India in an 'Asian' perspective... - Views on News from Equitymaster

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India in an 'Asian' perspective...

Dec 14, 2007

The growing importance of Asia in the global economy is well documented. A bird's eye view of the Indian economy from the perspective of being one of Asia's strongest and largest components brings to the fore some challenges that overlap both the geographies. In 1980, Asia accounted for 19% of the global GDP in purchasing power parity (PPP) terms. In 2007, Asia accounts for over 36% and as per the Asian Development Bank, by the year 2020, it is expected to reach over 45%. Also, currently Asia contributes close to 50% of world growth in PPP terms. The economic reforms in the real sector have improved the overall productivity and resilience in the continent. The macro economic conditions in Asia, as a whole, are significantly stronger and conducive to overall stability relative to the past. Nevertheless, there are several other concerns that need to be addressed.

Challenges confronting Asia

  • Economic disparity: Two-thirds of the world's poor live in Asia. According to the Asian Development Bank, 620 m people within the region are still living on less than US$ 1 per day and if we raise the limit to US$ 2 per day, the number would be more than a billion (almost one-sixth of world population). By 2030, Asia will have about 2.7 bn urban people, while all other regions in the world will have a combined urban population of about 2.3 bn. This will result in large constraints on urban infrastructure. At the same time, due to globalisation and growth experiences, the urban residents will be more demanding with regard to quality of urban infrastructure and services.

  • Demographic dilemma: Reaping the benefits of demographic dividend is dependent upon enhancing quality of health conditions, imparting better skills and improving public infrastructure so as to take advantage of globalisation. In the absence of appropriate public-policy initiatives, what could be a demographic dividend could potentially turn out to be a dilemma.

    The economic growth in Asia has resulted in an unprecedented number (in millions) of people moving out of poverty levels every year thus generating demand for food items, including cereals and milk. The structural increase in demand for food may continue for several years. While demand for food is relatively inelastic, the supply side is often influenced by several factors, including political and economic considerations. The problem is accentuated by the uncertainties in the global climatic conditions and increasing commercialisation of trade in these commodities.

  • Low representation: The global community needs to also address the issue of adequacy of voice and representation to a rising Asia in the current international financial architecture. In other words, governance structures and arrangements need to reflect the new realities of a rapidly growing Asia, in the interests of all stakeholders.

Challenges confronting India

  • Food security and price stability: Though about 60% of the Indian population is still dependent on agriculture, its share in GDP has been declining steadily over the years and now accounts for less than 20% of the same. Enhanced growth of the agricultural sector is, therefore, vital for ensuring food security, poverty alleviation, price stability, overall inclusive growth and sustainability of growth of the economy.

  • Infrastructure bottlenecks: Absence of modern infrastructure and shortage of skilled manpower are the most critical barriers to the economy's growth. It is, hence, imperative to augment the existing infrastructure facilities, particularly roads, ports and power, to provide the enabling environment for industries to prosper.

  • Re-prioritising expenditures: In order to reap the benefits of the demographic dividend, substantial expansion and reforms in the education sector would be needed on a priority basis. Reprioritisation of expenditures towards social sectors along with higher capital outlays is required to promote fiscal discipline without restricting operational efficiency of the government. Fiscal empowerment would allow higher capital outlays and boost infrastructure and social sector spending with beneficial impact on domestic productivity, growth and employment.

  • Inclusive credit growth: To meet the growing credit demand and sustain high economic growth, banks will need to widen their deposit base. Banks need to bring more and more financially excluded people within their fold, which would help the low-income households and strengthen financial deepening.

Thus, there are encumbrances that India, as a growing economy, needs to overcome. However, the same cannot be without some socio-economic aids that she, along with her peers in the Asian continent, will have to make a collaborative effort for.

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