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Indian Economy: Bet on it? - Views on News from Equitymaster
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  • Apr 17, 2001

    Indian Economy: Bet on it?

    In recent weeks, there has been a lot of ‘not-so-good’ news on the economy front. Growth in industrial production has slipped considerably from 7.2% in November to just 0.6% in February 2001. On the agricultural front (rabi season), the area under cultivation has reduced significantly – 12% for foodgrains and 23% for oil seeds. Growth in the services sector too slowed down, albeit marginally, to 8.1% as compared to 8.4% recorded in the first and second quarters. Overall, the GDP growth rate for FY01 is anticipated to be 5.8% as compared to 6.6% in FY99 and 6.4% in FY00.

  • More on the Indian Economy

    The numbers clearly bring out the fact that the Indian economy is witnessing a slowdown. There is no ambiguity here. Despite this, there is a lot of optimism regarding India’s economic performance. Indeed, stock markets, which at a macro level reflect the performance of the economy, have witnessed foreign inflows of over US$ 2 bn since the start of the year. The RBI governor has gone on record to say that India will be least affected by the US slowdown. Is there any justification for this optimism? Well, there are several. Let’s touch upon only the structural issues, which would affect India’s performance in the coming decades.

    First, over the next two decades, India will witness a significant increase in the proportion of working to total population. In other words the proportion of dependent population (those that do not earn but consume) will reduce. This will benefit the economy in two ways. One, there will be more workers in the economy, thus supporting higher growth. And, two, per capita incomes will be higher as more people work, thus supporting a higher standard of living. This will kick off a much-needed virtuous circle (more money, therefore more consumption).

    Second, population growth, as underscored by the recent census, has already begun to slowdown (1.93% in 2001 as compared to 2.14% in 1991). This is a very important development, as it will support a higher standard of living (more doctors per person, better basic amenities et cetera). Also, given the GDP growth rate, a slower population growth will result in a higher per capita income growth. This again will support a better standard of living.

    Third, literacy levels in India have improved dramatically over the recent years. According to the recent estimates, literacy levels have breached the 65% mark. Just to put this in perspective, literacy level in India in 1901 was 5% and in 1991 it was marginally above 50%. A more literate work force will be more of an asset especially in view of the globalization process sweeping the country. They will be able to handle more specialized jobs and therefore earn better incomes.

    So, in a gist, over the next few decades India will have a combination of slower population growth and a larger and more literate work force. This should help initiate the virtuous circle: more employment – more incomes – more consumption – more investment.

    Apart from these structural issues, there are several recent developments, which underscore one’s confidence in the Indian economy. First, India continues to be one of the fastest growing economies worldwide. The crisis in Southeast Asia and then Russia had only a marginal impact on our economy. The resilience of the economy is clearly evident. Second, there is a general acceptance about the reform process and this should deter any vested interests from sabotaging this process. This should augur well for the economy.

    Although these developments provide us with a launching pad, there is still a need for a catalyst – the government. And this is where it becomes tough to make a call on whether the government will deliver or not! Indications are that things continue to move, albeit at a slow pace. And then there is hope that the reform process will be speeded up. Already, the government has announced several modifications to the labour laws, which were hitherto treated as a sacred cow. These are positive signals. But then, should one bet on India? Yes, but then if you are looking at making a buck, you ought to bear the risk!



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