils, an independent body which will report to finance ministry but will continuously, independently evaluate the fiscal performance of the union government. Independent bodies has served well like election commission, CAG, Finance Commission – and Fiscal Council would play a similar role and bring Indian fiscal governance at par with the modern market economy.

Third is the need of similar institution reforms in monetary policy. The one which is important of all is providing greater independence to the Reserve Bank of India (RBI). This would also require enhanced accountability of RBI. There is a great deal of merit in bringing inflation targeting as one such instrument for the accountability of RBI. Inflation targeting is extremely important potential instrument for giving independence to India’s monetary authority for taking Indian economy’s institutional management one notch above.

Countries having some kind of inflation targeting handled recent recession well. Australia, Canada and South Africa did well during recession in this regard because of wise inflation targeting. India without any such arrangement handled its inflation targets better but in the coming years, country needs to move towards the inflation targeting as one of the anchors for monetary policy. And requirement is going to be of new institutions, frame works, new incentive structures to ensure that country continues to grow. We are only next to three decades to realise fruits of demographic dividend and we must capitalise as quickly as possible.

Team Inclusion

INCLUSION is the first and only journal in the country that champions the cause of social, financial and digital inclusion. With a discernable and ever- increasing readership, the quarterly relentlessly pursues the three inclusions through its rich content comprising analysis, reportage, features, interviews, grassroots case studies and columns by domain experts. The magazine caters to top decision makers, academia, civil society, policy makers and industry captains across banking, financial services and insurance.
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