Some observers prefer to describe
the emerging economies of Asia as re-emerging economies to clarify that shift
of wealth to Asia that is taking place is not an unprecedented situation, looking
back into economic history, of course, by about three centuries. As per an OECD
publication, in 1700, India's share in world GDP was 24.4 per cent, while China's
share was 22.3 per cent. Asia as a whole (including Japan) accounted for 61.7
per cent in 1700, which fell to 59.2 per cent in 1820, and to a low of 18.5
per cent in 1950, before climbing to 37.2 per cent by 1998 (Maddison Angus,
'The World Economy: A Millennium Perspective', OECD, 2001). The re-emergence
in the second half of the 20th century was led by resurgence of Japan, succeeded
by the miracle of East Asian economies, followed by China's outstanding success,
and currently strengthened by Indian economy's impressive performance in terms
of both growth and stability. According to the data published in the World Development
Indicators of the World Bank, India ranks fourth next only to the USA, China
and Japan in terms of size of the economies measured on the basis of Purchasing
Power Parity (PPP). It is interesting that in terms of PPP, three out of the
four largest economies of the world are in Asia.
In the recent years, the Asian
economies are emerging as major trading partners of India. India's trade has
grown faster with these countries than its overall trade growth. Emerging Asian
economies accounted for a significant share of 22.4 per cent in India's total
exports in 2004-05 (16.0 per cent in 1999-2000) and 20.1 per cent of total Indian
imports (16.2 per cent in 1999-2000). In 2004-05, China has emerged as the second
major export destination for India after the US and it has now become the largest
source of imports for India, surpassing the US. Exports to China surged by 81
per cent in 2004-05, while imports from China increased by 67 per cent reflecting
growing trade relations between the two countries. A similar trend was noticeable
vis-à-vis the ASEAN-5 (Singapore, Thailand, Malaysia, Indonesia
and the Philippines), but going forward there is vast scope for further expansion
in trade with these countries. In a way, the increasing openness of the Indian
economy to the external sector in recent years reflects its expanding economic
relationships with rest of Asia. In recognition of the growing importance of
Asian countries in India's foreign trade, the series of nominal and real effective
exchange rate indices released by the Reserve Bank have been revised to include
Chinese Renminbi and Hong Kong dollar in the weighting scheme. Japan being already
included, the representation of Asian economies has increased to three out of
the total of six countries.
Highlights of India's Performance
In November 2005, Minister Mentor
Lee Kuan Yew, the widely admired former Prime Minister of Singapore, said in
the 37th Jawaharlal Memorial Lecture:
"When I published the second
volume of my memoirs in 2000, I wrote that India is a nation of unfulfilled
greatness. Its potential has lain fallow under used".
"I am happy to now revise
my view – Nehru’s view of India’s place in the world and of India as a global
player is within India’s grasp."
While the change in India in the
past five years seems dramatic, indeed, it is not discontinuous. First, India
as a nation has been diligently working over half a century to realize the dreams
at the time of its independence. Second, the domestic deregulation of 1980s
and economic liberalisation of 1990s helped acceleration of growth. Third, perhaps,
the world is appreciating India and its progress better now than before.
The three salient features
in India’s economic performance over the period 1980-2000, as mentioned by several
analysts, have been a high growth of output per capita, surpassed only by China
and East Asian countries; a very stable output per capita, surpassing that of
even China and East Asia; and the growth is sourced by an increase in total
factor productivity, thereby having positive implications of an enduring nature
of the process, rather than being driven only by better returns on capital.
The Indian economy appears to be
shifting to higher levels of growth trajectory in more recent years with the
average annual growth of real GDP increasing to 6.3 per cent during 1992-93
to 2005-06 from 5.8 per cent in the 1980s. Again, lately, the economy is perhaps
picking up an accelerated growth momentum, with an average GDP growth at around
8 per cent per annum during the last three years. It is equally notable that
the inflation conditions have moderated to around 5 per cent, decelerating significantly
from relatively higher levels in the earlier periods.
The strengthening of economic activity
in the recent years has been supported by persistent increase in gross domestic
investment rates from 23.0 per cent of GDP in 2001-02 to 30.1 per cent in 2004-05
coupled with more efficient use of capital. Gross domestic saving rate has also
improved from 26.5 per cent to 29.1 per cent during the same period. The saving-investment
balance in India is in a desirable range thereby contributing to global stability
also.
Facilitated by reforms, financial
markets have become freer and institutions more independent operationally. Monetary
policy has gained more operational autonomy with discontinuation of automatic
monetization of deficits since 1997 and Reserve Bank's withdrawal from primary
gilt auctions from this financial year, combined with increasing reliance on
indirect instruments. Money markets are orderly and stable with participants
switching towards more collateralised segments and rates varying generally within
a corridor set by the policy stance. Government securities markets are now deep
and vibrant with varied instruments catering to varied investor perceptions.
The foreign exchange market has acquired depth, while the capital markets have
become mature in trading procedures, risk management as well as payment and
settlement mechanism. India ranks as one of the three largest emerging markets
in terms of stock-market capitalization. There are over 9000 listed companies,
out of which about 100 companies have market values of more than US $1 billion
each. Foreign investments span over more than 1,000 Indian companies which is
an impressive record.
The banking sector has strengthened
in recent years in terms of its conformance to sound prudential regulation and
governance standards thereby minimising risks, strengthening disclosure and
improving operational efficiency. Banks are migrating towards Basel II norms
and are taking steps for containment of impaired loans. There have been marked
improvements in the health of financial intermediaries and competition and efficiency
have also improved appreciably, while simultaneously adding to stability and
resilience to shocks.
Benefiting from a calibrated and
sequenced strategy of liberalisation, India’s external sector has become more
resilient. While the current account after remaining in surplus for three years
up to 2003-04 turned into a moderate and sustainable deficit in 2004-05, there
was a significant strengthening in the capital account resulting in continued
accretion to the foreign exchange reserves. India’s foreign exchange reserves
currently exceed its external debt, thereby reflecting improved solvency of
the economy.
The exchange rate policy in recent
years has been guided by the broad principles of careful monitoring and management
of exchange rates with flexibility, without a fixed target or a pre-announced
target or a band, while allowing the underlying demand and supply conditions
to determine the exchange rate movements over a period in an orderly way. The
Reserve Bank intervenes in the foreign exchange market to contain volatility.
Recent international research on viable exchange rate strategies in emerging
markets has lent considerable support to the exchange rate policy followed by
India.
The engagement of Indian firms
with the world has acquired new dimensions. Apart from its leading edge in the
software services, India is also becoming a major hub for manufacturing and
export of manufactured products. The Indian information technology industry
is becoming increasingly global through cross-border acquisitions, on-shore
contract wins and organic growth in other low-cost locations. This has been
complemented by global majors continuing to significantly improve their off-shore
delivery capabilities in India. Indian firms are also acquiring manufacturing
firms abroad to leverage comparative advantage of foreign locations, using synergies
between the parent company and the company under acquisition and having production
facilities near the major markets also.
Outlook and Challenges: A Central
Bank Perspective
The Annual Policy Statement for
the year 2006-07 released a month ago (April 18, 2006) provides the Reserve
Bank of India's assessment of the outlook for the economy. The Policy Statement
notes that a number of downside risks loom over the global economy that have
implications for the medium-term prospects of countries like India for which
the channels of global integration are getting stronger over time. The key global
risks for emerging economies are potential escalation and volatility in international
crude prices, a disorderly unwinding of the macroeconomic imbalances of the
major economies and a hardening of international interest rates. Though characterised
by significant downside risks, over the medium term, the prospects for the global
economy are by and large positive.
For the Indian economy, the evolving
economic and business environment exhibits a number of encouraging signs that
suggest reinforcement of the robust economic growth demonstrated in recent years.
First, increase in the gross domestic
saving rate to levels around 30 per cent, coupled with sustained absorption
of external savings of about 2 per cent of GDP, would provide the potential
for attainment of an accelerated growth trajectory.
Second, the micro structural reforms
undertaken over the years have enabled continuing productivity gains in the
real sector.
Third, the reform process involving
widening and deepening of the financial sector, along with improved regulation
and supervision, has also yielded encouraging results, as reflected in the productivity
measures relevant for the sector.
Fourth, there is evidence of increasing
business confidence as measured by various business expectation surveys and
improvement in the investment climate. This is also corroborated by signs of
enhanced levels of foreign direct investment.
Fifth, the most progressive and
dynamic of the Indian companies are manifesting increasing levels of global
presence through acquisitions and higher outward foreign direct investment.
The attainment of domain knowledge through such activities, along with best
practice business knowledge, and economies of scale in marketing may enhance
the productivity growth of Indian business.
Finally, it is noteworthy that
Indian business has managed to exhibit impressive growth performance in recent
years in terms of most parameters despite the presence of significant constraints
posed by infrastructure. It has also displayed resilience in terms of the ability
to cope with adverse developments such as oil price increases.
Despite the positive factors for
medium term outlook, there are some critical issues that need to be addressed
for maintaining the current momentum of growth with stability.
First, the poor state of the physical
infrastructure, both in terms of quantity and quality, has been rightly receiving
the focussed attention of the business class and the policy-makers. There are
some reasons to expect a satisfactory outcome, provided the improvement in regulatory
framework is sustained. The current investments are demand-led and therefore,
are likely to be completed with least gestation periods, coupled with a rapid
payback on completion. Technological developments and rapid enhancement of domestic
construction capabilities should aid the process of speedy and efficient implementation.
Given the healthy fundamentals of the domestic financial sector and the enhanced
interest of foreign investors, funding should not pose any serious problem.
Second, fiscal consolidation is
taking place both at the Centre and States and there is greater consensus now
on the broad directions. The recent budget of the central government brings
the consolidation on track, targeting a gross fiscal deficit of three per cent
of GDP by 2009 while eliminating revenue (current) deficit. Our studies on State
finances in Reserve Bank of India give grounds for optimism in regard to their
fiscal health. However, the issues of power subsidies and ensuring quality in
the delivery of services, especially with regard to education and health, do
need to be addressed.
Third, and perhaps the most challenging
issue relates to development of agriculture. While a majority of the workforce
is dependent on agriculture, the GDP growth generated from agriculture is only
marginally above the rate of growth of the population, in contrast to the strong
growth rates in the non-agricultural sectors, which is not adequate to address
rapid poverty reduction. To facilitate a more rapid growth in agriculture, legislative,
institutional and attitudinal changes to supplement enhanced public and private
investment may be needed. The Reserve Bank, for its part, is redoubling its
efforts in revitalising the rural cooperative credit system, in strengthening
Regional Rural Banks, in providing incentives to commercial banks for promoting
investments in rural economy and in ensuring adequate and timely delivery of
credit at appropriate price. In fact, we are studying legislation and implementation
of non-institutional money lending, as it continues to be a significant source
of credit for the farmers.
Despite the Indian economy being
poised towards a higher growth path, perceptible improvement is yet to be made
on reducing unemployment. The unemployment rate, based on periodical surveys
increased in both rural and urban areas during the period 1994 to 2004. The
sharper increase of unemployment rates in the rural areas reflects a slowdown
in agriculture. A positive feature has, however, been a reduction in the poverty
ratio from 36.0 per cent in 1993-94 to 26.1 per cent in 1999-2000. The Government
of India has set a target to bring down the proportion of people living below
the poverty line to 10 per cent by 2012, in line with the targets under the
Millennium Development Goals (MDGs) adopted by the United Nations.
Not Easily Quantifiable Strengths
A distinguishing characteristic
of recent global assessment of future of India has been greater awareness and
articulation of the strengths of India which are not easily quantifiable but
are critical to the longer term prospects. I wish to draw your attention to
some of the observations, in a summary form, without necessarily endorsing them.
In the social context, attention
has generally been given to the advantage of Indians’ proficiency in written
and spoken English language. However, this inherent strength should be viewed
in the backdrop of the linguistic diversity of India which encourages people
to learn several languages other than the mother tongue. (There are twenty two
national languages as per the Constitution of India.) The enhanced familiarity
with multiple languages not only helps bring about integration in the country,
but also prepares them to adapt better to multi-cultural situations. To illustrate,
a recent report in Financial Times (by Peter March dated May 17, 2006) titled
"Feast of a Movable Workforce" reads as follows:
"In an anonymous office building
in India, the J-Team is on a mission to strengthen links between India and Japan.
H.B. Jayanthi heads the 60-strong group of Indian engineers who are working
for Yojagawa, the Japanese industrial control systems market, in Bangalore.
They have been trained to speak – and even to think – in Japanese so they can
communicate effectively with colleagues in Japan while collaborating on product
development"
In this regard, it is also useful
to recognise the importance of empowerment of women. Let me illustrate with
some relevant facts in my home State, Andhra Pradesh. There is a minimum allocation
of one-third of admissions for women in medical colleges, but as of now, around
half of the students are women. Of the 92,000 students admitted in engineering
colleges this year in Andhra Pradesh, over 30,000 were women. Similarly in the
political arena, women are very well represented. In the local bodies, there
are about 250,000 elected officials ranging from a member of Gram Panchayats
(village-level elected self-governments) to Mayors of Municipal Corporations
and Chairpersons of Zilla Parishads (district level elected councils) and of
these, over 85,000 are women. These developments, which are shared in different
ways by other States, give a positive twist to the outlook for empowerment of
women for the future.
Above all, the existence of a free
press provides insurance against excesses and makes Governments at all levels
more accountable than otherwise. In this regard, it is interesting to note that
while 17 leading English newspapers have a combined circulation of 6.3 million
and readership of 17.9 million, 54 leading vernacular newspapers in India have
a circulation of 21.4 million and a readership of 197.2 million.
The political climate is characterised
by what may be termed as political system stability, despite the coalition cabinets
and periodic elections both at the Centre and several States. It is remarkable
that political cycles have not hindered the progress of well-calibrated economic
reforms. As Michael Mandelbaum, a democracy expert at Johns Hopkins University
in Washington said:
"There’s a lot of turmoil
on the surface of Indian democracy, but there’s a lot of consensus deep down
in the political system. "
In fact the political system should
lend comfort to the global businesses in view of elements of long-term predictability.
Ambassador Yasukuki Enoki, Japanese Ambassador to India is reported to have
said:
"For the next two decades,
Indian society is predictable and democratic framework is predictable. "
As regards macro-economy, there
is an increasing consensus that India has crossed the threshold of reform, leading
the economy to become really market-oriented and price based economy. This orientation
has helped the country emerging as the major service-outsourcing hub for the
world. Moreover, acceleration in growth is expected to be sustained in view
of the evolving pattern of domestic demand. For example, National Council of
Applied Economic Research (NCAER) MISH data
"clearly indicates that India
is growing immensely wealthy. By the end of this decade, the structure of the
country’s demographics will change from an inverted pyramid, signifying a small
rich class and a very large low-income class, to a rudimentary diamond, where
a significant part of the low-income class moves up to become part of the middle
class."
Further, there may be demographic
bonus between 2010 and 2040 when India’s working population is still increasing
while population in the rest of Asia may be levelling off or even declining.
Moreover, public and private sector compete and co-exist in a dynamic balance
which is imparting competitive strength to the economy.
Finally, in terms of business environment,
the impressive growth coupled with market orientation of the economy has been
a bottoms-up exercise, with a very broad-based growing entrepreneurial class.
The capacity to innovate is considered high and costs of innovation are reportedly
low in India. For example, engineering-intensive service-led manufacturing is
sought to balance the advantages of standardised way of mass production of goods.
Reportedly, there is an increasing emphasis on service approach to manufacturing
with adaptation of techniques such as lean production to keep quality high and
boost efficiency. These tendencies are perhaps reflective of a penchant for
innovation among growing entrepreneurial class in India, imbued with professionalism
and seeking to be globally competitive.
Evolving Indo-Japanese Economic
Relations
From global and our perspective,
Japan, as a leading industrial economy, has made substantial contributions to
the growth of world trade over the years. Japan has also played a key role in
the integration of developing countries, especially emerging Asia, with the
world economy in terms of trade and investment. The developing economies have
been the major destinations and source of Japan's exports and imports, accounting
for 58 per cent and 65.5 per cent of Japan's total exports and imports, respectively,
in 2004. Within developing economies, the share of emerging Asia accounted for
nearly 40 per cent of Japan's exports as well as imports.
India and Japan share a cultural
bond dating back to many centuries. The two countries, in the recent times,
have seen major improvement in the bilateral relations. The visit of the Japanese
Prime Minister Mr. Koizumi to India in April, 2005 marked a high point in this
bilateral relation. The visit highlighted the fact that the spiritual affinities,
enduring cultural contacts and high degree of commonality of political, economic
and strategic interests provide great strength to India and Japan as partners
in a globalising world. An eight fold initiative to further strengthen this
partnership was enunciated as an outcome of this visit. The intensity of high
level contacts with Japan has continued since then and the Prime Ministers of
the two countries have also met on the sidelines of the first East Asia Summit
at Kuala Lumpur. The last one year has, therefore, seen intense engagement in
our bilateral relations making Japan the focus of our policy in Asia.
India and Japan have many complementarities
in the economic sphere also. Japan is a relatively labour scarce but capital
abundant country whereas India has an abundance of an entire spectrum of human
resources. Similarly, India has a world acknowledged prowess in the software
sector and Japanese strength in the hardware sector is established for decades.
India has a wealth of resources by way of raw-materials and minerals and Japan
has the technology and capital to produce knowledge intensive manufactured goods.
In short, if the two were to engage more intensively in terms of economic collaboration,
the resulting synergies, the economies of scales and the complementarities could
lead to great welfare gains for both the countries.
In recent times, Japanese Foreign
Institutional Investors (FIIs) have started to evince an increasing interest
in India and among the FIIs registered during the year 2004, a significant number
belonged to Japan. Japan has also launched "India Investment Fund"
to mobilize funds from Japanese investors to invest in Indian securities market.
According to a survey on 'Overseas Business Operations by Japanese Manufacturing
Companies' (November 2004) carried out by JBIC, India emerged as the third most
promising investment destination after China and Thailand as against 5th in
the similar survey in 2003 and 11th in 2000.
Japan’s cooperation and participation
in the accelerated economic development of India is deeply appreciated. Japanese
assistance has been particularly helpful in the physical infrastructure sectors
of power, urban transportation, urban water supply and sanitation, water management,
seaports, tourism and also in the environment and forests sectors. Japan has
been extending bilateral loans and grants assistance to India since 1958 and
Japan is the largest bilateral official development assistance (ODA) partner
of India.
In sum, growing closer links between
Japan and India augur well for a bright future for Asia and a strong voice for
Asia in the global economy.
Concluding Remarks
Let me conclude by answering
three important questions relating to public policy in India. First, what is
the dominant objective of public policy? In Prime Minister Manmohan Singh’s
words:
"The first and foremost priority
is to finish the unfinished task which the founding fathers of our republic
set out for us at the time of Independence: to get rid of chronic poverty, ignorance,
and disease, which have afflicted millions and millions of our people. Great
progress has been made. Particularly in the last 20 years, the Indian economy
has done quite well. ....... We need to underpin that growth by strong performance
of our agriculture, strong performance of our physical and our social infrastructure.
These are our key priorities."
Second, what are the means by which
the objective can be achieved? Put succinctly, they encompass modernising the
country’s infrastructure - physical, social and governance; creating jobs and,
attracting foreign investment for the purpose.
Third, in this context, what is
the appropriate message to global managers as they think about India? Prime
Minister Manmohan Singh’s response to this question was:
"India’s future lies in being
an open society, an open polity, a functioning democracy respecting all fundamental
human freedoms, accepting the rule of law and, at the same time, to emerge as
a successful, internationally competitive economy."
Thank you.
Address of Dr. Y.V.Reddy, Governor, Reserve Bank
of India at the 12th International Conference on "The Future of Asia"
The Road to an "Asian Community" - Concepts and prospects, organised
by Nihon Keizai Shimbun, Inc (Nikkei) in Tokyo on May 25, 2006 (as circulated).
As per the definition adopted by the IMF in the Regional Economic Outlook on
Asia and Pacific (May 2006), Emerging Asia refers to China, India, Hong Kong
SAR, Korea, Singapore, Taiwan Province of China, Indonesia, Malaysia, the Philippines
and Thailand.