INDIA Raising the growth bar

January 2011

3%

6%

8%

10%
 India Raising the growth bar
A report by CRISIL Centre for Economic Research
 India Raising the growth bar
A report by CRISIL Centre for Economic Research
 Key Messages

India's growth prospects

l CRISIL expects India's GDP to grow at 8.6 per cent in 2010-11, and at a sustained annual average rate
of 8.4 per cent over 2011-12 to 2015-16.
l Domestic demand - spurred by a large, growing young population, rising middle-class household
consumption, and growing savings and investment rates - will support economic growth over the next
five years.
l A likely increase in discretionary spending by India's middle-class households will boost demand for
durables such as automobiles and white goods, and services like hotels, restaurants and tourism.
l Given reduced export opportunities to advanced economies, India will have to diversify its exports to
Analytical contacts rapidly growing Asian markets and leverage more on domestic demand to support its growth.
l Growing inflation, volatile capital inflows, and a fragile recovery in advanced economies that can
Dharmakirti Joshi djoshi@crisil.com dampen exports, are immediate risks to India's growth prospects.
Sunil K. Sinha susinha@crisil.com
Vidya Mahambare vmahambare@crisil.com
l Can India attain and sustain 10 per cent GDP growth? To raise the growth bar, India will have to
Poonam Munjal pmunjal@crisil.com remove supply-side constraints, the success of which will hinge on government initiatives of structural
Parul Bhardwaj pbhardwaj@crisil.com reforms in infrastructure, agriculture and education, and enhanced private sector participation.
Dipti Saletore dsaletore@crisil.com
India's policy challenges
l Provide adequate and good-quality physical infrastructure to sustain growth and reduce infrastructure
deficit.
l Create jobs and prepare the bulging youth population for these jobs.
l Control inflation by improving the supply potential of agriculture, and thereby increase the effectiveness
of monetary policy.
l Attract the right kind of capital inflows such as foreign direct investment which brings technology and
management expertise along with physical capital.
l Build fiscal flexibility to enhance spending on physical infrastructure, health and education.
l Promote public investment and land reforms for unlocking the potential of the agricultural sector.

We would like to acknowledge the contribution of

Krishnan Sivaramakrishnan, Nishikant Gawade,
Rahul Srinivasan, Suresh Salunkhe and Dilip Chavan
who helped in preparing the report.
 Key Messages

India's growth prospects

l CRISIL expects India's GDP to grow at 8.6 per cent in 2010-11, and at a sustained annual average rate
of 8.4 per cent over 2011-12 to 2015-16.
l Domestic demand - spurred by a large, growing young population, rising middle-class household
consumption, and growing savings and investment rates - will support economic growth over the next
five years.
l A likely increase in discretionary spending by India's middle-class households will boost demand for
durables such as automobiles and white goods, and services like hotels, restaurants and tourism.
l Given reduced export opportunities to advanced economies, India will have to diversify its exports to
Analytical contacts rapidly growing Asian markets and leverage more on domestic demand to support its growth.
l Growing inflation, volatile capital inflows, and a fragile recovery in advanced economies that can
Dharmakirti Joshi djoshi@crisil.com dampen exports, are immediate risks to India's growth prospects.
Sunil K. Sinha susinha@crisil.com
Vidya Mahambare vmahambare@crisil.com
l Can India attain and sustain 10 per cent GDP growth? To raise the growth bar, India will have to
Poonam Munjal pmunjal@crisil.com remove supply-side constraints, the success of which will hinge on government initiatives of structural
Parul Bhardwaj pbhardwaj@crisil.com reforms in infrastructure, agriculture and education, and enhanced private sector participation.
Dipti Saletore dsaletore@crisil.com
India's policy challenges
l Provide adequate and good-quality physical infrastructure to sustain growth and reduce infrastructure
deficit.
l Create jobs and prepare the bulging youth population for these jobs.
l Control inflation by improving the supply potential of agriculture, and thereby increase the effectiveness
of monetary policy.
l Attract the right kind of capital inflows such as foreign direct investment which brings technology and
management expertise along with physical capital.
l Build fiscal flexibility to enhance spending on physical infrastructure, health and education.
l Promote public investment and land reforms for unlocking the potential of the agricultural sector.

Acknowledgement: We would like to acknowledge

the contribution of Krishnan Sivaramakrishnan,
Nishikant Gawade, Rahul Srinivasan and Suresh
Salunkhe who helped in preparing the report.
 India: Raising the Growth Bar, January 2011 1

Contents Introduction

India has grown in stature over the past ten years. Its GDP growth accelerated steadily, after India
liberalised its economy in 1991, taking a decisive step towards open policies and relinquishing inward-
Introduction 1 looking policies. The average annual GDP growth went up to 7.3 per cent in the 2000s from 5.7 per cent in
the 1990s. The near 9 per cent average annual growth over 2003-04 to 2007-08 was unprecedented, but it
has now become a benchmark for India to assess its performance. Growth-enhancing reforms, a structural
upward shift in savings and investment rates, and rising consumption power have together powered the rise
in India's growth.
Economic outlook 2
Although its GDP growth dropped, due to the global financial crisis, to 6.7 per cent in 2008-09, India's
economy emerged quite rapidly from the crisis. The economic recovery was aided by the inherent strength
of India's domestic demand that was complemented by Reserve Bank of India's monetary management
Demand drivers 6 and the central government's fiscal stimulus measures. With its GDP likely to grow at 8.6 per cent in 2010-
11, India will be among the fastest growing economies.

The medium-term prospects for advanced economies, which were the epicenter of the crisis, have
Expanding supply potential 14 weakened. Plagued by a fractured financial sector, the advanced economies are deleveraging, tightening
financial sector regulation and gradually shifting their focus away from consumption towards savings. These
developments are growth restricting. Prospectively, since there would be reduced opportunities for exports
to advanced economies, domestic demand becomes vital for supporting growth of developing economies.
Growth enablers 22
The global crisis did not dent India's growth prospects the way it dented the prospects of the mature
economies. India, today, is well-positioned to sustain 8.0-8.5 per cent annual GDP growth over the next five
years. What will drive this growth? What can raise the growth bar to 10 per cent? These questions are
Roadblocks to 10 per cent growth 28 gaining more significance with a change in the global economic landscape, and consequently, a change in the
nature of economic growth drivers.

Annexure - Developing Asia in the Global landscape
This report addresses these issues by systematically analysing the demand-side drivers of India's economy,
supply-related issues, growth enablers and constraints. The report begins with our outlook for Indian
38
economy in 2010-11 and our forecast for 2011-12. It also assesses the outlook for the Indian economy over
the next 5 years, i.e: 2011-12 to 2015-16. Chapter 1 examines the strength and likely role of domestic
demand (consumption and investment) and international trade in supporting growth in future. Constraint
on the supply potential of the economy can however limit India's ability to meet this growing demand. This
raises an important question - what policies does India need to adopt to strengthen the economy's
productive capacity? The issue is studied in Chapter 2. It reviews the evolving dynamics of agriculture,
industry and services sector and discusses some of the growth-enhancing structural reforms that could
potentially step up supply potential of these sectors. Chapter 3 analyses the growth-enablers, such as
favourable population demographics and high savings rate, which create the potential for India to grow at
double-digit rates. Finally, chapter 4 encapsulates the major risks that can hinder India's attempts to move
into the 10 per cent growth zone. This hinges on India's ability to establish good-quality physical
infrastructure and social infrastructure, enhance the education and skills of India's workforce, and improve
the potential of the agriculture sector.
 India: Raising the Growth Bar, January 2011 1

Contents Introduction

India has grown in stature over the past ten years. Its GDP growth accelerated steadily, after India
liberalised its economy in 1991, taking a decisive step towards open policies and relinquishing inward-
Introduction 1 looking policies. The average annual GDP growth went up to 7.3 per cent in the 2000s from 5.7 per cent in
the 1990s. The near 9 per cent average annual growth over 2003-04 to 2007-08 was unprecedented, but it
has now become a benchmark for India to assess its performance. Growth-enhancing reforms, a structural
upward shift in savings and investment rates, and rising consumption power have together powered the rise
in India's growth.
Economic outlook 2
Although its GDP growth dropped, due to the global financial crisis, to 6.7 per cent in 2008-09, India's
economy emerged quite rapidly from the crisis. The economic recovery was aided by the inherent strength
of India's domestic demand that was complemented by Reserve Bank of India's monetary management
Demand drivers 6 and the central government's fiscal stimulus measures. With its GDP likely to grow at 8.6 per cent in 2010-
11, India will be among the fastest growing economies.

The medium-term prospects for advanced economies, which were the epicenter of the crisis, have
Expanding supply potential 14 weakened. Plagued by a fractured financial sector, the advanced economies are deleveraging, tightening
financial sector regulation and gradually shifting their focus away from consumption towards savings. These
developments are growth restricting. Prospectively, since there would be reduced opportunities for exports
to advanced economies, domestic demand becomes vital for supporting growth of developing economies.
Growth enablers 22
The global crisis did not dent India's growth prospects the way it dented the prospects of the mature
economies. India, today, is well-positioned to sustain 8.0-8.5 per cent annual GDP growth over the next five
years. What will drive this growth? What can raise the growth bar to 10 per cent? These questions are
Roadblocks to 10 per cent growth 28 gaining more significance with a change in the global economic landscape, and consequently, a change in the
nature of economic growth drivers.

Annexure - Developing Asia in the Global landscape
This report addresses these issues by systematically analysing the demand-side drivers of India's economy,
supply-related issues, growth enablers and constraints. The report begins with our outlook for Indian
38
economy in 2010-11 and our forecast for 2011-12. It also assesses the outlook for the Indian economy over
the next 5 years, i.e: 2011-12 to 2015-16. Chapter 1 examines the strength and likely role of domestic
demand (consumption and investment) and international trade in supporting growth in future. Constraint
on the supply potential of the economy can, however, limit India's ability to meet this growing demand.
This raises an important question - what policies does India need to adopt to strengthen the economy's
productive capacity? The issue is studied in Chapter 2. It reviews the evolving dynamics of agriculture,
industry and services sector and discusses some of the growth-enhancing structural reforms that could
potentially step up supply potential of these sectors. Chapter 3 analyses the growth-enablers, such as
favourable population demographics and high savings rate, which create the potential for India to grow at
double-digit rates. Finally, chapter 4 encapsulates the major risks that can hinder India's attempts to move
into the 10 per cent growth zone. This hinges on India's ability to establish good-quality physical
infrastructure and social infrastructure, enhance the education and skills of India's workforce, and improve
the potential of the agriculture sector.
 CRISIL Centre for Economic Research
2 India: Raising the Growth Bar, January 2011 3

Economic outlook
Average for
Outlook for 2010-11 2010-11 F 2011-12 F 2011-12 to 2015-16 F
CRISIL expects the Indian economy to grow by 8.6 per cent in 2010-11. GDP Growth (%) 8.6 8.3 8.4
The Indian economy grew at a higher-than-expected 8.9 per cent in the first half of Supply-side
2010-11, driven by strong growth in the services sector from the supply-side and Agriculture Growth (%) 5.0 2.7 3.0
household consumption from the demand-side. Services grew at an accelerated rate Industry Growth (%) 8.6 8.2 8.5

owing to increased government spending and a pick-up in trade, hotels, transport, Services Growth (%) 9.4 9.6 9.5

communication and related sub-sectors. Industrial growth, as measured by change in

Demand-side
index of industrial production was driven by robust private-consumption demand and
Private consumption % of GDP 60.1 59.5 58.5
resurgence in investment demand. Industrial growth has however now become volatile Gross domestic investment % of GDP 36.8 36.4 37.1
and is slowing in recent months - from an average 16 per cent growth in the fourth Government expenditure % of GDP 11.2 11.4 11.5
quarter of 2009-10, industrial growth considerably slowed to 12 per cent in the first
quarter and 9 per cent in the second quarter of 2010-11. CRISIL expects the overall WPI Inflation % 8.0 -8.5 5.8 5.5
decline in industrial growth to slow GDP growth to about 8.3 per cent in the second
half of 2010-11. Good monsoons during the year have benefited the agriculture sector. Gross domestic savings % of GDP 33.8 33.8 34.9

With a support from a low base, this sector is likely to grow at about 5 per cent - - Household % of GDP 22.8 22.9 22.6
- Corporate % of GDP 8.7 8.5 8.8
greater than its long-term average growth of 2.8 per cent over the last two decades.
- Government % of GDP 2.3 2.4 3.5

Two main domestic demand drivers, private consumption and investment, have Current account deficit/GDP % of GDP 3.3 2.6 2.2
recovered from the slowdown during the global economic crisis.
In the first half of 2010-11, household consumption growth surged to almost 9 per Fiscal deficit % of GDP 5.0 5.5 4.6
cent whereas investment growth crossed the double-digits to almost 15 per cent.
Note: The financial year refers to April to March, F: Forecast
CRISIL expects growth in both these demand drivers to slow marginally in the second Source: CRISIL estimate
half of 2010-11 in response to recent increases in bank lending rates. Government
consumption, another key domestic demand driver, has now been growing at a lesser Increased oil prices and a relatively slower economic recovery in advanced countries
rate (of 9 per cent in first half of 2010-11 as compared to 22.4 per cent in the first that can reduce India's export and invisible earning, are the key risks to current account
half of 2009-10) than during the global economic crisis as the government withdrew a deficit.
part of its stimulus.
Revenue windfall would help restrict fiscal deficit to 5.0 per cent of GDP in 2010-11.
WPI-based inflation is now expected to end the fiscal at 6.0 to 6.5 per cent. A partial roll-back of fiscal stimulus and sustained economic recovery are likely to
Wholesale price index (WPI) inflation has come down to 7.5 per cent in November increase the government's tax revenue in 2010-11. The increased tax revenue and non-
from 11 per cent in April 2010. CRISIL expects increased farm output, a low base and tax revenue from spectrum sales would enable the government to reduce the fiscal
Reserve Bank of India's monetary tightening measures during the year to help bring deficit to 5.0 per cent of GDP, even with higher than planned expenditure.
down inflation. Yet inflation could remain above RBI's expectation.
Outlook for 2011-12
Current account deficit as a percentage of GDP is expected to be higher (at 3.3 per With growth in industry and agriculture likely to slow, economic growth would step
cent) in 2010-11 owing to higher trade deficit and lower invisibles surplus. down to 8.3 per cent
Although current account deficit, at present, is not a cause for concern, as India's net While rising cost of credit could slow industrial growth to 8.2 per cent, agriculture
capital inflows are likely to exceed the current account deficit during the year, if the growth, despite a normal monsoon, could decline due to a higher base. The service
deficit widens further it would increase India's dependence on external capital flows. A sector, with a likely growth of 9.6 per cent, will remain the key driver of economic
wider current account deficit during this year has slowed rupee appreciation vis-à-vis growth in 2011-12. A further pick-up in trade, finance and communication, given a
the US dollar, as the country used most of the capital inflows to fund the deficit. resurgent economy, will drive the growth in services.
 CRISIL Centre for Economic Research
2 India: Raising the Growth Bar, January 2011 3

Economic outlook
Average for
Outlook for 2010-11 2010-11 F 2011-12 F 2011-12 to 2015-16 F
CRISIL expects the Indian economy to grow by 8.6 per cent in 2010-11. GDP Growth (%) 8.6 8.3 8.4
The Indian economy grew at a higher-than-expected 8.9 per cent in the first half of Supply-side
2010-11, driven by strong growth in the services sector from the supply-side and Agriculture Growth (%) 5.0 2.7 3.0
household consumption from the demand-side. Services grew at an accelerated rate Industry Growth (%) 8.6 8.2 8.5

owing to increased government spending and a pick-up in trade, hotels, transport, Services Growth (%) 9.4 9.6 9.5

communication and related sub-sectors. Industrial growth, as measured by change in

Demand-side
index of industrial production was driven by robust private-consumption demand and
Private consumption % of GDP 60.1 59.5 58.5
resurgence in investment demand. Industrial growth has however now become volatile Gross domestic investment % of GDP 36.8 36.4 37.1
and is slowing in recent months - from an average 16 per cent growth in the fourth Government expenditure % of GDP 11.2 11.4 11.5
quarter of 2009-10, industrial growth considerably slowed to 12 per cent in the first
quarter and 9 per cent in the second quarter of 2010-11. CRISIL expects the overall WPI Inflation % 8.0 -8.5 5.8 5.5
decline in industrial growth to slow GDP growth to about 8.3 per cent in the second
half of 2010-11. Good monsoons during the year have benefited the agriculture sector. Gross domestic savings % of GDP 33.8 33.8 34.9

With a support from a low base, this sector is likely to grow at about 5 per cent - - Household % of GDP 22.8 22.9 22.6
- Corporate % of GDP 8.7 8.5 8.8
greater than its long-term average growth of 2.8 per cent over the last two decades.
- Government % of GDP 2.3 2.4 3.5

Two main domestic demand drivers, private consumption and investment, have Current account deficit/GDP % of GDP 3.3 2.6 2.2
recovered from the slowdown during the global economic crisis.
In the first half of 2010-11, household consumption growth surged to almost 9 per Fiscal deficit % of GDP 5.0 5.5 4.6
cent whereas investment growth crossed the double-digits to almost 15 per cent.
Note: The financial year refers to April to March, F: Forecast
CRISIL expects growth in both these demand drivers to slow marginally in the second Source: CRISIL estimate
half of 2010-11 in response to recent increases in bank lending rates. Government
consumption, another key domestic demand driver, has now been growing at a lesser Increased oil prices and a relatively slower economic recovery in advanced countries
rate (of 9 per cent in first half of 2010-11 as compared to 22.4 per cent in the first that can reduce India's export and invisible earning, are the key risks to current account
half of 2009-10) than during the global economic crisis as the government withdrew a deficit.
part of its stimulus.
Revenue windfall would help restrict fiscal deficit to 5.0 per cent of GDP in 2010-11.
WPI-based inflation is now expected to end the fiscal at 6.0 to 6.5 per cent. A partial roll-back of fiscal stimulus and sustained economic recovery are likely to
Wholesale price index (WPI) inflation has come down to 7.5 per cent in November increase the government's tax revenue in 2010-11. The increased tax revenue and non-
from 11 per cent in April 2010. CRISIL expects increased farm output, a low base and tax revenue from spectrum sales would enable the government to reduce the fiscal
Reserve Bank of India's monetary tightening measures during the year to help bring deficit to 5.0 per cent of GDP, even with higher than planned expenditure.
down inflation. Yet inflation could remain above RBI's expectation.
Outlook for 2011-12
Current account deficit as a percentage of GDP is expected to be higher (at 3.3 per With growth in industry and agriculture likely to slow, economic growth would step
cent) in 2010-11 owing to higher trade deficit and lower invisibles surplus. down to 8.3 per cent
Although current account deficit, at present, is not a cause for concern, as India's net While rising cost of credit could slow industrial growth to 8.2 per cent, agriculture
capital inflows are likely to exceed the current account deficit during the year, if the growth, despite a normal monsoon, could decline due to a higher base. The service
deficit widens further it would increase India's dependence on external capital flows. A sector, with a likely growth of 9.6 per cent, will remain the key driver of economic
wider current account deficit during this year has slowed rupee appreciation vis-à-vis growth in 2011-12. A further pick-up in trade, finance and communication, given a
the US dollar, as the country used most of the capital inflows to fund the deficit. resurgent economy, will drive the growth in services.
 CRISIL Centre for Economic Research
4 India: Raising the Growth Bar, January 2011
With macroeconomic stability and improving consumer sentiment driving
consumption and investment growth, demand-side pressures on inflation could
remain firm
We expect RBI's monetary policy to help keep demand-side pressures on inflation in
check. If monsoons are normal and oil prices stabilise at US$ 85-90 per barrel, average
WPI-based inflation would be 5.8 per cent in 2011-12. However, any supply shock
from commodity prices due to the quantitative easing by central banks in advanced
countries can trigger inflation. Owing to rising demand, manufacturing inflation,
excluding food articles, is increasing once again, and the risk of a further increase in
inflation remains.
CRISIL expects investment rate to stay strong around 36.4 per cent with continued
thrust on infrastructure
Rising investments in infrastructure and certain consumer durable segments will drive
domestic investment in 2011-12. Domestic savings, which are expected to remain at
2010-11 level with increased corporate savings and a marginal deceleration in
government savings, will continue to fund a major proportion of domestic investment.
Fiscal deficit in 2011-12 is expected to be around 5.5 per cent of GDP.
CRISIL expects the government's balance-sheet to deteriorate in 2011-12 as revenue
growth is likely to slow down relative to that in the current year. The one-off gains in
revenue in 2010-11, such as revenue from the 3-G spectrum auction, will be missing in
2011-12. To reduce fiscal deficit further, the government may step up disinvestment.
The current account deficit to GDP in 2011-12 is expected around 2.6 per cent
Rising inflow of invisibles - as advanced economies recover - and growing export
demand are likely to reduce current account deficit to 2.6 per cent of GDP in 2011-12.
Risks for 2011-12
l Inflation- Inflation could rise beyond 5.8 per cent in 2011-12, if - i) global
commodity prices, especially oil prices, increase further with global economy
improving sooner than expected; ii) the Indian government, which has embarked
on fiscal restraint, passes on any unprecedented increase in global oil prices; or
iii) a truant monsoon leads to a sharp increase in food prices.
l Capital flows- Any slowdown in the economic recovery of advanced economies
could threaten a flight of capital from India. Since India's widening current
account deficit needs increased capital inflows, such a flight of capital could affect
India's economic recovery.
l Currency- Any unanticipated shocks to the global economic recovery could drive
capital outflows from India resulting in increased volatility in the Indian Rupee.
5
Medium-term outlook
CRISIL expects the Indian economy to sustain an annual average growth rate of 8.4
per cent over 2011-12 to 2015-16, propelled by growth in the service and industrial
sectors. Economic growth in advanced countries, although below pre-crisis levels, will
support growth in sectors such as IT/ITeS whereas rising household spending in India
would benefit segments such as consumer durables and hotel and restaurants. A likely
increase in domestic demand and improvement in exports will support industrial
growth.
l Domestic demand - supported by a large and growing young population, middle-
class income dynamics, and rising savings and investment rates - will drive India's
economic growth. Investment rate is also likely to increase to around 37 per cent
of GDP over the forecast period. Increased consumer spending will help maintain
the share of private consumption in household income, thereby limiting the
increase in household savings rate.
l Owing to strong economic growth, demand-side pressures will tend to increase
inflation. CRISIL, however, expects timely actions from RBI, facilitating growth
and price stability, to keep average WPI-based inflation at 5.5 per cent over the
next five years.
l With its inflation rate in check and its economic growth robust, foreign inflows to
India are likely to rise during the period resulting in the appreciation of the
currency. Rising trade demand from advanced countries would push up export
and invisibles' earnings of India's current account. CRISIL therefore expects
India's current account deficit to average at 2.2 per cent of GDP over the next
five years.
l With tax revenues increasing following the implementation of Goods and
Services Tax (GST), and the government refocusing on expenditure restraint,
CRISIL expects fiscal deficit to come down to 4.0 per cent of GDP by 2015-16
from 5.0 per cent in 2010-11.
Risks to medium term outlook and barrier to 10 per cent growth
l Inadequate physical infrastructure is regarded as a major risk to sustenance of
high growth in India. If the progress on infrastructure stumbles, even maintaining
8.4 per cent growth would be difficult.
l Skill shortage which accentuates with fast growth can also become a bottleneck
for sustaining growth.
l Unless fiscal reforms are carried out on the expenditure side, the government's
fiscal inflexibility to invest in physical and social (health and education)
infrastructure will only rise. This may not bite immediately but can become a
challenge to maintaining 8-10 per cent growth trajectory that India now aspires to
acheive.
 CRISIL Centre for Economic Research
4 India: Raising the Growth Bar, January 2011
With macroeconomic stability and improving consumer sentiment driving
consumption and investment growth, demand-side pressures on inflation could
remain firm
We expect RBI's monetary policy to help keep demand-side pressures on inflation in
check. If monsoons are normal and oil prices stabilise at US$ 85-90 per barrel, average
WPI-based inflation would be 5.8 per cent in 2011-12. However, any supply shock
from commodity prices due to the quantitative easing by central banks in advanced
countries can trigger inflation. Owing to rising demand, manufacturing inflation,
excluding food articles, is increasing once again, and the risk of a further increase in
inflation remains.
CRISIL expects investment rate to stay strong around 36.4 per cent with continued
thrust on infrastructure
Rising investments in infrastructure and certain consumer durable segments will drive
domestic investment in 2011-12. Domestic savings, which are expected to remain at
2010-11 level with increased corporate savings and a marginal deceleration in
government savings, will continue to fund a major proportion of domestic investment.
Fiscal deficit in 2011-12 is expected to be around 5.5 per cent of GDP.
CRISIL expects the government's balance-sheet to deteriorate in 2011-12 as revenue
growth is likely to slow down relative to that in the current year. The one-off gains in
revenue in 2010-11, such as revenue from the 3-G spectrum auction, will be missing in
2011-12. To reduce fiscal deficit further, the government may step up disinvestment.
The current account deficit to GDP in 2011-12 is expected around 2.6 per cent
Rising inflow of invisibles - as advanced economies recover - and growing export
demand are likely to reduce current account deficit to 2.6 per cent of GDP in 2011-12.
Risks for 2011-12
l Inflation- Inflation could rise beyond 5.8 per cent in 2011-12, if - i) global
commodity prices, especially oil prices, increase further with global economy
improving sooner than expected; ii) the Indian government, which has embarked
on fiscal restraint, passes on any unprecedented increase in global oil prices; or
iii) a truant monsoon leads to a sharp increase in food prices.
l Capital flows- Any slowdown in the economic recovery of advanced economies
could threaten a flight of capital from India. Since India's widening current
account deficit needs increased capital inflows, such a flight of capital could affect
India's economic recovery.
l Currency- Any unanticipated shocks to the global economic recovery could drive
capital outflows from India resulting in increased volatility in the Indian Rupee.
5
Medium-term outlook
CRISIL expects the Indian economy to sustain an annual average growth rate of 8.4
per cent over 2011-12 to 2015-16, propelled by growth in the service and industrial
sectors. Economic growth in advanced countries, although below pre-crisis levels, will
support growth in sectors such as IT/ITeS whereas rising household spending in India
would benefit segments such as consumer durables and hotel and restaurants. A likely
increase in domestic demand and improvement in exports will support industrial
growth.
l Domestic demand - supported by a large and growing young population, middle-
class income dynamics, and rising savings and investment rates - will drive India's
economic growth. Investment rate is also likely to increase to around 37 per cent
of GDP over the forecast period. Increased consumer spending will help maintain
the share of private consumption in household income, thereby limiting the
increase in household savings rate.
l Owing to strong economic growth, demand-side pressures will tend to increase
inflation. CRISIL, however, expects timely actions from RBI, facilitating growth
and price stability, to keep average WPI-based inflation at 5.5 per cent over the
next five years.
l With its inflation rate in check and its economic growth robust, foreign inflows to
India are likely to rise during the period resulting in the appreciation of the
currency. Rising trade demand from advanced countries would push up export
and invisibles' earnings of India's current account. CRISIL therefore expects
India's current account deficit to average at 2.2 per cent of GDP over the next
five years.
l With tax revenues increasing following the implementation of Goods and
Services Tax (GST), and the government refocusing on expenditure restraint,
CRISIL expects fiscal deficit to come down to 4.0 per cent of GDP by 2015-16
from 5.0 per cent in 2010-11.
Risks to medium term outlook and barrier to 10 per cent growth
l Inadequate physical infrastructure is regarded as a major risk to sustenance of
high growth in India. If the progress on infrastructure stumbles, even maintaining
8.4 per cent growth would be difficult.
l Skill shortage which accentuates with fast growth can also become a bottleneck
for sustaining growth.
l Unless fiscal reforms are carried out on the expenditure side, the government's
fiscal inflexibility to invest in physical and social (health and education)
infrastructure will only rise. This may not bite immediately but can become a
challenge to maintaining 8-10 per cent growth trajectory that India now aspires to
acheive.
Robust consumption and rising investment will
drive domestic demand over the next five
years.
Demand drivers
Key points
Chapter 1
l Private consumption expenditure, and within it
discretionary spending, is likely to rise since household
expenditure on necessities now accounts for less than
one-fourth of disposable income, and its share in
consumption could fall further. Private consumption
accounted for about 60 per cent of total demand in the
first six months of 2010-11. After a sharp decline
during the global economic crisis, consumption growth
has picked up strongly to reach the pre-crisis growth of
almost 9 per cent and is leading economic revival.
l India's economic growth, which had depended
predominantly on domestic consumption, became
more evenly dependent on consumption and
investment in the 2000s, as the rate of domestic
investment increased to almost 37 per cent in 2007-08
from a mere 24.5 per cent in 2000-01. To sustain 9 per
cent GDP growth, India needs to maintain investment
rate at the pre-crisis level of about 37 per cent.
l External trade expanded rapidly in the past ten years.
India's merchandise and services exports grew from
US$ 60.9 billion in 2000-01 to US$ 272.5 billion in
2009-10, and imports too grew at a brisk pace.
Growing exports provided a stimulus to domestic
production whereas imports supported domestic
demand drivers by making available raw material,
technology, consumer goods and capital goods. In
future, India's challenge will be to increase its share in
world exports from a mere 1.2 per cent by expanding
into new, fast-growing markets.
India: Raising the Growth Bar, January 2011 7
Consumption
Private consumption continues to be the largest demand driver of the Indian
economy
After a sharp fall during the global economic crisis, private consumption growth The global economic crisis disrupts India's
growth, but only temporarily
recovered to its pre-crisis rate by the second quarter of 2010-11. During 2005-06 to % y-o-y
2007-08, real private consumption growth stood at 9 per cent. During the global
financial crisis, however when consumer confidence diminished and lenders became 2000-01 2005-06 2010-11F
risk averse, private consumption growth fell to an average of 5.5 per cent in 2008-09
and 2009-10. By the second quarter of 2010-11, private consumption growth
recovered to 9 per cent. At present, private consumption accounts for nearly 60 per
cent of overall demand in the economy (Figure 1).
The growth in private consumption since 2005-06 was fuelled by an increase in funds
available with households for discretionary spending. Over time, as households'
incomes increased, consumption expenditure on necessities, as a share of disposable
income has come down sharply relative to total consumption (Figure 2). As a result,
the proportion of discretionary expenditure in disposable income has risen from 34.6
per cent in 2001-02 to 43.5 per cent in 2008-09.
Government consumption rose during the economic slowdown to push up
domestic demand
Real government consumption grew at an average of 13 per cent in 2008-09 and
2009-10, from an average of 5.6 per cent over 2004-05 to 2007-08, the period of
India's economic upturn. During the global crisis which began in late 2007, India's
government, following a traditional practice with governments worldwide, increased
its expenditure to support domestic demand.
Despite the increase in government expenditure, the pattern and direction of the
spending is a cause of concern from a longer term perspective. Most of the fiscal
stimulus, as reflected in the Indian government's expenditure, was directed at reviving
Figure 1: Share of private consumption in GDP is dominant Figure 2: Share of necessities in disposable income has been falling
% %
100 110
80
90
60
Private consumption
70 Total Private Consumption
40
Gross capital formation
50
20
Necessities
0 30
1972-73 1981-82 1990-91 1999-00 2008-09 1972-73 1981-82 1990-91 1999-00 2008-09
Source: Central Statistical Organisation Source: Central Statistical Organisation
Robust consumption and rising investment will
drive domestic demand over the next five
years.
Demand drivers
Key points
Chapter 1
l Private consumption expenditure, and within it
discretionary spending, is likely to rise since household
expenditure on necessities now accounts for less than
one-fourth of disposable income, and its share in
consumption could fall further. Private consumption
accounted for about 60 per cent of total demand in the
first six months of 2010-11. After a sharp decline
during the global economic crisis, consumption growth
has picked up strongly to reach the pre-crisis growth of
almost 9 per cent and is leading economic revival.
l India's economic growth, which had depended
predominantly on domestic consumption, became
more evenly dependent on consumption and
investment in the 2000s, as the rate of domestic
investment increased to almost 37 per cent in 2007-08
from a mere 24.5 per cent in 2000-01. To sustain 9 per
cent GDP growth, India needs to maintain investment
rate at the pre-crisis level of about 37 per cent.
l External trade expanded rapidly in the past ten years.
India's merchandise and services exports grew from
US$ 60.9 billion in 2000-01 to US$ 272.5 billion in
2009-10, and imports too grew at a brisk pace.
Growing exports provided a stimulus to domestic
production whereas imports supported domestic
demand drivers by making available raw material,
technology, consumer goods and capital goods. In
future, India's challenge will be to increase its share in
world exports from a mere 1.2 per cent by expanding
into new, fast-growing markets.
India: Raising the Growth Bar, January 2011 7
Consumption
Private consumption continues to be the largest demand driver of the Indian
economy
After a sharp fall during the global economic crisis, private consumption growth The global economic crisis disrupts India's
growth, but only temporarily
recovered to its pre-crisis rate by the second quarter of 2010-11. During 2005-06 to % y-o-y
2007-08, real private consumption growth stood at 9 per cent. During the global
financial crisis, however when consumer confidence diminished and lenders became 2000-01 2005-06 2010-11F
risk averse, private consumption growth fell to an average of 5.5 per cent in 2008-09
and 2009-10. By the second quarter of 2010-11, private consumption growth
recovered to 9 per cent. At present, private consumption accounts for nearly 60 per
cent of overall demand in the economy (Figure 1).
The growth in private consumption since 2005-06 was fuelled by an increase in funds
available with households for discretionary spending. Over time, as households'
incomes increased, consumption expenditure on necessities, as a share of disposable
income has come down sharply relative to total consumption (Figure 2). As a result,
the proportion of discretionary expenditure in disposable income has risen from 34.6
per cent in 2001-02 to 43.5 per cent in 2008-09.
Government consumption rose during the economic slowdown to push up
domestic demand
Real government consumption grew at an average of 13 per cent in 2008-09 and
2009-10, from an average of 5.6 per cent over 2004-05 to 2007-08, the period of
India's economic upturn. During the global crisis which began in late 2007, India's
government, following a traditional practice with governments worldwide, increased
its expenditure to support domestic demand.
Despite the increase in government expenditure, the pattern and direction of the
spending is a cause of concern from a longer term perspective. Most of the fiscal
stimulus, as reflected in the Indian government's expenditure, was directed at reviving
Figure 1: Share of private consumption in GDP is dominant Figure 2: Share of necessities in disposable income has been falling
% %
100 110
80
90
60
Private consumption
70 Total Private Consumption
40
Gross capital formation
50
20
Necessities
0 30
1972-73 1981-82 1990-91 1999-00 2008-09 1972-73 1981-82 1990-91 1999-00 2008-09
Source: Central Statistical Organisation Source: Central Statistical Organisation
 CRISIL Centre for Economic Research
8 India: Raising the Growth Bar, January 2011 9

investment; and ii) rising household demand, particularly on consumer durables,

private consumption expenditure rather than on increasing corporate or public
accelerated private corporate investment (see section on domestic consumption for
investment in sectors such as infrastructure and education. A decline in development
further details).
expenditure, which has fallen to 1.4 per cent of GDP in the 2000s from 2.1 per cent in
the previous decade, is another concern about government expenditure.
The liberalisation process created a favourable environment for firms to increase their
manufacturing capacity by increasing the availability and reducing the cost of capital.
Outlook
The initial focus of liberalisation was to lift internal controls to enable the private
Private consumption will remain the largest demand driver of the Indian economy
sector to expand and improve its efficiency. Coinciding with the development and
over the next five years, although its share in GDP will decline marginally.
expansion of the equity market, this supported the corporate sector's rising retained
Real private consumption will grow strongly and remain the largest demand driver in
earnings and increased domestic bank credit for financing corporate investment.
India's economy. An increase in discretionary income is likely to boost household
spending on goods like consumer durables and automobiles, and services such as Private consumption is the largest demand
In the next stage, the focus was on partially removing restrictions on the external driver, but investment rises rapidly
hotels and restaurants over 2010-11 to 2015-16.
sector, to allow Indian firms to import technology and capital inputs at a decreased % in GDP
57.3
cost, and tap foreign financial markets for funding - by way of external commercial
The government would have to focus its expenditure on health, education and 33.7
borrowings and equity funding from overseas capital markets. The private corporate
infrastructure 12.3
sector's sources of funding therefore diversified. During 2007-08, internal sources of
The government would have to increase its development expenditure, especially in
funds (retained earnings) met almost 50 per cent, and borrowings 21 per cent, of the Private
Investment
Govt
education, healthcare and infrastructure, and encourage private sector participation to consumption Consumption
total funding requirement of non-financial private sector companies. 2009-10
boost the long-term growth prospects of the economy.

India's investment efficiency also improved

Investment
Even as funding availability increased, the efficiency of investment, an equally
A sharp increase in private corporate investment led to a structural shift in
important input for economic growth, improved. India's average incremental capital
investment rate
output ratio (ICOR), which was 4.1 during the 1990s, fell to 3.6 between 2004 and
India's investment rate climbed sharply from around 26 per cent in 2003-04 to its peak
2008, as per an RBI report. In contrast, China's investment, with its ICOR rising from
of 37.6 per cent of GDP in 2007-08, accelerating GDP growth to about 9 per cent
3.5 in the 1990s to 4.1 in the 2000s, became less efficient.
during the same period.

Investment flows mainly to industries and services, agricultural investment remains

Private corporate investment rose rapidly in recent years (Figure 3). In 2007-08, it was
stagnant (Figure 4)
2.4 times the investment rate in 2003-04. The corporate sector's investment rose due
A cause of concern, however, is that India's investment is highly skewed towards
to two main reasons; i) the process of economic liberalisation, with reforms of
industrial and services sectors, with agriculture investment remaining stagnant (see
industrial policy and external sector, made the business environment conducive for
agriculture section).

Figure 3: Private sector investment is rapidly expanding Figure 4: Sectoral investment is skewed towards industry and services

% of GDP Rs million
20
40

16
30 Public
Services
12
20 Private corporate
8
Industry
10 4
Household
Agriculture
0 0
1972-73 1981-82 1990-91 1999-00 2008-09 1999-00 2002-03 2005-06 2008-09

Source: Central Statistical Organisation Source: Central Statistical Organisation

 CRISIL Centre for Economic Research
8 India: Raising the Growth Bar, January 2011 9

investment; and ii) rising household demand, particularly on consumer durables,

private consumption expenditure rather than on increasing corporate or public
accelerated private corporate investment (see section on domestic consumption for
investment in sectors such as infrastructure and education. A decline in development
further details).
expenditure, which has fallen to 1.4 per cent of GDP in the 2000s from 2.1 per cent in
the previous decade, is another concern about government expenditure.
The liberalisation process created a favourable environment for firms to increase their
manufacturing capacity by increasing the availability and reducing the cost of capital.
Outlook
The initial focus of liberalisation was to lift internal controls to enable the private
Private consumption will remain the largest demand driver of the Indian economy
sector to expand and improve its efficiency. Coinciding with the development and
over the next five years, although its share in GDP will decline marginally.
expansion of the equity market, this supported the corporate sector's rising retained
Real private consumption will grow strongly and remain the largest demand driver in
earnings and increased domestic bank credit for financing corporate investment.
India's economy. An increase in discretionary income is likely to boost household
spending on goods like consumer durables and automobiles, and services such as Private consumption is the largest demand
In the next stage, the focus was on partially removing restrictions on the external driver, but investment rises rapidly
hotels and restaurants over 2010-11 to 2015-16.
sector, to allow Indian firms to import technology and capital inputs at a decreased % in GDP
57.3
cost, and tap foreign financial markets for funding - by way of external commercial
The government would have to focus its expenditure on health, education and 33.7
borrowings and equity funding from overseas capital markets. The private corporate
infrastructure 12.3
sector's sources of funding therefore diversified. During 2007-08, internal sources of
The government would have to increase its development expenditure, especially in
funds (retained earnings) met almost 50 per cent, and borrowings 21 per cent, of the Private
Investment
Govt
education, healthcare and infrastructure, and encourage private sector participation to consumption Consumption
total funding requirement of non-financial private sector companies. 2009-10
boost the long-term growth prospects of the economy.

India's investment efficiency also improved

Investment
Even as funding availability increased, the efficiency of investment, an equally
A sharp increase in private corporate investment led to a structural shift in
important input for economic growth, improved. India's average incremental capital
investment rate
output ratio (ICOR), which was 4.1 during the 1990s, fell to 3.6 between 2004 and
India's investment rate climbed sharply from around 26 per cent in 2003-04 to its peak
2008, as per an RBI report. In contrast, China's investment, with its ICOR rising from
of 37.6 per cent of GDP in 2007-08, accelerating GDP growth to about 9 per cent
3.5 in the 1990s to 4.1 in the 2000s, became less efficient.
during the same period.

Investment flows mainly to industries and services, agricultural investment remains

Private corporate investment rose rapidly in recent years (Figure 3). In 2007-08, it was
stagnant (Figure 4)
2.4 times the investment rate in 2003-04. The corporate sector's investment rose due
A cause of concern, however, is that India's investment is highly skewed towards
to two main reasons; i) the process of economic liberalisation, with reforms of
industrial and services sectors, with agriculture investment remaining stagnant (see
industrial policy and external sector, made the business environment conducive for
agriculture section).

Figure 3: Private sector investment is rapidly expanding Figure 4: Sectoral investment is skewed towards industry and services

% of GDP Rs million
20
40

16
30 Public
Services
12
20 Private corporate
8
Industry
10 4
Household
Agriculture
0 0
1972-73 1981-82 1990-91 1999-00 2008-09 1999-00 2002-03 2005-06 2008-09

Source: Central Statistical Organisation Source: Central Statistical Organisation

 CRISIL Centre for Economic Research
10 India: Raising the Growth Bar, January 2011 11

Public investment remains low, limiting the scale of overall investment
As a share of gross fixed capital formation of central government, budgetary allocation
for physical infrastructure has fallen to 56 per cent as per 2010-11 budget estimates,
from 72.6 per cent in 2003-04, while allocation for investment in agriculture remains
dismally low at 2 per cent in 2010-11. Similarly, public sector allocation on social
services such as health care, education, urban development etc. is again low at 6 per
cent.
Outlook
The significance of investments in economic growth will increase if public
investment rises
Investment will remain a key driver of economic growth over the next five years. If
India has to sustain GDP growth at 8.4 per cent, the investment rate will have to
increase to the pre-crisis level of 37 per cent. The cause for concern would continue to
be inadequate public investment in agriculture and services such as education,
healthcare and infrastructure. If the government steps up investment in these critical
areas, investments will become an even more significant driver of economic growth.
While the share of private corporate investment had fallen to 13 per cent of GDP in
2008-09 from 16 per cent in 2007-08, given the current momentum it is expected to
pick up and maintain its level in 2007-08 over 2010-11 to 2015-16.
External trade
India's external trade has increased strongly over the past 10 years
India's exports more than quadrupled over 2000-01 to 2009-10, driven by sharp growth
in services exports. And, driven by rising domestic demand, India's imports
(merchandise and services) increased in the same period by over five times to US$
346.4 billion in 2009-10 (Figure 5).
Total exports of goods and services rose from US$ 60.9 billion in 2000-01 to US$
272.5 billion by 2009-10. India's share of global exports therefore increased from 0.8
per cent in 2003 to 1.2 per cent in 2009, as per World Trade Organization's estimates.
Growing at a compounded annual rate of 25.5 per cent, services exports crossed US$
100 billion in 2008-09, rising from a modest US$ 16.3 billion in 2000-01. And, exports
of manufactured goods more than tripled to US$ 115.3 billion in 2009-10 from US$
34.3 billion in 2000-01.
A conscious shift away from import substitution policies and an emphasis on
increasing exports, characterised India's external trade policy since 1991. And, that has
been a key driver of India's trade growth in the 2000s. Reduced customs duties and
simplified imports procedure allowed corporate India, particularly the manufacturing
sector, to gain easy access to global technology and raw materials, at a competitive
price.
As imports picked up in 1990s, it became imperative to increase the country's exports
to keep trade deficit under control. The industrial deregulation and reforms that began
in 1991 subjected Indian industry to increased competition and raised their
productivity. As a result, when global growth picked up in the decade of 2000, some
segments of Indian industry were well positioned to capitalise on emerging export
opportunity. Export participation raised productivity of these industries further due to
technology transfer and continuous innovation. Also, exporting helped boost
employment. India's IT/ITeS sector is a prime example. The export-oriented IT/ITeS
sector is one of the largest employment generators in India's organized sector. As per
CRISIL Research, employment in this sector increased from 180 thousand in 2002-03
to nearly 830 thousand in 2009-10.
Even while India remains largely a domestic demand driven economy, India's exports
to GDP ratio increased to 21 per cent in 2009-10 from 13 per cent in 2000-2001.
India's rising exports gave a stimulus to domestic production whereas its growing
imports supported domestic production by supplying necessary raw materials,
technology, and consumer and capital goods.

Figure 5: A surge in India's external trade

US$ billion Merchandise Services
350
300
250
200
150
100
50
0
2001-02

2001-02
2005-06

2007-08

2005-06

2007-08
2009-10

2009-10
2003-04

2003-04

Exports Imports

Source: Reserve Bank of India

 CRISIL Centre for Economic Research
10 India: Raising the Growth Bar, January 2011 11

Public investment remains low, limiting the scale of overall investment
As a share of gross fixed capital formation of central government, budgetary allocation
for physical infrastructure has fallen to 56 per cent as per 2010-11 budget estimates,
from 72.6 per cent in 2003-04, while allocation for investment in agriculture remains
dismally low at 2 per cent in 2010-11. Similarly, public sector allocation on social
services such as health care, education, urban development etc. is again low at 6 per
cent.
Outlook
The significance of investments in economic growth will increase if public
investment rises
Investment will remain a key driver of economic growth over the next five years. If
India has to sustain GDP growth at 8.4 per cent, the investment rate will have to
increase to the pre-crisis level of 37 per cent. The cause for concern would continue to
be inadequate public investment in agriculture and services such as education,
healthcare and infrastructure. If the government steps up investment in these critical
areas, investments will become an even more significant driver of economic growth.
While the share of private corporate investment had fallen to 13 per cent of GDP in
2008-09 from 16 per cent in 2007-08, given the current momentum it is expected to
pick up and maintain its level in 2007-08 over 2010-11 to 2015-16.
External trade
India's external trade has increased strongly over the past 10 years
India's exports more than quadrupled over 2000-01 to 2009-10, driven by sharp growth
in services exports. And, driven by rising domestic demand, India's imports
(merchandise and services) increased in the same period by over five times to US$
346.4 billion in 2009-10 (Figure 5).
Total exports of goods and services rose from US$ 60.9 billion in 2000-01 to US$
272.5 billion by 2009-10. India's share of global exports therefore increased from 0.8
per cent in 2003 to 1.2 per cent in 2009, as per World Trade Organization's estimates.
Growing at a compounded annual rate of 25.5 per cent, services exports crossed US$
100 billion in 2008-09, rising from a modest US$ 16.3 billion in 2000-01. And, exports
of manufactured goods more than tripled to US$ 115.3 billion in 2009-10 from US$
34.3 billion in 2000-01.
A conscious shift away from import substitution policies and an emphasis on
increasing exports, characterised India's external trade policy since 1991. And, that has
been a key driver of India's trade growth in the 2000s. Reduced customs duties and
simplified imports procedure allowed corporate India, particularly the manufacturing
sector, to gain easy access to global technology and raw materials, at a competitive
price.
As imports picked up in 1990s, it became imperative to increase the country's exports
to keep trade deficit under control. The industrial deregulation and reforms that began
in 1991 subjected Indian industry to increased competition and raised their
productivity. As a result, when global growth picked up in the decade of 2000, some
segments of Indian industry were well positioned to capitalise on emerging export
opportunity. Export participation raised productivity of these industries further due to
technology transfer and continuous innovation. Also, exporting helped boost
employment. India's IT/ITeS sector is a prime example. The export-oriented IT/ITeS
sector is one of the largest employment generators in India's organized sector. As per
CRISIL Research, employment in this sector increased from 180 thousand in 2002-03
to nearly 830 thousand in 2009-10.
Even while India remains largely a domestic demand driven economy, India's exports
to GDP ratio increased to 21 per cent in 2009-10 from 13 per cent in 2000-2001.
India's rising exports gave a stimulus to domestic production whereas its growing
imports supported domestic production by supplying necessary raw materials,
technology, and consumer and capital goods.

Figure 5: A surge in India's external trade

US$ billion Merchandise Services
350
300
250
200
150
100
50
0
2001-02

2001-02
2005-06

2007-08

2005-06

2007-08
2009-10

2009-10
2003-04

2003-04

Exports Imports

Source: Reserve Bank of India

 CRISIL Centre for Economic Research
12
India's diversified export products
Among India's exports of manufactured goods, exports of engineering goods have
grown most rapidly, followed by exports of machinery and instruments, and transport
equipment (Figure 6). The share of engineering products increased from 14 per cent
in 2000-01, to 21.5 per cent in 2009-10, contributing more than one-fifth of India's
total merchandise exports. During the recent years, petroleum and crude products
have emerged as important export items
India's top six imported items are petroleum and crude products, gems and jewellery,
non-electrical machinery, coke coal and briquettes, iron and steel and organic
chemicals. The share of these items in India's total imports increased from more than
65 per cent in 2000 to 72 per cent in 2009. The share of crude and petroleum
products in total imports grew at a steady 30 per cent from US$ 15.7 billion in 2000-
01 to US$ 86.8 billion in 2009-10, driven mainly by a 115 per cent jump in crude oil
prices. Among non-oil items, imports of capital goods (including electronic goods and
non-electrical machinery goods) grew at 22.6 per cent over the period.
India's imports from China and Middle-East rise
Adoption of regional and bilateral free trade agreements helped India diversify its
export destinations and products. After signing the trade pacts, India's trade with
SAARC countries, Singapore, China and Brazil increased significantly. Despite the
market diversification, UAE and USA - India's top two export destinations - still
accounted for about 25 per cent of India's total merchandise exports in 2009-10. With
a share of 6.5 per cent in 2009-10, China emerged as India's third largest exports
destination, with India's exports to the country rising from US$ 674 million in 2000-
01 to US$ 11.5 billion in 2009-10 (Figure 7).
China has also emerged as India's largest import partner, with its share in total imports
rising from 3 per cent in 2000-01 to 10.7 per cent in 2009-10. Electronics and non-
electrical machinery goods are the main items imported from China. Interestingly, two
Figure 6: India's diversifying export basket
%
25 2000-01 2009-10
20
15
10
5
0 Engineering Gems & Petroleum Agriculture Chemicals Textile Ores & Leather &
goods jewellery products & allied & allied & textile minerals manufactures
products products products
Source: Directorate General of Commercial Intelligence and Statistics
India: Raising the Growth Bar, January 2011 13
middle-east economies - UAE and Saudi Arabia - are now among India's top three
import partners. UAE's share in India's total imports increased from 1.3 per cent in
2000-01 to 6.8 per cent in 2009-10. India mainly imports oil, oil products, gold, pearls
and precious stones from UAE. USA's share in India's total imports remained stable at
6.5 per cent over the period.
Outlook
Only reforms can take India's manufactured goods' exports closer to their potential
CRISIL expects India to achieve its export target in the current year. Although sluggish
recovery in the US and European economies may not allow exports to pick up in the
current year to the extent that it grew before the global financial crisis, India is likely to
mitigate the shortfall by focusing on fast-recovering developing economies in Asia.
After declining by 3.6 per cent in 2009-10, India's exports have been growing at more
than 10 per cent since the start of 2010-11. Thus, despite sluggish global recovery,
India's exports will rise to US$ 200 billion in 2010-11.
However, to achieve its Foreign Trade Policy target of 25 per cent annual exports
growth over 2009 to 2014, India would need to remove infrastructure constraints such
as inferior power services and low turnaround time of cargo in ports, simplify complex
administrative processes, and minimise delays in clearing imported inputs necessary for
exports that substantially push up transaction cost for exports.
Although external trade has been a relatively less important contributor to India's
economic growth, India will need to increase its share of 1.2 per cent in world exports,
by focusing on the rapidly growing markets of China and South-East Asia.
Imports will continue to outpace exports, but widening trade deficit may not be a
concern
Although imports will outpace exports, a healthy surplus in the capital account will
enable India to address its widening trade deficit. As domestic demand growth is likely
to be robust over 2011-12 to 2015-16, India's imports of crude oil and petroleum
products and technology, which are critical inputs to industry, and imports of
consumer goods will continue to rise strongly. Since growth in merchandise imports
Figure 7: Top 10 partners in India's commodity imports
would outpace exports growth, CRISIL expects India's trade deficit to widen over the
%
2000-01 2009-10
12 next five years.
10
8
6
4
2
0
China UAE Saudi US Switzerland Australia Iran Germany Indonesia South
Arabia Korea
Source: Directorate General of Commercial Intelligence and Statistics
 CRISIL Centre for Economic Research
12
India's diversified export products
Among India's exports of manufactured goods, exports of engineering goods have
grown most rapidly, followed by exports of machinery and instruments, and transport
equipment (Figure 6). The share of engineering products increased from 14 per cent
in 2000-01, to 21.5 per cent in 2009-10, contributing more than one-fifth of India's
total merchandise exports. During the recent years, petroleum and crude products
have emerged as important export items
India's top six imported items are petroleum and crude products, gems and jewellery,
non-electrical machinery, coke coal and briquettes, iron and steel and organic
chemicals. The share of these items in India's total imports increased from more than
65 per cent in 2000 to 72 per cent in 2009. The share of crude and petroleum
products in total imports grew at a steady 30 per cent from US$ 15.7 billion in 2000-
01 to US$ 86.8 billion in 2009-10, driven mainly by a 115 per cent jump in crude oil
prices. Among non-oil items, imports of capital goods (including electronic goods and
non-electrical machinery goods) grew at 22.6 per cent over the period.
India's imports from China and Middle-East rise
Adoption of regional and bilateral free trade agreements helped India diversify its
export destinations and products. After signing the trade pacts, India's trade with
SAARC countries, Singapore, China and Brazil increased significantly. Despite the
market diversification, UAE and USA - India's top two export destinations - still
accounted for about 25 per cent of India's total merchandise exports in 2009-10. With
a share of 6.5 per cent in 2009-10, China emerged as India's third largest exports
destination, with India's exports to the country rising from US$ 674 million in 2000-
01 to US$ 11.5 billion in 2009-10 (Figure 7).
China has also emerged as India's largest import partner, with its share in total imports
rising from 3 per cent in 2000-01 to 10.7 per cent in 2009-10. Electronics and non-
electrical machinery goods are the main items imported from China. Interestingly, two
Figure 6: India's diversifying export basket
%
25 2000-01 2009-10
20
15
10
5
0 Engineering Gems & Petroleum Agriculture Chemicals Textile Ores & Leather &
goods jewellery products & allied & allied & textile minerals manufactures
products products products
Source: Directorate General of Commercial Intelligence and Statistics
India: Raising the Growth Bar, January 2011 13
middle-east economies - UAE and Saudi Arabia - are now among India's top three
import partners. UAE's share in India's total imports increased from 1.3 per cent in
2000-01 to 6.8 per cent in 2009-10. India mainly imports oil, oil products, gold, pearls
and precious stones from UAE. USA's share in India's total imports remained stable at
6.5 per cent over the period.
Outlook
Only reforms can take India's manufactured goods' exports closer to their potential
CRISIL expects India to achieve its export target in the current year. Although sluggish
recovery in the US and European economies may not allow exports to pick up in the
current year to the extent that it grew before the global financial crisis, India is likely to
mitigate the shortfall by focusing on fast-recovering developing economies in Asia.
After declining by 3.6 per cent in 2009-10, India's exports have been growing at more
than 10 per cent since the start of 2010-11. Thus, despite sluggish global recovery,
India's exports will rise to US$ 200 billion in 2010-11.
However, to achieve its Foreign Trade Policy target of 25 per cent annual exports
growth over 2009 to 2014, India would need to remove infrastructure constraints such
as inferior power services and low turnaround time of cargo in ports, simplify complex
administrative processes, and minimise delays in clearing imported inputs necessary for
exports that substantially push up transaction cost for exports.
Although external trade has been a relatively less important contributor to India's
economic growth, India will need to increase its share of 1.2 per cent in world exports,
by focusing on the rapidly growing markets of China and South-East Asia.
Imports will continue to outpace exports, but widening trade deficit may not be a
concern
Although imports will outpace exports, a healthy surplus in the capital account will
enable India to address its widening trade deficit. As domestic demand growth is likely
to be robust over 2011-12 to 2015-16, India's imports of crude oil and petroleum
products and technology, which are critical inputs to industry, and imports of
consumer goods will continue to rise strongly. Since growth in merchandise imports
Figure 7: Top 10 partners in India's commodity imports
would outpace exports growth, CRISIL expects India's trade deficit to widen over the
%
2000-01 2009-10
12 next five years.
10
8
6
4
2
0
China UAE Saudi US Switzerland Australia Iran Germany Indonesia South
Arabia Korea
Source: Directorate General of Commercial Intelligence and Statistics
Services and industry will remain the key
drivers of economic growth but agriculture will
India: Raising the Growth Bar, January 2011 15
have to ensure adequate food supply to keep
inflation rates manageable.

Agriculture
A falling share of GDP does not undermine the importance of the agriculture
sector
The average growth of agriculture has dropped from 3.2 per cent in the 1990s to 2.5 Volatile agriculture growth still depends on
monsoons
per cent in the current decade. Agricultural growth, unlike GDP growth, has also been

Expanding supply increasingly volatile in the current decade, than in the previous decade (Figure 8).
After a good run from 2005-06 to 2007-08, when the average growth was 4.6 per cent, 1980-81 1993-94 2010-11F

potential agricultural growth fell to 1.6 per cent in 2008-09, and was near zero in 2009-10.
CRISIL now expects agriculture growth to rise sharply to 5.0 per cent in 2010-11 on
account of low base and good monsoons. While the coefficient of variation for
Key points annual GDP growth has remained at 0.3 in the current and the previous decades, for
Chapter 2 agricultural growth it has increased from 1.2 in the previous decade to 2 in the current
l Agricultural growth will remain volatile in future, with
decade.
an excessive dependence on the monsoons. During the
past decade, various structural factors - decline in
The share of agriculture in GDP therefore declined from nearly 19.0 per cent in 2005-
public expenditure on capital formation, and research
06 to about 15 per cent in 2009-10. Despite the decline in its share in GDP, agriculture
and extension; and a rising share of economically
remains an important sector of the Indian economy. Agriculture contributed 9.9 per
unviable land holdings - adversely affected agricultural
cent of total exports, and employed 45.5 per cent of India's workforce in 2009-10.
productivity. As a result, agricultural growth became
more volatile in the 2000s than in the 1990s. The per
A combination of structural factors have adversely affected agricultural growth
capita availability of food grain has therefore reduced,
Although erratic monsoons have been a direct factor in the sharp decline in
exerting pressure on food prices.
agricultural growth, a combination of three structural factors have shackled India's
l Industry will be a key driver of India's GDP growth agriculture sector;
over 2011-2012 to 2015-2016. With appropriate policy i) stagnant capital formation
support and investment in technology, certain sectors - ii) fragmentation of land holding
notably automobiles, chemical and chemical products iii) decline in public expenditure on agricultural research and extension services
and basic metals - have grown rapidly during economic
upturn. To realise the true potential of industrial
growth however, the government would have to
upgrade infrastructure, and introduce reforms that
speed up business operations and reduce transaction
cost.

l Given its 55 per cent share in overall GDP and its Figure 8: Agriculture growth is more volatile Figure 9: Low capital formation in agriculture is affecting output
resilience during the economic crisis, services will y-o-y% Rs million
12 8000
remain the most significant contributor to GDP GDP
8
growth. Over 2000-01 to 2009-10, services grew at an 6000
4 Agriculture
average of 8.9 per cent whereas GDP grew at an Private
0 4000
average of 7.2 per cent. Growth in services, which can
-4
be sustained mainly by the availability of trained and 2000
-8 Public
skilled manpower, will hinge on the quality of higher
-12 0
education.
1990-91 1994-95 1998-99 2002-03 2006-07 H12010-11 1980-81 1989-90 1998-99 2007-08
Source: Central Statistical Organisation Source: Central Statistical Organisation
Services and industry will remain the key
drivers of economic growth but agriculture will
India: Raising the Growth Bar, January 2011 15
have to ensure adequate food supply to keep
inflation rates manageable.

Agriculture
A falling share of GDP does not undermine the importance of the agriculture
sector
The average growth of agriculture has dropped from 3.2 per cent in the 1990s to 2.5 Volatile agriculture growth still depends on
monsoons
per cent in the current decade. Agricultural growth, unlike GDP growth, has also been

Expanding supply increasingly volatile in the current decade, than in the previous decade (Figure 8).
After a good run from 2005-06 to 2007-08, when the average growth was 4.6 per cent, 1980-81 1993-94 2010-11F

potential agricultural growth fell to 1.6 per cent in 2008-09, and was near zero in 2009-10.
CRISIL now expects agriculture growth to rise sharply to 5.0 per cent in 2010-11 on
account of low base and good monsoons. While the coefficient of variation for
Key points annual GDP growth has remained at 0.3 in the current and the previous decades, for
Chapter 2 agricultural growth it has increased from 1.2 in the previous decade to 2 in the current
l Agricultural growth will remain volatile in future, with
decade.
an excessive dependence on the monsoons. During the
past decade, various structural factors - decline in
The share of agriculture in GDP therefore declined from nearly 19.0 per cent in 2005-
public expenditure on capital formation, and research
06 to about 15 per cent in 2009-10. Despite the decline in its share in GDP, agriculture
and extension; and a rising share of economically
remains an important sector of the Indian economy. Agriculture contributed 9.9 per
unviable land holdings - adversely affected agricultural
cent of total exports, and employed 45.5 per cent of India's workforce in 2009-10.
productivity. As a result, agricultural growth became
more volatile in the 2000s than in the 1990s. The per
A combination of structural factors have adversely affected agricultural growth
capita availability of food grain has therefore reduced,
Although erratic monsoons have been a direct factor in the sharp decline in
exerting pressure on food prices.
agricultural growth, a combination of three structural factors have shackled India's
l Industry will be a key driver of India's GDP growth agriculture sector;
over 2011-2012 to 2015-2016. With appropriate policy i) stagnant capital formation
support and investment in technology, certain sectors - ii) fragmentation of land holding
notably automobiles, chemical and chemical products iii) decline in public expenditure on agricultural research and extension services
and basic metals - have grown rapidly during economic
upturn. To realise the true potential of industrial
growth however, the government would have to
upgrade infrastructure, and introduce reforms that
speed up business operations and reduce transaction
cost.

l Given its 55 per cent share in overall GDP and its Figure 8: Agriculture growth is more volatile Figure 9: Low capital formation in agriculture is affecting output
resilience during the economic crisis, services will y-o-y% Rs million
12 8000
remain the most significant contributor to GDP GDP
8
growth. Over 2000-01 to 2009-10, services grew at an 6000
4 Agriculture
average of 8.9 per cent whereas GDP grew at an Private
0 4000
average of 7.2 per cent. Growth in services, which can
-4
be sustained mainly by the availability of trained and 2000
-8 Public
skilled manpower, will hinge on the quality of higher
-12 0
education.
1990-91 1994-95 1998-99 2002-03 2006-07 H12010-11 1980-81 1989-90 1998-99 2007-08
Source: Central Statistical Organisation Source: Central Statistical Organisation
 CRISIL Centre for Economic Research
16 India: Raising the Growth Bar, January 2011 17

This has increased the dependence of agriculture on monsoons and shrouded its difficult for a majority of Indian farmers to get bank credit for funding new
growth potential in uncertainty. technology or investing on more capital-intensive land improvement programmes that
are vital to restore farm productivity.
i) Stagnant capital formation
Aggregate capital formation in agriculture, after stagnating in the 1980s and the 1990s, iii) Decline in public expenditure on agricultural research and extension services
revived towards the end of 1990s (Figure 9). Public capital formation declined through Growth in real public expenditure on agricultural research and extension services
the 1980s and the 1990s, and started rising only after 2003-04. Private capital slowed since 1990. Growth of expenditure in extension and training services was the
formation, which collapsed with the onset of the economic reforms in 1991, revived highest in the 1960s, the last time when agricultural decadel growth rate accelerated
since the second half of the nineties, more sharply since 1998-99. (Figure 11).

Capital formation in public and private sectors are not substitutes and therefore they Outlook
contribute differently to the production process. Public investment, unlike private Sustained investment and reforms would be critical for unlocking the potential of
investment, is in the nature of a public good, e.g. creating roads, embankments, agriculture
irrigation networks etc. Therefore, the impact of the depressed state of public capital In future, sustained agricultural growth will hinge on the government's ability to push
formation is quite unlikely to be fully offset by the rising private investment. Moreover, land holding reforms and increase public investment in key agricultural inputs such as
as the public investment has a longer gestation period its impact gets realized with a irrigation. Until then, agricultural growth will remain predominantly dependent on
considerable lag. In other words, the way the decline in public capital formation of monsoons. CRISIL expects average agriculture growth at 3.0 per cent over 2010-11 to
eighties and nineties has adversely impacted the agricultural output in the current 2015-16, if monsoons remain normal during the period.
decade, the rise in public capital formation of the current decade is likely to impact the
agricultural output positively in the coming decades. Industry
Despite its rapid growth, the potential growth of industry has not increased
ii) Fragmentation of land holding significantly
The farm size in India is continuously shrinking. The share of marginal and small farm The liberalisation process initiated in the industrial and trade regime since 1991 led to
holdings of less than two hectares rose from nearly 62 per cent in 1960-61 to 86 per impressive industrial growth in the 2000s (Figure 12). Industrial growth, which
cent to 2002-03 (Figure 10). A significant increase in the share of land holdings in the exceeded 10 per cent between 2004-05 and 2007-08, nose-dived to 3.9 per cent in
smallest size category, and a clear decline in the share of holdings in all other sizes is 2008-09 with the onset of the global financial crisis, before staging a dramatic
likely to adversely affect India's agricultural output. recovery at 8.2 per cent in 2009-10. In the first half of 2010-11, average industrial
growth was estimated at 10.1 per cent; CRISIL expects the average growth for 2010-
With little scope to increase area under cultivation, agricultural growth then needs to 11 at 8.6 per cent. The resilience of the industrial sector after the global financial crisis
be driven by productivity increases. Uneconomic size of land holdings makes it

Figure 10: Shrinking farm size affects agriculture Figure 11: Slow growth in public expenditure on research & development Figure 12: Robust industrial growth provides resilience to GDP growth
% share y-o-y% Research & Education Extension & Training y-o-y%
100 12
12
10.7
Marginal and Small (<2 hectares) 9.5 Industry GDP
80 10 10
Overall GDP
8 7.0 8
6.5 6.3
60
6 6
4.8
40 4
4
2.0
2
20 2
Semi- medium to Large (>2) 0
-0.1 0
0 -2
1960-61 1970-71 1981-82 1991-92 2002-03 1960s 1970s 1980s 1990-2005 1970s 2000-01 2003-04 2006-07 2009-10
Source: 'Some aspects of operational land holdings in India 2002-03', Source: Pulapre, Golait and Kumar (2008), Agricultural Growth in India since 1991, Source: Central Statistical Organisation
National Sample Survey Report no. 492 Reserve Bank of India
 CRISIL Centre for Economic Research
16 India: Raising the Growth Bar, January 2011 17

This has increased the dependence of agriculture on monsoons and shrouded its difficult for a majority of Indian farmers to get bank credit for funding new
growth potential in uncertainty. technology or investing on more capital-intensive land improvement programmes that
are vital to restore farm productivity.
i) Stagnant capital formation
Aggregate capital formation in agriculture, after stagnating in the 1980s and the 1990s, iii) Decline in public expenditure on agricultural research and extension services
revived towards the end of 1990s (Figure 9). Public capital formation declined through Growth in real public expenditure on agricultural research and extension services
the 1980s and the 1990s, and started rising only after 2003-04. Private capital slowed since 1990. Growth of expenditure in extension and training services was the
formation, which collapsed with the onset of the economic reforms in 1991, revived highest in the 1960s, the last time when agricultural decadel growth rate accelerated
since the second half of the nineties, more sharply since 1998-99. (Figure 11).

Capital formation in public and private sectors are not substitutes and therefore they Outlook
contribute differently to the production process. Public investment, unlike private Sustained investment and reforms would be critical for unlocking the potential of
investment, is in the nature of a public good, e.g. creating roads, embankments, agriculture
irrigation networks etc. Therefore, the impact of the depressed state of public capital In future, sustained agricultural growth will hinge on the government's ability to push
formation is quite unlikely to be fully offset by the rising private investment. Moreover, land holding reforms and increase public investment in key agricultural inputs such as
as the public investment has a longer gestation period its impact gets realized with a irrigation. Until then, agricultural growth will remain predominantly dependent on
considerable lag. In other words, the way the decline in public capital formation of monsoons. CRISIL expects average agriculture growth at 3.0 per cent over 2010-11 to
eighties and nineties has adversely impacted the agricultural output in the current 2015-16, if monsoons remain normal during the period.
decade, the rise in public capital formation of the current decade is likely to impact the
agricultural output positively in the coming decades. Industry
Despite its rapid growth, the potential growth of industry has not increased
ii) Fragmentation of land holding significantly
The farm size in India is continuously shrinking. The share of marginal and small farm The liberalisation process initiated in the industrial and trade regime since 1991 led to
holdings of less than two hectares rose from nearly 62 per cent in 1960-61 to 86 per impressive industrial growth in the 2000s (Figure 12). Industrial growth, which
cent to 2002-03 (Figure 10). A significant increase in the share of land holdings in the exceeded 10 per cent between 2004-05 and 2007-08, nose-dived to 3.9 per cent in
smallest size category, and a clear decline in the share of holdings in all other sizes is 2008-09 with the onset of the global financial crisis, before staging a dramatic
likely to adversely affect India's agricultural output. recovery at 8.2 per cent in 2009-10. In the first half of 2010-11, average industrial
growth was estimated at 10.1 per cent; CRISIL expects the average growth for 2010-
With little scope to increase area under cultivation, agricultural growth then needs to 11 at 8.6 per cent. The resilience of the industrial sector after the global financial crisis
be driven by productivity increases. Uneconomic size of land holdings makes it

Figure 10: Shrinking farm size affects agriculture Figure 11: Slow growth in public expenditure on research & development Figure 12: Robust industrial growth provides resilience to GDP growth
% share y-o-y% Research & Education Extension & Training y-o-y%
100 12
12
10.7
Marginal and Small (<2 hectares) 9.5 Industry GDP
80 10 10
Overall GDP
8 7.0 8
6.5 6.3
60
6 6
4.8
40 4
4
2.0
2
20 2
Semi- medium to Large (>2) 0
-0.1 0
0 -2
1960-61 1970-71 1981-82 1991-92 2002-03 1960s 1970s 1980s 1990-2005 1970s 2000-01 2003-04 2006-07 2009-10
Source: 'Some aspects of operational land holdings in India 2002-03', Source: Pulapre, Golait and Kumar (2008), Agricultural Growth in India since 1991, Source: Central Statistical Organisation
National Sample Survey Report no. 492 Reserve Bank of India
 CRISIL Centre for Economic Research
18 India: Raising the Growth Bar, January 2011 19

of 2008 is a reflection of its growing innate strength, shaped by the economic reforms Outlook
initiated in India since 1991. Industrial growth could be sustained at about 8.5 per cent over the next five
years, but improved infrastructure and structural reforms would be key to
Despite the rapid industrial growth, the share of industry in overall GDP has remained accelerate growth
fairly unchanged for decades. From an average of 22.6 per cent in 1970s, its share rose Given a regime of liberalised trade, deregulated interest rate, and the increasing Industrial growth was high in phases

to 26.4 per cent during the 1990s, and crept to 28.6 per cent in 2009-10. The current
share of industry in India's GDP does not reflect its potential, especially when
compared with the transformational industrial growth in other Asian countries (Figure
13).
Yet, the remarkable growth in certain sectors of industry, notably automobiles,
chemical and chemical products and basic metals, suggest that the true potential of
industrial growth can be unlocked by increasing the scale of operations and investment
in technology. These sectors, which successfully leveraged India's competitive
advantage in labour cost, integrated themselves with global production chains and
realised rapid export growth.
Industry has not been able to generate adequate employment opportunities to a
larger section of the population
The share of industry in total workforce rose from 15.4 per cent in 1993-94 to only
18.8 per cent in 2004-05, according to NSSO's (National Sample Survey Organisation)
series of large sample surveys, largely as a result of strict labour laws. This is a cause of
concern since India, over the next decade, has to create gainful employment
opportunities for a large section of its population that has varying degrees of skill and
qualification. And, the industrial sector would have to be the backbone of this
employment creation initiative. For a country with the largest young population in the
world, this is a challenge of a significant order.
competitiveness of domestic producers, CRISIL expects industrial growth to be
about 8.5 per cent over 2011-12 to 2015-16. However, the outlook for growth will
1980-81 1993-94 2010-11F
largely depend on the government's ability to remove infrastructure constraints,
labour market rigidities and entry and exit barriers for business, and relax land
acquisition norms.
India's industrial growth has come at the price of environmental degradation
If liberalised industrial policies in developing countries are not safeguarded by
stringent environmental policies, pollution-intensive industries would tend to flourish
in those countries. Has this been the case in India?
Data from the Annual Survey of Industries (analysed using on United Nations
Industrial Development Organisation's classification) shows that the share of highly
polluting industries in manufacturing increased substantially during the post-reform
period, since 1991. This holds true irrespective of whether industrial expansion is
measured in value of output (Figure 14) or gross value added or by the number of
workers employed (Figure 15). For instance, the share of highly polluting industries in
value of output increased from 36.9 per cent in 1990-91 to 49.2 per cent in 2007-08.
Their share in gross value added rose from 34.3 per cent to 48.1 per cent, and in
number of workers, from 20.4 per cent to 28.8 per cent, during the period.
Although less polluting industries show a similar pattern, but due to their meager
share in total manufacturing, an increase in their share does not hold as much
significance from the standpoint of industrial pollution as that of more polluting
industries.

Figure 13: Share of industry in India's economy remains low Figure 14: Polluting industries have increased in output value terms... Figure 15: ...and in terms of number of workers employed
% of GDP More polluting industries Somewhat polluting industries Less polluting indsutries More polluting industries Somewhat polluting industries Less polluting indsutries
60

50 2007-08 2007-08
40

30
2001-02 2001-02
20

10
1990-91 1990-91
0
1970s 1980s 1990s 2000s 1970s 1980s 1990s 2000s 1970s 1980s 1990s 2000s 1970s 1980s 1990s 2000s 1970s 1980s 1990s 2000s

Malaysia China Thailand South Korea India

0.0 20.0 40.0 60.0 80.0 100.0 0.0 20.0 40.0 60.0 80.0 100.0
Source: 'World Development Indicators', World Bank Source: Annual Survey of Industries and CRISIL estimates Source: Annual Survey of Industries and CRISIL estimates
 CRISIL Centre for Economic Research
18 India: Raising the Growth Bar, January 2011 19

of 2008 is a reflection of its growing innate strength, shaped by the economic reforms Outlook
initiated in India since 1991. Industrial growth could be sustained at about 8.5 per cent over the next five
years, but improved infrastructure and structural reforms would be key to
Despite the rapid industrial growth, the share of industry in overall GDP has remained accelerate growth
fairly unchanged for decades. From an average of 22.6 per cent in 1970s, its share rose Given a regime of liberalised trade, deregulated interest rate, and the increasing Industrial growth was high in phases

to 26.4 per cent during the 1990s, and crept to 28.6 per cent in 2009-10. The current
share of industry in India's GDP does not reflect its potential, especially when
compared with the transformational industrial growth in other Asian countries (Figure
13).
Yet, the remarkable growth in certain sectors of industry, notably automobiles,
chemical and chemical products and basic metals, suggest that the true potential of
industrial growth can be unlocked by increasing the scale of operations and investment
in technology. These sectors, which successfully leveraged India's competitive
advantage in labour cost, integrated themselves with global production chains and
realised rapid export growth.
Industry has not been able to generate adequate employment opportunities to a
larger section of the population
The share of industry in total workforce rose from 15.4 per cent in 1993-94 to only
18.8 per cent in 2004-05, according to NSSO's (National Sample Survey Organisation)
series of large sample surveys, largely as a result of strict labour laws. This is a cause of
concern since India, over the next decade, has to create gainful employment
opportunities for a large section of its population that has varying degrees of skill and
qualification. And, the industrial sector would have to be the backbone of this
employment creation initiative. For a country with the largest young population in the
world, this is a challenge of a significant order.
competitiveness of domestic producers, CRISIL expects industrial growth to be
about 8.5 per cent over 2011-12 to 2015-16. However, the outlook for growth will
1980-81 1993-94 2010-11F
largely depend on the government's ability to remove infrastructure constraints,
labour market rigidities and entry and exit barriers for business, and relax land
acquisition norms.
India's industrial growth has come at the price of environmental degradation
If liberalised industrial policies in developing countries are not safeguarded by
stringent environmental policies, pollution-intensive industries would tend to flourish
in those countries. Has this been the case in India?
Data from the Annual Survey of Industries analysed using United Nations Industrial
Development Organisation's classification, shows that the share of highly polluting
industries in manufacturing increased substantially during the post-reform period,
since 1991. This holds true irrespective of whether industrial expansion is measured
in value of output (Figure 14) or gross value added or by the number of workers
employed (Figure 15). For instance, the share of highly polluting industries in value
of output increased from 36.9 per cent in 1990-91 to 49.2 per cent in 2007-08. Their
share in gross value added rose from 34.3 per cent to 48.1 per cent, and in number of
workers, from 20.4 per cent to 28.8 per cent, during the period.
Although less polluting industries show a similar pattern, but due to their meager
share in total manufacturing, an increase in their share does not hold as much
significance from the standpoint of industrial pollution as that of more polluting
industries.

Figure 13: Share of industry in India's economy remains low Figure 14: Polluting industries have increased in output value terms... Figure 15: ...and in terms of number of workers employed
% of GDP More polluting industries Somewhat polluting industries Less polluting indsutries More polluting industries Somewhat polluting industries Less polluting indsutries
60

50 2007-08 2007-08
40

30
2001-02 2001-02
20

10
1990-91 1990-91
0
1970s 1980s 1990s 2000s 1970s 1980s 1990s 2000s 1970s 1980s 1990s 2000s 1970s 1980s 1990s 2000s 1970s 1980s 1990s 2000s

Malaysia China Thailand South Korea India

0.0 20.0 40.0 60.0 80.0 100.0 0.0 20.0 40.0 60.0 80.0 100.0
Source: 'World Development Indicators', World Bank Source: Annual Survey of Industries and CRISIL estimates Source: Annual Survey of Industries and CRISIL estimates
 CRISIL Centre for Economic Research
20
While it may be difficult to say whether industrial policy pursued since 1991 had a bias
in favour of more polluting industry or not, the structural shift in the relative share of
the type of industry in the total manufacturing indicates that clearly the more polluting
industries have expanded much faster than somewhat polluting industries between
1990-91 and 2007-08. Apparently, due to weak environmental policies, the more
pollution intensive industries generally flourish in developing countries taking
advantage of the liberalised industrial regime.
Services
Over the past decade, the resilient services sector has emerged as the most
significant contributor to India's economic growth
Growth of the services sector in India has not only been impressive but has also been
more resilient and shockproof than in industry and agriculture. Services grew at 8.9 per
cent on an average as against the average GDP growth of 7.2 per cent during the
2000s (Figure 16). After the global crisis erupted in September 2008, services growth in
India, unlike industrial growth, did not nosedive. Although it slowed from an average
of 10.4 per cent between 2005-06 and 2008-09 to 8.5 per cent in 2009-10, services
growth remained strong enough to be the key driver of India's GDP growth.
Owing to its rapid growth, the share of services in India's GDP grew from 38.4 per
cent in the 1970s to 45.9 per cent in the 1990s, and further to 56.9 per cent in 2009-10.
The share of the services sector in GDP is thus comparable to that of developed
upper-middle income countries.
The growth of the services sector, similar to industrial growth, benefited from the
economic reforms initiated since 1991. In addition, technological breakthroughs in IT
(information technology) and telecommunications, and availability of low-cost,
educated 'knowledge workers' made India an attractive destination for business
process outsourcing (BPO) and software services exports. (In simple terms, knowledge
workers are those who work in high-technology industries such as information and
Figure 16: Services grow faster than the economy
y-o-y%
12
10
Services
GDP
8
6
0
1970s 2001-02 2005-06 2009-10
Source: Central Statistical Organisation
India: Raising the Growth Bar, January 2011 21
communication technologies. CRISIL defines knowledge workers as those who
harness and use existing and new knowledge to improve productivity in an economy.)
The increase in share of services in India's total employment is however not
noteworthy - it has risen from 22.4 per cent in 1993-94 to only 25.1 per cent in 2004-
05. And, given that the jobs created in the sector are, by nature, mostly white collar
jobs, the services sector is unlikely to solve India's unemployment problem.
Knowledge-based services face a shortage of skilled manpower that is crucial to its
growth
A steady supply of skilled manpower is crucial for sustaining the rapid run-rate of Structural break in services growth in the
early 2000s
services. Although India's large and educated labour pool has been the most
prominent growth driver for the services sector, it constitutes only a small proportion
of India's total workforce. In 2007-08 only 8.7 per cent of Indian workforce was 1980-81 1993-94 2010-11F
educated up to the graduate level. Further, the quality of India's educated workforce
remains below par. For example, CRISIL Research's study on India's education
services industry, August 2010, points out, that although engineer turnout from India's
institutes will almost double over 2011 to 2015 - from 0.37 million to 0.65 million
engineers, their employability will diminish further. India therefore does not have a
stable supply chain of knowledge workers who can sustain the rising growth in
services.
Outlook
As India's GDP growth will hinge on growth in services, much will depend on how
effectively India reforms higher education to bridge the supply gap of skilled
manpower
As the services sector contributed almost 57 per cent to India's total GDP in 2009-10,
overall GDP growth over the next five years will critically depend on the growth in
this segment. Although the services sector growth has yet to return to the pre-crisis
level of above 10 per cent, it is recovering fast and expected to be 9.4 per cent in
2010-11, nearly 1 per cent higher than in 2009-10. CRISIL expects average growth in
services at 9.5 per cent between 2011-12 to 2015-16.
To sustain the growth in services, much will depend on how effectively India reforms
its higher education system to bridge the supply gap of knowledge workers. For
instance, India would have to introduce structural reforms to improve the quality of
higher education, with an emphasis on learning and skill development.
 CRISIL Centre for Economic Research
20
While it may be difficult to say whether industrial policy pursued since 1991 had a bias
in favour of more polluting industry or not, the structural shift in the relative share of
the type of industry in the total manufacturing indicates that clearly the more polluting
industries have expanded much faster than somewhat polluting industries between
1990-91 and 2007-08. Apparently, due to weak environmental policies, the more
pollution intensive industries generally flourish in developing countries taking
advantage of the liberalised industrial regime.
Services
Over the past decade, the resilient services sector has emerged as the most
significant contributor to India's economic growth
Growth of the services sector in India has not only been impressive but has also been
more resilient and shockproof than in industry and agriculture. Services grew at 8.9 per
cent on an average as against the average GDP growth of 7.2 per cent during the
2000s (Figure 16). After the global crisis erupted in September 2008, services growth in
India, unlike industrial growth, did not nosedive. Although it slowed from an average
of 10.4 per cent between 2005-06 and 2008-09 to 8.5 per cent in 2009-10, services
growth remained strong enough to be the key driver of India's GDP growth.
Owing to its rapid growth, the share of services in India's GDP grew from 38.4 per
cent in the 1970s to 45.9 per cent in the 1990s, and further to 56.9 per cent in 2009-10.
The share of the services sector in GDP is thus comparable to that of developed
upper-middle income countries.
The growth of the services sector, similar to industrial growth, benefited from the
economic reforms initiated since 1991. In addition, technological breakthroughs in IT
(information technology) and telecommunications, and availability of low-cost,
educated 'knowledge workers' made India an attractive destination for business
process outsourcing (BPO) and software services exports. (In simple terms, knowledge
workers are those who work in high-technology industries such as information and
Figure 16: Services grow faster than the economy
y-o-y%
12
10
Services
GDP
8
6
0
1970s 2001-02 2005-06 2009-10
Source: Central Statistical Organisation
India: Raising the Growth Bar, January 2011 21
communication technologies. CRISIL defines knowledge workers as those who
harness and use existing and new knowledge to improve productivity in an economy.)
The increase in share of services in India's total employment is however not
noteworthy - it has risen from 22.4 per cent in 1993-94 to only 25.1 per cent in 2004-
05. And, given that the jobs created in the sector are, by nature, mostly white collar
jobs, the services sector is unlikely to solve India's unemployment problem.
Knowledge-based services face a shortage of skilled manpower that is crucial to its
growth
A steady supply of skilled manpower is crucial for sustaining the rapid run-rate of Structural break in services growth in the
early 2000s
services. Although India's large and educated labour pool has been the most
prominent growth driver for the services sector, it constitutes only a small proportion
of India's total workforce. In 2007-08 only 8.7 per cent of Indian workforce was 1980-81 1993-94 2010-11F
educated up to the graduate level. Further, the quality of India's educated workforce
remains below par. For example, CRISIL Research's study on India's education
services industry, August 2010, points out, that although engineer turnout from India's
institutes will almost double over 2011 to 2015 - from 0.37 million to 0.65 million
engineers, their employability will diminish further. India therefore does not have a
stable supply chain of knowledge workers who can sustain the rising growth in
services.
Outlook
As India's GDP growth will hinge on growth in services, much will depend on how
effectively India reforms higher education to bridge the supply gap of skilled
manpower
As the services sector contributed almost 57 per cent to India's total GDP in 2009-10,
overall GDP growth over the next five years will critically depend on the growth in
this segment. Although the services sector growth has yet to return to the pre-crisis
level of above 10 per cent, it is recovering fast and expected to be 9.4 per cent in
2010-11, nearly 1 per cent higher than in 2009-10. CRISIL expects average growth in
services at 9.5 per cent between 2011-12 to 2015-16.
To sustain the growth in services, much will depend on how effectively India reforms
its higher education system to bridge the supply gap of knowledge workers. For
instance, India would have to introduce structural reforms to improve the quality of
higher education, with an emphasis on learning and skill development.
Domestic savings and foreign direct investment
will support India's physical investment,
whereas its potentially large workforce could
provide the human capital for improving the
productivity of its economy.
Growth enablers
Key points
Chapter 3
l Domestic savings will continue to fund a major
proportion of domestic investment. Domestic savings
rose from 23.7 per cent of GDP in 2000-01 to 36.4 per
cent in 2007-08. However, given a likely stagnation in
net household savings owing to rising consumption
expenditure, and a decline in public savings relative to
the pre-crisis level, the gap between the required
domestic investment rate and domestic savings is likely
to widen.
l India will have to depend more on foreign savings,
preferably foreign direct investment, to bridge the gap
between domestic savings and the required investment
rate. The benefits of foreign direct investment would
go beyond providing funds, to improving efficiency
through technology transfer, giving Indian industry
exposure to better management practices, and enabling
Indian companies to gain entry to export markets.
l A likely rapid increase in India's working-age
population has set the stage for increasing India's
labour force, another critical factor, apart from
investment, for improving the productivity of the
economy. India's working-age population (15-59 years)
is likely to swell from 1.21 billion in 2010 to 1.48 in
billion in 2030. If this large pool of people is educated
and its skills are developed, India could reap the
benefits of its demographic dividend.
India: Raising the Growth Bar, January 2011 23
Domestic savings
Historically, domestic savings almost entirely funded India's domestic investment
Until 2008-09, investment in India was almost entirely financed by domestic savings.
India's domestic savings rate accelerated to 36.4 per cent in 2007-08 from 21.9 per
cent in 1993-94. During the first phase of its growth, from 1993-94 to 2003-04,
domestic savings were driven by sharply rising household savings fuelled by an
increase in household incomes (Figure 17). And, in the second phase, over 2003-04 to
2007-08, the period of India's remarkable economic upturn, the growth in domestic
savings was sustained by rapidly growing corporate and public savings, until the global
financial crisis affected India in 2008-09. Despite the increase in corporate and public
savings, household savings accounted for 68 per cent of India's domestic savings, with
private corporate and public savings contributing 23 per cent and 9 per cent
respectively in 2008-09.
India's domestic savings rate fell during the global financial crisis, from 36.4 per cent
in 2007-08 to 32.5 per cent in 2008-09, largely due to a sharp decline in public savings.
Household savings as a ratio of household income stabilised, after rising rapidly
since the mid-1990s
Household sector savings jumped sharply from 17.3 per cent of GDP in 1993-94 to
24.1 per cent in 2003-04. The ratio of household savings to GDP stabilised after
2003-04 due to relatively fast incremental consumption growth. Greater
macroeconomic stability and rising asset values increased household wealth whereas
easy availability and lower cost of and greater availability of retail credit pushed up
consumption growth after 2003-04, clipping the household savings rate. In the midst
of the crisis, households maintained their savings to GDP ratio of 22.6 per cent in
2008-09, as in the previous year.
Figure 17: Household savings dominate domestic savings
% of GDP
40
Public
30
Private
20
Household
10
0
1970-71 1979-80 1988-89 1997-98 2006-07
Source: Central Statistical Organisation
Domestic savings and foreign direct investment
will support India's physical investment,
whereas its potentially large workforce could
provide the human capital for improving the
productivity of its economy.
Growth enablers
Key points
Chapter 3
l Domestic savings will continue to fund a major
proportion of domestic investment. Domestic savings
rose from 23.7 per cent of GDP in 2000-01 to 36.4 per
cent in 2007-08. However, given a likely stagnation in
net household savings owing to rising consumption
expenditure, and a decline in public savings relative to
the pre-crisis level, the gap between the required
domestic investment rate and domestic savings is likely
to widen.
l India will have to depend more on foreign savings,
preferably foreign direct investment, to bridge the gap
between domestic savings and the required investment
rate. The benefits of foreign direct investment would
go beyond providing funds, to improving efficiency
through technology transfer, giving Indian industry
exposure to better management practices, and enabling
Indian companies to gain entry to export markets.
l A likely rapid increase in India's working-age
population has set the stage for increasing India's
labour force, another critical factor, apart from
investment, for improving the productivity of the
economy. India's working-age population (15-59 years)
is likely to swell from 1.21 billion in 2010 to 1.48 in
billion in 2030. If this large pool of people is educated
and its skills are developed, India could reap the
benefits of its demographic dividend.
India: Raising the Growth Bar, January 2011 23
Domestic savings
Historically, domestic savings almost entirely funded India's domestic investment
Until 2008-09, investment in India was almost entirely financed by domestic savings.
India's domestic savings rate accelerated to 36.4 per cent in 2007-08 from 21.9 per
cent in 1993-94. During the first phase of its growth, from 1993-94 to 2003-04,
domestic savings were driven by sharply rising household savings fuelled by an
increase in household incomes (Figure 17). And, in the second phase, over 2003-04 to
2007-08, the period of India's remarkable economic upturn, the growth in domestic
savings was sustained by rapidly growing corporate and public savings, until the global
financial crisis affected India in 2008-09. Despite the increase in corporate and public
savings, household savings accounted for 68 per cent of India's domestic savings, with
private corporate and public savings contributing 23 per cent and 9 per cent
respectively in 2008-09.
India's domestic savings rate fell during the global financial crisis, from 36.4 per cent
in 2007-08 to 32.5 per cent in 2008-09, largely due to a sharp decline in public savings.
Household savings as a ratio of household income stabilised, after rising rapidly
since the mid-1990s
Household sector savings jumped sharply from 17.3 per cent of GDP in 1993-94 to
24.1 per cent in 2003-04. The ratio of household savings to GDP stabilised after
2003-04 due to relatively fast incremental consumption growth. Greater
macroeconomic stability and rising asset values increased household wealth whereas
easy availability and lower cost of and greater availability of retail credit pushed up
consumption growth after 2003-04, clipping the household savings rate. In the midst
of the crisis, households maintained their savings to GDP ratio of 22.6 per cent in
2008-09, as in the previous year.
Figure 17: Household savings dominate domestic savings
% of GDP
40
Public
30
Private
20
Household
10
0
1970-71 1979-80 1988-89 1997-98 2006-07
Source: Central Statistical Organisation
 CRISIL Centre for Economic Research
24 India: Raising the Growth Bar, January 2011 25

Corporate savings rate, which rose sharply over 2003-04 to 2008-09, remained
steady
As the economic upturn over 2003-04 to 2007-08 significantly shored up the retained
earnings of the private corporate sector, private corporate savings rate rose from 4.6
per cent in 2003-04 to 8.7 per cent in 2007-08. During 2008-09, when India's domestic
savings rate dropped sharply, private corporate sector savings decreased only
marginally, by 0.3 per cent due to a sharper fall in input costs/expenditure relative to a
drop in sales.
India will have to depend more on foreign savings to bridge the gap between
domestic savings and the required investment rate
In 2010-11, foreign savings are expected to play a crucial role in funding the projected
domestic investment. The requirement of foreign savings, to bridge the gap between
domestic savings and the required investment rate, would be substantially higher over
2011-12 to 2015-16 than in the previous five years, given that household and
corporate savings rates are unlikely to rise sharply and government savings rate is
likely to remain lower than the pre-crisis level during the period.

Public savings, which had increased as an outcome of the government's fiscal Foreign direct investment
consolidation measures, fell sharply during the global financial crisis FDI inflows in India have grown rapidly, doubling over three years
Public savings increased sharply from -2.0 per cent of GDP in 2001-02 to 5.0 per cent Corporate and public savings drive rising Between 2006 and 2008, FDI inflows in India doubled from US$ 20 billion to US$ 40
domestic savings
in 2007-08, as an outcome of the government's fiscal consolidation measures. During billion (Figure 18). Unlike FII (foreign institutional investment) inflows which have
the global financial crisis, when India's overall domestic savings rate dropped, public been volatile - rising sharply from US$ 24 billion in 2006 to nearly US$ 51 billion in
savings too fell from 5.0 per cent of GDP in 2007-08 to 1.3 per cent of GDP in 2008- 1980-81 1993-94 2010-11F 2007 before falling to US$ 18 billion in 2008 and again rising to nearly US$ 48 billion
09. in 2009, FDI inflows were fairly resilient.

With contribution from domestic savings slowing, increasingly foreign savings are
financing India's domestic investment
During India's high-growth phase from 2003-04 to 2007-08, foreign savings financed
less than 1 per cent of domestic investment, although foreign capital inflow remained
substantially higher than the funding requirement of domestic investment. Foreign
savings of a country broadly comprise net foreign capital inflows such as foreign direct
investment, external commercial borrowings and short term credit, among others. As a
result of relatively small gap between domestic investment and domestic savings, the
Reserve Bank of India was actively absorbing excess foreign savings up to 2007-08.
However, in 2008-09, as domestic savings, especially public savings, dropped, foreign
savings financed 6.8 per cent of domestic investment.
For a developing country like India, FDI is considered as the most preferred route
among sources of foreign capital. FDI acts as a catalyst to economic growth by
increasing the investment rate, and also improves total-factor productivity by allowing
technology transfer, enhancing efficiency of human capital, increasing competition,
and contributing to exports growth.
India's share in total global FDI inflows however remains only at about 3 per cent
whereas the UNCTAD's (United Nations Conference on Trade and Development)
global investment prospect lists India among five most-favoured investment
destinations for FDI. This clearly highlights India's significant potential for attracting
more FDI.

Outlook
To restore domestic savings to the pre-crisis rate of about 36 per cent of GDP, India
will need to significantly increase its public savings rate
If India has to restore domestic savings to the pre-crisis rate of about 36 per cent of
Figure 18: FDI remains resilient
GDP, government savings rate would have to climb to 3 per cent of GDP by 2014-15. US$ billion
50
If the government fails to reverse the declining public savings rate, public investment
in sectors such as infrastructure, agriculture, health and education would be adversely 40
Inward FDI
affected. 30

20
Outward FDI
10

0
1995-2005 2006 2007 2008 2009
Source: International Monetary Fund
 CRISIL Centre for Economic Research
24 India: Raising the Growth Bar, January 2011 25

Corporate savings rate, which rose sharply over 2003-04 to 2008-09, remained
steady
As the economic upturn over 2003-04 to 2007-08 significantly shored up the retained
earnings of the private corporate sector, private corporate savings rate rose from 4.6
per cent in 2003-04 to 8.7 per cent in 2007-08. During 2008-09, when India's domestic
savings rate dropped sharply, private corporate sector savings decreased only
marginally, by 0.3 per cent due to a sharper fall in input costs/expenditure relative to a
drop in sales.
India will have to depend more on foreign savings to bridge the gap between
domestic savings and the required investment rate
In 2010-11, foreign savings are expected to play a crucial role in funding the projected
domestic investment. The requirement of foreign savings, to bridge the gap between
domestic savings and the required investment rate, would be substantially higher over
2011-12 to 2015-16 than in the previous five years, given that household and
corporate savings rates are unlikely to rise sharply and government savings rate is
likely to remain lower than the pre-crisis level during the period.

Public savings, which had increased as an outcome of the government's fiscal Foreign direct investment
consolidation measures, fell sharply during the global financial crisis FDI inflows in India have grown rapidly, doubling over three years
Public savings increased sharply from -2.0 per cent of GDP in 2001-02 to 5.0 per cent Corporate and public savings drive rising Between 2006 and 2008, FDI inflows in India doubled from US$ 20 billion to US$ 40
domestic savings
in 2007-08, as an outcome of the government's fiscal consolidation measures. During billion (Figure 18). Unlike FII (foreign institutional investment) inflows which have
the global financial crisis, when India's overall domestic savings rate dropped, public been volatile - rising sharply from US$ 24 billion in 2006 to nearly US$ 51 billion in
savings too fell from 5.0 per cent of GDP in 2007-08 to 1.3 per cent of GDP in 2008- 1980-81 1993-94 2010-11F 2007 before falling to US$ 18 billion in 2008 and again rising to nearly US$ 48 billion
09. in 2009, FDI inflows were fairly resilient.

With contribution from domestic savings slowing, increasingly foreign savings are
financing India's domestic investment
During India's high-growth phase from 2003-04 to 2007-08, foreign savings financed
less than 1 per cent of domestic investment, although foreign capital inflow remained
substantially higher than the funding requirement of domestic investment. Foreign
savings of a country broadly comprise net foreign capital inflows such as foreign direct
investment, external commercial borrowings and short term credit, among others. As a
result of relatively small gap between domestic investment and domestic savings, the
Reserve Bank of India was actively absorbing excess foreign savings up to 2007-08.
However, in 2008-09, as domestic savings, especially public savings, dropped, foreign
savings financed 6.8 per cent of domestic investment.
For a developing country like India, FDI is considered as the most preferred route
among sources of foreign capital. FDI acts as a catalyst to economic growth by
increasing the investment rate, and also improves total-factor productivity by allowing
technology transfer, enhancing efficiency of human capital, increasing competition,
and contributing to exports growth.
India's share in total global FDI inflows however remains only at about 3 per cent
whereas the UNCTAD's (United Nations Conference on Trade and Development)
global investment prospect lists India among five most-favoured investment
destinations for FDI. This clearly highlights India's significant potential for attracting
more FDI.

Outlook
To restore domestic savings to the pre-crisis rate of about 36 per cent of GDP, India
will need to significantly increase its public savings rate
If India has to restore domestic savings to the pre-crisis rate of about 36 per cent of
Figure 18: FDI remains resilient
GDP, government savings rate would have to climb to 3 per cent of GDP by 2014-15. US$ billion
50
If the government fails to reverse the declining public savings rate, public investment
in sectors such as infrastructure, agriculture, health and education would be adversely 40
Inward FDI
affected. 30

20
Outward FDI
10

0
1995-2005 2006 2007 2008 2009
Source: International Monetary Fund
26 CRISIL Centre for Economic Research
India: Raising the Growth Bar, January 2011 27

India's FDI outflows have also risen sharply, reflecting in Indian corporates' mergers Working age population
and acquisitions especially in the pharmaceutical and IT sectors, and also acquisition Set to become the largest contributor to the global workforce in the next 20 years,
of energy assets resulting in access to better technology and export markets. India will have a demographic advantage over advanced countries and China
With a population growth rate of 1.2 per cent per annum, India will overtake China to
FDI inflows are skewed towards certain sectors and regions, reflecting regulatory become the world's most populous country by 2030. Of India's 1.2 billion population
and infrastructure constraints in 2010, 50 per cent are below 25 years of age and 62 per cent are in the working age
FDI has increased sharply in recent years
Although FDI inflows in India have increased sharply over 2006 to 2010, the group of 15-59 years (Figure 20). India will continue to have the largest population of
distribution of FDI across sectors remains skewed, largely due to regulatory and youth in the next decade.
infrastructure constraints that vary widely across sectors and regions in India. Four
1980-81 1993-94 2010-11F
sectors - telecommunication, power, construction and commercial and residential real India is set to become the largest contributor to the global workforce over the next 20 India's edge in incremental workforce by
2030
estate which have the least regulatory hurdles for FDI and offer attractive returns on years, with its working-age population likely to swell from 749 million in 2010 to 962 millions
340
investment, account for almost 40 per cent of India's total FDI inflows (Figure 19). million in 2030. India will hence add 213 million to the global workforce, far more than 213
Among Indian states, Maharashtra and the National Capital Region together account China, Europe and Japan, where the working age population is set to shrink. During the
14
for more than 50 per cent of FDI inflows over the same period due to better period, 28 per cent of the increase in global workforce will come from India.
-11
-45 -54
infrastructure facilities among other reasons. Africa India US Japan China Europe
Also, India's dependency ratio, conventionally measured as the ratio of children and
Even though rising FDI inflows in infrastructure sectors, despite the high gestation old-aged to working-age population, will fall in the coming decades. This implies that its
period of such investments, is an encouraging sign, poor FDI inflows in export- working-age population (roughly in the age-group of 15-59 years) will have to shoulder
intensive, but less efficient manufacturing sectors like textile, leather and food- a lesser burden of its dependents. Rising population in the age group of 45-60 years,
processing is a cause of concern. These three sectors together account for less than 2 with higher propensity to save, would help garner household savings. As per cent to
per cent of India's total FDI inflows. total population, population in this age-group is projected to increase from 11.5 per
cent in 2000 to 17.2 per cent by 2030.
Outlook
India will need to introduce reforms and upgrade its supply-chain networks to Outlook
sustain the growth momentum of FDI inflows India will have to raise employment opportunities and provide quality education to
Prospects of foreign direct investment inflows in India remain strong over 2010-11 to India's potential workforce
2015-16 as the economy would continue to grow at a robust pace of around 8.4 per The rise in India’s working-age population is a necessary but not a sufficient condition
cent. However, the regulatory conditions, policy barriers and the state of supply-chain for India to raise its growth to 10 per cent. India will have to address the critical issues
networks, especially those that serve the retail sector, would determine the extent of of creating jobs and preparing its youth to participate in its economic growth.
FDI inflows in India over the next five years.

Figure 19: FDI inflows are skewed towards certain sectors Figure 20: India's bulging working-age population
US$ billion
million
4
1600
60+ yrs
3 1300

2 1000

700
1 15-59 yrs
400
0
0-14 yrs
2005-06

2005-06

2007-08

2005-06

2007-08
2009-10

2005-06

2007-08

2005-06

2009-10

100
2007-08

2007-08

2009-10

2009-10
2009-10

Construction Housing Telecom Power Textile -200 2010 2020 2030 2040 2050
Source: Department of Industrial Policy & Promotion Source: United Nations Population Projections
26 CRISIL Centre for Economic Research
India: Raising the Growth Bar, January 2011 27

India's FDI outflows have also risen sharply, reflecting in Indian corporates' mergers Working age population
and acquisitions especially in the pharmaceutical and IT sectors, and also acquisition Set to become the largest contributor to the global workforce in the next 20 years,
of energy assets resulting in access to better technology and export markets. India will have a demographic advantage over advanced countries and China
With a population growth rate of 1.2 per cent per annum, India will overtake China to
FDI inflows are skewed towards certain sectors and regions, reflecting regulatory become the world's most populous country by 2030. Of India's 1.2 billion population
and infrastructure constraints in 2010, 50 per cent are below 25 years of age and 62 per cent are in the working age
FDI has increased sharply in recent years
Although FDI inflows in India have increased sharply over 2006 to 2010, the group of 15-59 years (Figure 20). India will continue to have the largest population of
distribution of FDI across sectors remains skewed, largely due to regulatory and youth in the next decade.
infrastructure constraints that vary widely across sectors and regions in India. Four
1980-81 1993-94 2010-11F
sectors - telecommunication, power, construction and commercial and residential real India is set to become the largest contributor to the global workforce over the next 20 India's edge in incremental workforce by
2030
estate which have the least regulatory hurdles for FDI and offer attractive returns on years, with its working-age population likely to swell from 749 million in 2010 to 962 millions
340
investment, account for almost 40 per cent of India's total FDI inflows (Figure 19). million in 2030. India will hence add 213 million to the global workforce, far more than 213
Among Indian states, Maharashtra and the National Capital Region together account China, Europe and Japan, where the working age population is set to shrink. During the
14
for more than 50 per cent of FDI inflows over the same period due to better period, 28 per cent of the increase in global workforce will come from India.
-11
-45 -54
infrastructure facilities among other reasons. Africa India US Japan China Europe
Also, India's dependency ratio, conventionally measured as the ratio of children and
Even though rising FDI inflows in infrastructure sectors, despite the high gestation old-aged to working-age population, will fall in the coming decades. This implies that its
period of such investments, is an encouraging sign, poor FDI inflows in export- working-age population (roughly in the age-group of 15-59 years) will have to shoulder
intensive, but less efficient manufacturing sectors like textile, leather and food- a lesser burden of its dependents. Rising population in the age group of 45-60 years,
processing is a cause of concern. These three sectors together account for less than 2 with higher propensity to save, would help garner household savings. As per cent to
per cent of India's total FDI inflows. total population, population in this age-group is projected to increase from 11.5 per
cent in 2000 to 17.2 per cent by 2030.
Outlook
India will need to introduce reforms and upgrade its supply-chain networks to Outlook
sustain the growth momentum of FDI inflows India will have to raise employment opportunities and provide quality education to
Prospects of foreign direct investment inflows in India remain strong over 2010-11 to India's potential workforce
2015-16 as the economy would continue to grow at a robust pace of around 8.4 per The rise in India’s working-age population is a necessary but not a sufficient condition
cent. However, the regulatory conditions, policy barriers and the state of supply-chain for India to raise its growth to 10 per cent. India will have to address the critical issues
networks, especially those that serve the retail sector, would determine the extent of of creating jobs and preparing its youth to participate in its economic growth.
FDI inflows in India over the next five years.

Figure 19: FDI inflows are skewed towards certain sectors Figure 20: India's bulging working-age population
US$ billion
million
4
1600
60+ yrs
3 1300

2 1000

700
1 15-59 yrs
400
0
0-14 yrs
2005-06

2005-06

2007-08

2005-06

2007-08
2009-10

2005-06

2007-08

2005-06

2009-10

100
2007-08

2007-08

2009-10

2009-10
2009-10

Construction Housing Telecom Power Textile -200 2010 2020 2030 2040 2050
Source: Department of Industrial Policy & Promotion Source: United Nations Population Projections
Keeping inflation in check, reducing deficit in its
physical infrastructure, addressing the skill
India: Raising the Growth Bar, January 2011 29
shortage in its bulging population, improving its
flexibility to reduce fiscal deficit and
strengthening governance are the five key
challenges facing India.

Fiscal challenge
Targeting a reduced fiscal deficit to GDP for 2010-11, India's government has
signaled a renewed focus on fiscal consolidation
Fiscal worsening, like plummeting growth, had synchronised across the world during
the global economic crisis which began in late 2007. Slowing growth shrunk revenues

Roadblocks to 10 across countries whereas an unprecedented quantum of discretionary fiscal stimulus

bloated expenditures, as governments worldwide tried to revive their economies. The
deterioration in government finances has however been more pronounced and is likely
per cent growth to be more prolonged in advanced economies than in emerging countries such as
India. With India's GDP growth quickly returning to the pre-crisis levels, ahead of
Key points advanced countries, the Indian government has signaled its renewed focus on fiscal
Chapter 4 consolidation, targeting a lower fiscal deficit at 5.5 per cent of GDP for 2010-11 and
l With persistent supply shocks from low growth of
aiming to reduce it further through FRBM (Table 1).
agricultural production and volatile global commodity
prices, monetary management will become increasingly
Aided by sharp revenue growth and its traditional focus on fiscal discipline, India's
difficult. At the same time, rising domestic demand,
fiscal position improved over 2003-04 to 2007-08 (Figure 21). India had embarked on
both consumption and investment, will continue to
a fiscal consolidation program since the early 1990s, strengthening it with the Fiscal
exert pressure on inflation.
Reform and Budget Management (FRBM) Act of 2003. Lack of expenditure reforms,
notwithstanding, buoyant revenues, excellent corporate performance and tax reforms
l India continues to have a deficit in most segments of
together set off a phase of steady improvement in India's fiscal position since 2003-
its physical infrastructure. Narrowing it will depend on
04. Not surprisingly, the central government achieved the FRBM goal of 3 per cent
- i) mobilising funds for infrastructure expenditure, and
fiscal deficit in 2007-08, a year ahead of the targeted date. The more critical parameter,
ii) removing policy hurdles in setting up infrastructure
revenue deficit, however, could not be trimmed to zero.
projects, to attract private investment.

India's public finances worsened abruptly since 2008-09, as a series of domestic events
l India faces a skill shortage, with twin challenges of
and external shocks bloated its public expenditure and brought its revenues down.
insufficient quantity and quality of its workforce. The
Over 2008-09 and 2009-10 implementation of the Sixth Pay Commission Report,
skill deficit could diminish India's productivity, increase
National Rural Employment Guarantee Act, farm loan waiver and various subsidies
wage rates excessively and result in higher
fuelled the rising domestic expenditure. The external shocks came in two episodes -
unemployment.
first, the sharp commodity inflation in the first half of 2008-09, which increased the

l India, unlike most advanced countries, has a favourable

debt position. India's fiscal challenge, however, lies in
addressing the root cause of the debt - in steering its Figure 21: Emerging need to restore fiscal discipline Table 1: Forecasts of fiscal deficit

public expenditures from wasteful subsidies to Fiscal deficit % of GDP

7.0 as a % to GDP 2010-11 2011-12 2013-14 2015-16
improving its inadequate physical and social
6.0
infrastructure. 5.5
Fiscal Deficit 5.0 5.5 4.7 3.9
5.0

l Poor governance can limit India's growth possibilities. 4.0

Revenue Deficit 3.7 4.4 3.1 2.3
3.0
2.6
2.0 Debt 54.0 52.9 49.5 47.1
2000-01 2005-06 2010-11 BE

Note: BE- Budget estimates Source: CRISIL estimates

Source: Budget documents and CRISIL estimates
Keeping inflation in check, reducing deficit in its
physical infrastructure, addressing the skill
India: Raising the Growth Bar, January 2011 29
shortage in its bulging population, and
improving its flexibility to reduce fiscal deficit
and strengthening governance are the five key
challenges facing India.

Fiscal challenge
Targeting a reduced fiscal deficit to GDP for 2010-11, India's government has
signaled a renewed focus on fiscal consolidation
Fiscal worsening, like plummeting growth, had synchronised across the world during
the global economic crisis which began in late 2007. Slowing growth shrunk revenues

Roadblocks to 10 across countries whereas an unprecedented quantum of discretionary fiscal stimulus

bloated expenditures, as governments worldwide tried to revive their economies. The
deterioration in government finances has however been more pronounced and is likely
per cent growth to be more prolonged in advanced economies than in emerging countries such as
India. With India's GDP growth quickly returning to the pre-crisis levels, ahead of
Key points advanced countries, the Indian government has signaled its renewed focus on fiscal
Chapter 4 consolidation, targeting a lower fiscal deficit at 5.5 per cent of GDP for 2010-11 and
l With persistent supply shocks from low growth of
aiming to reduce it further through FRBM (Table 1).
agricultural production and volatile global commodity
prices, monetary management will become increasingly
Aided by sharp revenue growth and its traditional focus on fiscal discipline, India's
difficult. At the same time, rising domestic demand,
fiscal position improved over 2003-04 to 2007-08 (Figure 21). India had embarked on
both consumption and investment, will continue to
a fiscal consolidation program since the early 1990s, strengthening it with the Fiscal
exert pressure on inflation.
Reform and Budget Management (FRBM) Act of 2003. Lack of expenditure reforms,
notwithstanding, buoyant revenues, excellent corporate performance and tax reforms
l India continues to have a deficit in most segments of
together set off a phase of steady improvement in India's fiscal position since 2003-
its physical infrastructure. Narrowing it will depend on
04. Not surprisingly, the central government achieved the FRBM goal of 3 per cent
- i) mobilising funds for infrastructure expenditure, and
fiscal deficit in 2007-08, a year ahead of the targeted date. The more critical parameter,
ii) removing policy hurdles in setting up infrastructure
revenue deficit, however, could not be trimmed to zero.
projects, to attract private investment.

India's public finances worsened abruptly since 2008-09, as a series of domestic events
l India faces a skill shortage, with twin challenges of
and external shocks bloated its public expenditure and brought its revenues down.
insufficient quantity and quality of its workforce. The
Over 2008-09 and 2009-10 implementation of the Sixth Pay Commission Report,
skill deficit could diminish India's productivity, increase
National Rural Employment Guarantee Act, farm loan waiver and various subsidies
wage rates excessively and result in higher
fuelled the rising domestic expenditure. The external shocks came in two episodes -
unemployment.
first, the sharp commodity inflation in the first half of 2008-09, which increased the

l India, unlike most advanced countries, has a favourable

debt position. India's fiscal challenge, however, lies in
addressing the root cause of the debt - in steering its Figure 21: Emerging need to restore fiscal discipline Table 1: Forecasts of fiscal deficit

public expenditures from wasteful subsidies to Fiscal deficit % of GDP

7.0 as a % to GDP 2010-11 2011-12 2013-14 2015-16
improving its inadequate physical and social
6.0
infrastructure. 5.5
Fiscal Deficit 5.0 5.5 4.7 3.9
5.0

l Poor governance can limit India's growth possibilities. 4.0

Revenue Deficit 3.7 4.4 3.1 2.3
3.0
2.6
2.0 Debt 54.0 52.9 49.5 47.1
2000-01 2005-06 2010-11 BE

Note: BE- Budget estimates Source: CRISIL estimates

Source: Budget documents and CRISIL estimates
 CRISIL Centre for Economic Research
30 India: Raising the Growth Bar, January 2011 31

oil, fertiliser and food-subsidy bill; and the second, the global financial crisis, which
slowed India's real economic growth and increased public expenditures as the
government tried to stimulate the economy by reducing taxes and duties and increasing
spending. As a result, India's fiscal deficit rose to 6 per cent in 2008-09 and 6.7 per cent
in 2009-10
To stabilise the economy from sharp growth contraction, the government postponed
the FRBM targets. The government now seems intent on restoring FRBM discipline, as
noted by the Thirteenth Finance Commission recommendations.
Sustaining accelerated GDP growth will call for increased fiscal flexibility to address
vital constraints
Infrastructure constraints which amplified during India's economic upturn over 2004-
05 to 2007-08, would continue to plague the domestic economy in future. India's fiscal
challenge therefore would not be merely reducing its debt and fiscal deficit; another
spurt of high growth would accomplish that. India will have to expand its fiscal
age population with adequate education and directly-applicable work skills, to stem a
possible rise in unproductive transfers to support its unemployed youth through social
schemes.
Inflation
Persistently high food inflation and volatile commodity prices pose challenges to
inflationary management
Since India's economy has historically been supply constrained, domestic supply
shocks have often triggered episodes of high inflation in India. At the same time,
demand-side pressures emanating from rising incomes (and specifically discretionary
incomes) have also been major contributors especially during cyclical upturns.
Barring the 1950s, India's inflation rates were the lowest, since independence, during While volatile, increased food inflation
remains a worry, manufacturing inflation
remains relatively stable
the 2000s. Average WPI (wholesale prices) based inflation declined to 5.3 per cent in
the 2000s, from 6.8 per cent in the 1980s and 8.1 per cent in the 1990s. Inflation
remained relatively benign through the 2000s, with the exception of 2000-01 and 2008- FY91 FY01 H11 FY11

flexibility to address the constraints that stifle its economy. And that is the fundamental 09; the annual inflation in 2008-09, at 8.4 per cent, was the highest during the 2000s.
fiscal challenge for India. In India, food inflation tends to contribute significantly to overall inflation (Figure 22).

India's long-pending expenditure reforms should cut expenditures in less productive
general consumption areas, and steer these to more productive areas - such as
increasing government investment in infrastructure, education and health, which would
have a multiplier effect on the economy. These measures would lend India the much-
needed fiscal flexibility for focusing investment in human development and
infrastructure, and mitigating the risks to its sustained economic growth.
Outlook
India's debt position is not as worrisome as in some of the advanced nations, but
unproductive expenses can diminish that advantage
Its likely swift recovery to economic growth would reduce India's fiscal stress, as it did
during 2003-04 to 2007-08. CRISIL expects the central government debt ratio to fall to
India's food inflation is currently driven more by structural than cyclical factors,
making inflationary management difficult for the Reserve Bank of India (RBI). Food
inflation has remained at an elevated double digit level now for almost two years since
October 2008. There are two main reasons for this stubbornness in food inflation.
Firstly, the persistently high demand and supply mismatch in 'protein-rich' food items
like pulses, milk, and eggs have resulted in sustained high prices for such 'protein-rich'
items. Secondly, due to structural factors there has been a steady decline in per capita
food grain production leading to decline in per capita availability of food grains. This
has resulted in widening the gap between production and consumption among major
food items (Figure 23). Thus when monsoons failed in 2009 and agriculture output
High fiscal deficit warrants budgetary declined food inflation further aggravated
restraint
% of GDP

44.5 per cent in 2014-15 from 56.1 per cent in 2009-10. India's debt-GDP ratio (centre
and states), 76.6 per cent of GDP in 2009-10, is largely domestic debt with a long and
Figure 22: Inflation drivers across major sub-categories Figure 23: Widening production-consumption gap in major food items
1982-83 1996-97 2010-11F
fixed tenure that will not expose India to the kind of external debt vulnerabilities that y-o-y% Million tonnes
19
countries such as Greece, Portugal and Spain are facing. 12

6
12
Also, unlike many developed nations, India, with a large proportion of youth in its 0
population, would not face the fiscal burden of an aging population in the next few 5
-6
decades. It would however have to create an infrastructure for equipping its working-
-12
H12010-11

H12010-11

H12010-11

H12010-11
2008-09

2008-09

2008-09

2008-09
2006-07

2006-07

2006-07

2006-07
-2

2005-06

2007-08

2005-06

2007-08

2005-06

2007-08

2005-06

2007-08

2005-06

2007-08
2009-10P

2009-10P

2009-10P

2009-10P

2009-10P
Overall Total food Non-food mfing Fuel group Sugar Oilseeds Rice Pulses Wheat
Source: Ministry of Industry and CRISIL estimates Note: P- Projected
Source: Reserve Bank of India
 CRISIL Centre for Economic Research
30 India: Raising the Growth Bar, January 2011 31

oil, fertiliser and food-subsidy bill; and the second, the global financial crisis, which
slowed India's real economic growth and increased public expenditures as the
government tried to stimulate the economy by reducing taxes and duties and increasing
spending. As a result, India's fiscal deficit rose to 6 per cent in 2008-09 and 6.7 per cent
in 2009-10
To stabilise the economy from sharp growth contraction, the government postponed
the FRBM targets. The government now seems intent on restoring FRBM discipline, as
noted by the Thirteenth Finance Commission recommendations.
Sustaining accelerated GDP growth will call for increased fiscal flexibility to address
vital constraints
Infrastructure constraints which amplified during India's economic upturn over 2004-
05 to 2007-08, would continue to plague the domestic economy in future. India's fiscal
challenge therefore would not be merely reducing its debt and fiscal deficit; another
spurt of high growth would accomplish that. India will have to expand its fiscal
age population with adequate education and directly-applicable work skills, to stem a
possible rise in unproductive transfers to support its unemployed youth through social
schemes.
Inflation
Persistently high food inflation and volatile commodity prices pose challenges to
inflationary management
Since India's economy has historically been supply constrained, domestic supply
shocks have often triggered episodes of high inflation in India. At the same time,
demand-side pressures emanating from rising incomes (and specifically discretionary
incomes) have also been major contributors especially during cyclical upturns.
Barring the 1950s, India's inflation rates were the lowest, since independence, during While volatile, increased food inflation
remains a worry, manufacturing inflation
remains relatively stable
the 2000s. Average WPI (wholesale prices) based inflation declined to 5.3 per cent in
the 2000s, from 6.8 per cent in the 1980s and 8.1 per cent in the 1990s. Inflation
remained relatively benign through the 2000s, with the exception of 2000-01 and 2008- FY91 FY01 H11 FY11

flexibility to address the constraints that stifle its economy. And that is the fundamental 09; the annual inflation in 2008-09, at 8.4 per cent, was the highest during the 2000s.
fiscal challenge for India. In India, food inflation tends to contribute significantly to overall inflation (Figure 22).

India's long-pending expenditure reforms should cut expenditures in less productive
general consumption areas, and steer these to more productive areas - such as
increasing government investment in infrastructure, education and health, which would
have a multiplier effect on the economy. These measures would lend India the much-
needed fiscal flexibility for focusing investment in human development and
infrastructure, and mitigating the risks to its sustained economic growth.
Outlook
India's debt position is not as worrisome as in some of the advanced nations, but
unproductive expenses can diminish that advantage
Its likely swift recovery to economic growth would reduce India's fiscal stress, as it did
during 2003-04 to 2007-08. CRISIL expects the central government debt ratio to fall to
India's food inflation is currently driven more by structural than cyclical factors,
making inflationary management difficult for the Reserve Bank of India (RBI). Food
inflation has remained at an elevated double digit level now for almost two years since
October 2008. There are two main reasons for this stubbornness in food inflation.
Firstly, the persistently high demand and supply mismatch in 'protein-rich' food items
like pulses, milk, and eggs have resulted in sustained high prices for such 'protein-rich'
items. Secondly, due to structural factors there has been a steady decline in per capita
food grain production leading to decline in per capita availability of food grains. This
has resulted in widening the gap between production and consumption among major
food items (Figure 23). Thus when monsoons failed in 2009 and agriculture output
High fiscal deficit warrants budgetary declined food inflation further aggravated
restraint
% of GDP

44.5 per cent in 2014-15 from 56.1 per cent in 2009-10. India's debt-GDP ratio (centre
and states), 76.6 per cent of GDP in 2009-10, is largely domestic debt with a long and
Figure 22: Inflation drivers across major sub-categories Figure 23: Widening production-consumption gap in major food items
1982-83 1996-97 2010-11F
fixed tenure that will not expose India to the kind of external debt vulnerabilities that y-o-y% Million tonnes
19
countries such as Greece, Portugal and Spain are facing. 12

6
12
Also, unlike many developed nations, India, with a large proportion of youth in its 0
population, would not face the fiscal burden of an aging population in the next few 5
-6
decades. It would however have to create an infrastructure for equipping its working-
-12
H12010-11

H12010-11

H12010-11

H12010-11
2008-09

2008-09

2008-09

2008-09
2006-07

2006-07

2006-07

2006-07
-2

2005-06

2007-08

2005-06

2007-08

2005-06

2007-08

2005-06

2007-08

2005-06

2007-08
2009-10P

2009-10P

2009-10P

2009-10P

2009-10P
Overall Total food Non-food mfing Fuel group Sugar Oilseeds Rice Pulses Wheat
Source: Ministry of Industry and CRISIL estimates Note: P- Projected
Source: Reserve Bank of India
 CRISIL Centre for Economic Research
32 India: Raising the Growth Bar, January 2011 33

With greater integration into the global economy, India's inflation rate has become
vulnerable to changes in global factors - global commodity inflation now gets
transmitted to the domestic economy far more quickly than ever before. For instance,
the high annual inflation in 2008-09 was sparked by an unprecedented surge in
international commodity and oil prices.
These structural factors have made inflationary and monetary management difficult for
RBI as use of monetary instrument is not an effective tool for addressing inflation
arising from supply side bottlenecks. The effective and lasting solution will be to find
ways to increase the supply of agricultural output (see chapter titled 'Expanding supply
potential').
Skills shortage and mismatch
Despite the rising literacy rate of its swelling population, India faces a skill
shortage, with twin challenges of insufficient quantity and quality of its workforce
Although India's literacy rate has increased over the past four decades - from 28.3 per
cent in 1961 to 52.2 per cent in 1991 and to 64.8 per cent in 2001 - it continues to
have a greater proportion of illiterate population over 15 years of age than most other
developing countries (Figure 24). Besides, India's school drop-out rate continues to be
alarming - in 2006-07, only 17 of 100 children who entered 1st grade completed 10th
grade. In addition, according to the latest statistics of 2008-09, 13 per cent of India's
primary schools are single-teacher schools. The lack of sufficient number of teachers
has adversely affected the quality of learning in India's schools.

Outlook
Inflation rate is likely to moderate in the short term
CRISIL expects inflation to decline from 7.5 per cent in November 2010 to around 6.5
per cent by March 2011, owing to favourable base effect, and a gradual decline in
inflation of food items (due to normal 2010 monsoon) and in manufactured goods due
to monetary tightening by the RBI.
Any persistence in food inflation will complicate monetary management
If international crude and commodity prices firm up further and inflation in
agriculture commodities remains sticky, monetary management will remain a
complicated exercise for Reserve Bank of India.
India has an insufficient supply of skilled workers who have received vocational
training (Figure 25). In 2004-05, only 28 million of India's 255 million-strong job-
seeking population in the age group of 15-29 received some form of vocational
training (Source: Skilling India| The Billion People Challenge, 2010, CRISIL).
Opportunities in infrastructure, construction, mining and healthcare have increased
the demand for vocationally-trained workers such as technicians, welders, fitters and
paramedics. As formal vocational training has not been widespread, skilled workers to
meet the rising demand from these sectors has remained in short supply.
India's knowledge-based service industries face a different kind of challenge - that of
skill mismatch - where there are an insufficient number of workers with specialised
skill that available jobs require. For example, knowledge-based industries such as
IT/ITeS find it difficult to locate the kind of information technology specialists they
need. This implies that the workforce, despite being qualified, falls short of skills that
are required by the job market. Wages and attrition rates therefore continue to rise in
industries that face such skill mismatch.

Figure 24: Share of population > 15 years of age, without schooling Figure 25: Percentage of youth population with vocational training
%
% 100 91.1
86.2
70
80
56

42 60

28 40

14
20 9.5
4.3 3.0 5.9
0
1980 2010 1980 2010 1980 2010 1980 2010 1980 2010 0
Formally Non-formally Unskilled Formally Non-formally Unskilled
India China Malaysia Korea Thailand skilled skilled skilled skilled

Male Female
Source: Barro-Lee data set, 2010 Source: National Sample Survey Organisation, 61st round, 2004-05
 CRISIL Centre for Economic Research
32 India: Raising the Growth Bar, January 2011 33

With greater integration into the global economy, India's inflation rate has become
vulnerable to changes in global factors - global commodity inflation now gets
transmitted to the domestic economy far more quickly than ever before. For instance,
the high annual inflation in 2008-09 was sparked by an unprecedented surge in
international commodity and oil prices.
These structural factors have made inflationary and monetary management difficult for
RBI as use of monetary instrument is not an effective tool for addressing inflation
arising from supply side bottlenecks. The effective and lasting solution will be to find
ways to increase the supply of agricultural output (see chapter titled 'Expanding supply
potential').
Skills shortage and mismatch
Despite the rising literacy rate of its swelling population, India faces a skill
shortage, with twin challenges of insufficient quantity and quality of its workforce
Although India's literacy rate has increased over the past four decades - from 28.3 per
cent in 1961 to 52.2 per cent in 1991 and to 64.8 per cent in 2001 - it continues to
have a greater proportion of illiterate population over 15 years of age than most other
developing countries (Figure 24). Besides, India's school drop-out rate continues to be
alarming - in 2006-07, only 17 of 100 children who entered 1st grade completed 10th
grade. In addition, according to the latest statistics of 2008-09, 13 per cent of India's
primary schools are single-teacher schools. The lack of sufficient number of teachers
has adversely affected the quality of learning in India's schools.

Outlook
Inflation rate is likely to moderate in the short term
CRISIL expects inflation to decline from 7.5 per cent in November 2010 to around 6.5
per cent by March 2011, owing to favourable base effect, and a gradual decline in
inflation of food items (due to normal 2010 monsoon) and in manufactured goods due
to monetary tightening by the RBI.
Any persistence in food inflation will complicate monetary management
If international crude and commodity prices firm up further and inflation in
agriculture commodities remains sticky, monetary management will remain a
complicated exercise for Reserve Bank of India.
India has an insufficient supply of skilled workers who have received vocational
training (Figure 25). In 2004-05, only 28 million of India's 255 million-strong job-
seeking population in the age group of 15-29 received some form of vocational
training (Source: Skilling India| The Billion People Challenge, 2010, CRISIL).
Opportunities in infrastructure, construction, mining and healthcare have increased
the demand for vocationally-trained workers such as technicians, welders, fitters and
paramedics. As formal vocational training has not been widespread, skilled workers to
meet the rising demand from these sectors has remained in short supply.
India's knowledge-based service industries face a different kind of challenge - that of
skill mismatch - where there are an insufficient number of workers with specialised
skill that available jobs require. For example, knowledge-based industries such as
IT/ITeS find it difficult to locate the kind of information technology specialists they
need. This implies that the workforce, despite being qualified, falls short of skills that
are required by the job market. Wages and attrition rates therefore continue to rise in
industries that face such skill mismatch.

Figure 24: Share of population > 15 years of age, without schooling Figure 25: Percentage of youth population with vocational training
%
% 100 91.1
86.2
70
80
56

42 60

28 40

14
20 9.5
4.3 3.0 5.9
0
1980 2010 1980 2010 1980 2010 1980 2010 1980 2010 0
Formally Non-formally Unskilled Formally Non-formally Unskilled
India China Malaysia Korea Thailand skilled skilled skilled skilled

Male Female
Source: Barro-Lee data set, 2010 Source: National Sample Survey Organisation, 61st round, 2004-05
 CRISIL Centre for Economic Research
34 India: Raising the Growth Bar, January 2011 35

Skill shortage could diminish India's productivity and increase wage rates
excessively
As the demand for skilled workers increases, if relatively low-skilled workers are added
to the workforce, they would drag down overall workforce quality and impact
productivity growth. Also, skilled workers would have to put in longer hours for
sustaining the current growth rate, which, in turn, would adversely affect their
productivity. Thus, given its shortage of skilled workers, the growth in productivity of
India's workforce could slow down in future.
Skill shortage could also increase wage inflation and income inequality. Companies'
bargaining power tends to be severely restricted vis-à-vis their skilled employees during
phases of skill shortage. As a result, wages increase at a greater rate than productivity
growth. Excessive wage growth for a section of the population would increase income
inequality and inflation.
Also, if shortages in skills are significant, companies would avoid investing in new
technologies as these cannot then be fully exploited. They would thus produce less
differentiated and relatively lower-quality products.
Outlook
India's labour participation and unemployment rate could increase, if the
government does not take policy measures to address the skill shortage
If the current trend in India's labour participation and unemployment rate continues,
about 423 million in India's working age population will be unemployed or unable to
participate in the job market by 2030.
Infrastructure deficit
Despite rising infrastructure investment, India's physical infrastructure is
inadequate to meet rising demand
Although India's capital spending in infrastructure has increased in the 2000s as
Skill shortage and mismatch to pose a compared to that in the 1990s, the demand-supply gap in its physical infrastructure
challenge
Quality Quantity
has widened. During the tenth five-year plan (2002-07), India had invested about 5 per
Young cent of GDP in physical infrastructure (Figure 26). In the eleventh five-year plan
and
Education large
work
(2007-12), it has estimated infrastructure investment at 7.5 per cent of GDP, and, in
Skills force
the twelfth five year plan (2012-17), it intends to increase the investment further to
about 10 per cent of GDP.
India has yet not been able to meet the rising demand for physical infrastructure,
driven by strong GDP growth. For instance:
l Although power availability grew at 5.9 per cent CAGR between 2004-05 and
2008-09, demand grew at 7 per cent CAGR for the same period, thereby
increasing the power deficit
l With rising trade, port congestion has increased - the average turnaround time
went up from 3.4 days in 2004-05 to 3.9 days in 2008-09.
l The railways and airports are operating at more than 100 per cent capacity
utilisation.
Higher spending on infrastructure should either precede or at least accompany the
economic growth in the early stages of economic development where India currently
is. However, since most of the spending in India on infrastructure is typically of
catching up variety, huge infrastructure deficit continues to exist.

India would need to focus more on educating and developing skills of its workforce India's physical infrastructure is therefore more underdeveloped than in peer
and increasing jobs, than on increasing public expenditure on social welfare developing countries. According to the Global Competitiveness Index 2009-10, which
schemes indicates the extent and effectiveness of a country's infrastructure, India's
India would need to carry out structural reforms to improve the quality of education infrastructure development ranks 76 among 133 countries, lower than all other BRIC
and skill development, and devise measures to increase job creation. Without reforms nations - China at 46, Brazil at 74 and Russian Federation at 71.
in the education sector, particularly in higher education, India's large army of under-
educated, unskilled and hence unemployable labour would be unable to meaningfully
Figure 26: Infrastructure investments are on the rise
plug into the growing services sector. And, without industrial reforms to expand the
% of GDP
labour-intensive industrial sector, a major proportion of India's workforce, 55 per cent 12
10.0
as in 2007-08, would remain dependent on the agricultural sector. 7.5
8
5.0
India is currently addressing the challenge of unemployment through social security 4

schemes such as NREGA (National Rural Employment Guarantee Act). This is at best
0
a 'stop-gap' solution as the government, in the longer run, will need to increasingly 2002-07 2007-12 2012-17
transfer funds through social security schemes to provide income to the unemployed. 10th Plan 11th Plan 12th Plan
The resultant increase in the fiscal burden of income-supporting schemes will crowd Source: Planning Commission
out public expenditures on education and infrastructure.
 CRISIL Centre for Economic Research
34 India: Raising the Growth Bar, January 2011 35

Skill shortage could diminish India's productivity and increase wage rates
excessively
As the demand for skilled workers increases, if relatively low-skilled workers are added
to the workforce, they would drag down overall workforce quality and impact
productivity growth. Also, skilled workers would have to put in longer hours for
sustaining the current growth rate, which, in turn, would adversely affect their
productivity. Thus, given its shortage of skilled workers, the growth in productivity of
India's workforce could slow down in future.
Skill shortage could also increase wage inflation and income inequality. Companies'
bargaining power tends to be severely restricted vis-à-vis their skilled employees during
phases of skill shortage. As a result, wages increase at a greater rate than productivity
growth. Excessive wage growth for a section of the population would increase income
inequality and inflation.
Also, if shortages in skills are significant, companies would avoid investing in new
technologies as these cannot then be fully exploited. They would thus produce less
differentiated and relatively lower-quality products.
Outlook
India's labour participation and unemployment rate could increase, if the
government does not take policy measures to address the skill shortage
If the current trend in India's labour participation and unemployment rate continues,
about 423 million in India's working age population will be unemployed or unable to
participate in the job market by 2030.
Infrastructure deficit
Despite rising infrastructure investment, India's physical infrastructure is
inadequate to meet rising demand
Although India's capital spending in infrastructure has increased in the 2000s as
Skill shortage and mismatch to pose a compared to that in the 1990s, the demand-supply gap in its physical infrastructure
challenge
Quality Quantity
has widened. During the tenth five-year plan (2002-07), India had invested about 5 per
Young cent of GDP in physical infrastructure (Figure 26). In the eleventh five-year plan
and
Education large
work
(2007-12), it has estimated infrastructure investment at 7.5 per cent of GDP, and, in
Skills force
the twelfth five year plan (2012-17), it intends to increase the investment further to
about 10 per cent of GDP.
India has yet not been able to meet the rising demand for physical infrastructure,
driven by strong GDP growth. For instance:
l Although power availability grew at 5.9 per cent CAGR between 2004-05 and
2008-09, demand grew at 7 per cent CAGR for the same period, thereby
increasing the power deficit
l With rising trade, port congestion has increased - the average turnaround time
went up from 3.4 days in 2004-05 to 3.9 days in 2008-09.
l The railways and airports are operating at more than 100 per cent capacity
utilisation.
Higher spending on infrastructure should either precede or at least accompany the
economic growth in the early stages of economic development where India currently
is. However, since most of the spending in India on infrastructure is typically of
catching up variety, huge infrastructure deficit continues to exist.

India would need to focus more on educating and developing skills of its workforce India's physical infrastructure is therefore more underdeveloped than in peer
and increasing jobs, than on increasing public expenditure on social welfare developing countries. According to the Global Competitiveness Index 2009-10, which
schemes indicates the extent and effectiveness of a country's infrastructure, India's
India would need to carry out structural reforms to improve the quality of education infrastructure development ranks 76 among 133 countries, lower than all other BRIC
and skill development, and devise measures to increase job creation. Without reforms nations - China at 46, Brazil at 74 and Russian Federation at 71.
in the education sector, particularly in higher education, India's large army of under-
educated, unskilled and hence unemployable labour would be unable to meaningfully
Figure 26: Infrastructure investments are on the rise
plug into the growing services sector. And, without industrial reforms to expand the
% of GDP
labour-intensive industrial sector, a major proportion of India's workforce, 55 per cent 12
10.0
as in 2007-08, would remain dependent on the agricultural sector. 7.5
8
5.0
India is currently addressing the challenge of unemployment through social security 4

schemes such as NREGA (National Rural Employment Guarantee Act). This is at best
0
a 'stop-gap' solution as the government, in the longer run, will need to increasingly 2002-07 2007-12 2012-17
transfer funds through social security schemes to provide income to the unemployed. 10th Plan 11th Plan 12th Plan
The resultant increase in the fiscal burden of income-supporting schemes will crowd Source: Planning Commission
out public expenditures on education and infrastructure.
 CRISIL Centre for Economic Research
36
Narrowing the infrastructure deficit would depend on mobilising adequate funds
To narrow the demand-supply deficit in its physical infrastructure, India would need to
improve availability of funds for infrastructure projects through domestic financial
intermediaries, to remove the funding constraint for infrastructure development
(Figure 27). Currently, shortage of funds is not as much a constraint for infrastructure
funding as the ability of India's financial intermediaries to tailor their lending to the
specific nature and requirement of financing infrastructure projects.
Bank financing of infrastructure projects is constrained by a need to minimise asset-
liability mismatch and meet exposure norms. Also, bank financing is currently unable
to match the tenure of lending to the long-term nature of financing infrastructure
projects. For instance, the average tenure of bank deposits is 3 years whereas that of
infrastructure loans would typically be about 10-15 years. India's corporate bond
market, which would have an inherent ability to meet the project risk and high capital
costs of infrastructure projects, is underdeveloped. A mature corporate bond market
that allows debt of long term maturity, for example of 10 years or more, therefore will
be important for financing long-term funding needs of the infrastructure sector.
Besides corporate bond market other avenues of long term funding could be FDI,
ECB, multilateral and bilateral lending agencies.
India would need to remove policy hurdles to attract private investment in
infrastructure projects
The Planning Commission has estimated the infrastructure requirement during 2009-
10 to 2016-17 at Rs 53 trillion, of which it expects 50 per cent to be met by the private
sector. Infrastructure projects in India carry significant risks associated with meeting
government regulation, environment norms and legal requirements; inadequate user
charges; and execution and construction risks. India's government has addressed, with
some degree of success, issues of delay in land acquisition, transparency in
determining project returns, and availability of finances in road development projects.
In the power sector, by introducing a competitive bidding mechanism, the government
Figure 27: Closing the funding gap for infrastructure is critical
% of total
30
25
20
15
10
0
FDI Insurance Funding Central FIs/ Internal State Banks
companies gap budget NBFCs accruals budget
Note: The above break-up excludes special economic zones, healthcare,
education and warehousing
Source: CRISIL Research
India: Raising the Growth Bar, January 2011 37
has addressed a major hurdle for private participation. Yet many policy and operational
hurdles remain.
The government therefore needs to take further policy measures to mitigate both, the
project and financing related hurdles to physical infrastructure.
Outlook
Regulatory reforms and fast-track implementation would hold the key to bridging
India's infrastructure deficit
In future also physical infrastructure-related sectors in India would continue to face
challenges in relation to long term financing needs from financial intermediaries and
policy hurdles that increases project risk. But given the government's renewed thrust
on infrastructure development, India's physical infrastructure deficit is likely to reduce
over 2010-11 to 2015-16, although much would depend on the government's ability to India ranks lowest among BRIC nations in
infrastructure development ranking
fulfill its budgetary commitment on infrastructure investment. United States(Rank 4)
China(46)
Russian Federation (74)
Governance Brazil (74)
India (76)
Poor governance can be a hurdle for sustaining high economic growth and Zimbabwe (130)
0 40 80 140
reducing inequality
It is widely accepted that governance is one of the critical factors explaining the
divergence in performance across developing countries. Governance consists of the
traditions and institutions by which authority in a country is exercised, as per the
World Bank definition. This includes the process by which governments are selected,
monitored and replaced, the accountability and effectiveness of the government to
formulate and implement sound policies and control of corruption. India ranks very
low on the governance on a comparative scale. The percentile rank of the Worldwide
Governance Indicators (WGI) indicates the percentage of countries that rate below
the selected country. Higher values on the scale of 1 to 100 thus, indicate better
governance ratings. The WGI measures, on annual basis, six dimensions of
governance: citizen's voice and accountability of the government (India's rank 60 in
2009), political stability and absence of violence/terrorism (13), government
effectiveness (54), regulatory quality (44), rule of law (56), and control of corruption
(47). India's ranking, especially on the control of corruption indictor within WGI is
volatile ranging from 36 to 50 during the period 1996 and 2009. For one of the fastest
growing economy in the world which desperately needs to sustain high growth rates in
future, fixing the governance issues should be first priority.
 CRISIL Centre for Economic Research
36
Narrowing the infrastructure deficit would depend on mobilising adequate funds
To narrow the demand-supply deficit in its physical infrastructure, India would need to
improve availability of funds for infrastructure projects through domestic financial
intermediaries, to remove the funding constraint for infrastructure development
(Figure 27). Currently, shortage of funds is not as much a constraint for infrastructure
funding as the ability of India's financial intermediaries to tailor their lending to the
specific nature and requirement of financing infrastructure projects.
Bank financing of infrastructure projects is constrained by a need to minimise asset-
liability mismatch and meet exposure norms. Also, bank financing is currently unable
to match the tenure of lending to the long-term nature of financing infrastructure
projects. For instance, the average tenure of bank deposits is 3 years whereas that of
infrastructure loans would typically be about 10-15 years. India's corporate bond
market, which would have an inherent ability to meet the project risk and high capital
costs of infrastructure projects, is underdeveloped. A mature corporate bond market
that allows debt of long term maturity, for example of 10 years or more, therefore will
be important for financing long-term funding needs of the infrastructure sector.
Besides corporate bond market other avenues of long term funding could be FDI,
ECB, multilateral and bilateral lending agencies.
India would need to remove policy hurdles to attract private investment in
infrastructure projects
The Planning Commission has estimated the infrastructure requirement during 2009-
10 to 2016-17 at Rs 53 trillion, of which it expects 50 per cent to be met by the private
sector. Infrastructure projects in India carry significant risks associated with meeting
government regulation, environment norms and legal requirements; inadequate user
charges; and execution and construction risks. India's government has addressed, with
some degree of success, issues of delay in land acquisition, transparency in
determining project returns, and availability of finances in road development projects.
In the power sector, by introducing a competitive bidding mechanism, the government
Figure 27: Closing the funding gap for infrastructure is critical
% of total
30
25
20
15
10
0
FDI Insurance Funding Central FIs/ Internal State Banks
companies gap budget NBFCs accruals budget
Note: The above break-up excludes special economic zones, healthcare,
education and warehousing
Source: CRISIL Research
India: Raising the Growth Bar, January 2011 37
has addressed a major hurdle for private participation. Yet many policy and operational
hurdles remain.
The government therefore needs to take further policy measures to mitigate both, the
project and financing related hurdles to physical infrastructure.
Outlook
Regulatory reforms and fast-track implementation would hold the key to bridging
India's infrastructure deficit
In future also physical infrastructure-related sectors in India would continue to face
challenges in relation to long term financing needs from financial intermediaries and
policy hurdles that increases project risk. But given the government's renewed thrust
on infrastructure development, India's physical infrastructure deficit is likely to reduce
over 2010-11 to 2015-16, although much would depend on the government's ability to India ranks lowest among BRIC nations in
infrastructure development ranking
fulfill its budgetary commitment on infrastructure investment. United States(Rank 4)
China(46)
Russian Federation (74)
Governance Brazil (74)
India (76)
Poor governance can be a hurdle for sustaining high economic growth and Zimbabwe (130)
0 40 80 140
reducing inequality
It is widely accepted that governance is one of the critical factors explaining the
divergence in performance across developing countries. Governance consists of the
traditions and institutions by which authority in a country is exercised, as per the
World Bank definition. This includes the process by which governments are selected,
monitored and replaced, the accountability and effectiveness of the government to
formulate and implement sound policies and control of corruption. India ranks very
low on the governance on a comparative scale. The percentile rank of the Worldwide
Governance Indicators (WGI) indicates the percentage of countries that rate below
the selected country. Higher values on the scale of 1 to 100 thus, indicate better
governance ratings. The WGI measures, on annual basis, six dimensions of
governance: citizen's voice and accountability of the government (India's rank 60 in
2009), political stability and absence of violence/terrorism (13), government
effectiveness (54), regulatory quality (44), rule of law (56), and control of corruption
(47). India's ranking, especially on the control of corruption indictor within WGI is
volatile ranging from 36 to 50 during the period 1996 and 2009. For one of the fastest
growing economy in the world which desperately needs to sustain high growth rates in
future, fixing the governance issues should be first priority.
Developing Asia's stature in the world economy
will continue to grow. It will however, have to
ease infrastructure constraints, manage capital
flows and reduce poverty levels.
Developing Asia
in the Global
landscape
Key points
Annexure
l The better growth prospects for Developing Asia vis-à-
vis mature economies will quicken the drift of
economic power towards Asia, particularly developing
Asia. By 2015 the Developing Asia's contribution to
world GDP will rise to 28 per cent from 15 per cent
currently.
l Despite China's population demographics expected to
turn adverse, Developing Asia will make an incremental
addition of 348 million to the working population
between 2010 and 2020. This together with rising
disposable incomes is expected to fuel domestic
demand and drive growth.
l One key challenge for the Developing Asia in coming
years would be to efficiently manage large amount of
capital inflows without undermining the stability of
asset markets or financial systems.
India: Raising the Growth Bar, January 2011 39
Asia, in particular Developing Asia, is leading the world economy out of the global
financial crisis
The crisis fractured the financial sector and impaired the growth prospects of mature Developing Asia will account for nearly 30%
economies. The medium- term prospects for these economies have weakened due to
deleveraging, ageing populations, tightening regulation, mounting deficits and shift of
of world GDP in 2015
focus away from consumption towards savings. In contrast, Developing Asia in
contrast has swiftly come out of the crisis with its GDP projected to grow at 9.4 per 1990 2002 2015
cent in 2010 and 8.4 per cent in 2011 (Figure 28).
A faster growth in Developing Asia means a faster drift of economic power from
towards it. The International Monetary Fund (IMF) projects that by 2015 Developing
Asia's share of world GDP will swell to 28.6 per cent from 15.1 per cent at the start
of the 2000s decade, if the current growth trends continue. India's share in world
GDP would rise from 3.6 per cent to 6.3 per cent during the same period. Asian
countries in general would also continue to become more integrated with the world
along with significant growth with intra-Asia region. Developing Asia's share in the
world exports increased to 14.3 in 2008 from 5.3 per cent in 1990 as per the latest data
available from World Trade Organisation (Figure 29).
Rapid and comprehensive monetary/fiscal response to the global economic crisis,
strong fiscal positions and increasing trade-linkages with Asia of many developing
Asian economies added resilience to economic recovery.
Many developing Asian countries will need to re-balance growth in favor of
domestic demand
A number of developing Asian economies grew rapidly during the last two decades on
the back of strong exports. Going forward, as advanced countries try to reduce
imports and increase their exports, some re-balancing of demand drivers in the
developing Asian economies would become necessary. Increasing private consumption
in a number of countries particularly China (Figure 30) would be critical to sustain
Figure 28: Developing Asia to lead Global growth Figure 29: Developing Asia's exports have risen sharply
y-o-y% %
16
12
Developing Asia
Developing Asia 12
8
China
4 World 8
United States
0 4
India
-4 0
2003 2004 2005 2006 2007 2008 2009 2010F 2011F 1990 1993 1996 1999 2002 2005 2008
Note: F- Forecast Source: World Trade Organisation
Source: International Monetary Fund
Developing Asia's stature in the world economy
will continue to grow. It will however, have to
ease infrastructure constraints, manage capital
flows and reduce poverty levels.
Developing Asia
in the Global
landscape
Key points
Annexure
l The better growth prospects for Developing Asia vis-à-
vis mature economies will quicken the drift of
economic power towards Asia, particularly developing
Asia. By 2015 the Developing Asia's contribution to
world GDP will rise to 28 per cent from 15 per cent
currently.
l Despite China's population demographics expected to
turn adverse, Developing Asia will make an incremental
addition of 348 million to the working population
between 2010 and 2020. This together with rising
disposable incomes is expected to fuel domestic
demand and drive growth.
l One key challenge for the Developing Asia in coming
years would be to efficiently manage large amount of
capital inflows without undermining the stability of
asset markets or financial systems.
India: Raising the Growth Bar, January 2011 39
Asia, in particular Developing Asia, is leading the world economy out of the global
financial crisis
The crisis fractured the financial sector and impaired the growth prospects of mature Developing Asia will account for nearly 30%
economies. The medium- term prospects for these economies have weakened due to
deleveraging, ageing populations, tightening regulation, mounting deficits and shift of
of world GDP in 2015
focus away from consumption towards savings. In contrast, Developing Asia in
contrast has swiftly come out of the crisis with its GDP projected to grow at 9.4 per 1990 2002 2015
cent in 2010 and 8.4 per cent in 2011 (Figure 28).
A faster growth in Developing Asia means a faster drift of economic power from
towards it. The International Monetary Fund (IMF) projects that by 2015 Developing
Asia's share of world GDP will swell to 28.6 per cent from 15.1 per cent at the start
of the 2000s decade, if the current growth trends continue. India's share in world
GDP would rise from 3.6 per cent to 6.3 per cent during the same period. Asian
countries in general would also continue to become more integrated with the world
along with significant growth with intra-Asia region. Developing Asia's share in the
world exports increased to 14.3 in 2008 from 5.3 per cent in 1990 as per the latest data
available from World Trade Organisation (Figure 29).
Rapid and comprehensive monetary/fiscal response to the global economic crisis,
strong fiscal positions and increasing trade-linkages with Asia of many developing
Asian economies added resilience to economic recovery.
Many developing Asian countries will need to re-balance growth in favor of
domestic demand
A number of developing Asian economies grew rapidly during the last two decades on
the back of strong exports. Going forward, as advanced countries try to reduce
imports and increase their exports, some re-balancing of demand drivers in the
developing Asian economies would become necessary. Increasing private consumption
in a number of countries particularly China (Figure 30) would be critical to sustain
Figure 28: Developing Asia to lead Global growth Figure 29: Developing Asia's exports have risen sharply
y-o-y% %
16
12
Developing Asia
Developing Asia 12
8
China
4 World 8
United States
0 4
India
-4 0
2003 2004 2005 2006 2007 2008 2009 2010F 2011F 1990 1993 1996 1999 2002 2005 2008
Note: F- Forecast Source: World Trade Organisation
Source: International Monetary Fund
 CRISIL Centre for Economic Research
40

high growth rates as exports are expected to grow at a rate lower than that witnessed CRISIL Centre for Economic Research (C-CER)
in earlier decades.
The Centre for Economic Research is a division of CRISIL. Set up in April 2002,
Dealing with excessive and volatile capital inflows pose a challenge for Developing C-CER reflects CRISIL’s commitment to provide an integrated research offering
Asia to help corporates and policy makers take more informed business decisions.
Ample global liquidity on the one hand and the relatively robust growth in developing
Asia on the other hand, has fuelled capital flows to the region. According to estimates C-CER applies sound economic principles to real world applications, creating
by IMF, developing Asia is likely to receive US$135 billion worth of net private conceptual and contextual linkages that are unique to CRISIL. C-CER also
financial flows in 2010 as against US$ 38 billion in 2008. This has translated into a supports Standard & Poor’s Asia Pacific by analysing and forecasting
challenge for the region due to the continuous capital flows along with trade surpluses macroeconomic variables for 14 countries in the region.
and rising inflation risks.
C-CER’s core strengths emerge from a strong understanding of and capabilities
India's stature in Asia and the world will continue to grow in the following areas:
India is the fourth largest economy in the world (in PPP terms) and the second largest
in Developing Asia. By 2012 it is expected to overtake Japan to become the third l Macroeconomics: Regular monitoring and forecasting of macroeconomic
largest economy. India accounts for 22 per cent of GDP, 33.8 per cent of population indicators, assessment of domestic and global events, and analysis of long-
and 32.5 per cent of potential workforce in the Developing Asia. In the next 10 years it term structural changes in the economy.
will add 120 million to the region's workforce, accounting for 53 per cent of the l Financial Economics: Analysis and forecasting of interest rates and
incremental addition. exchange rates.
l Public Finance: Analysis and forecasting of central and state government
revenues, expenditures and borrowing requirements.
l Environmental Economics: Analysis of Indian firms’ impact on
environmental, social and governance parameters.

C-CER reviews developments in the Indian economy on a monthly basis and

provides its outlook on the economy through a dedicated publication
“CRISIL EcoView”. CRISIL EcoView is used by CEOs, CFOs, economists,
corporate strategy teams, marketing teams, treasuries and knowledge
management teams of various corporates and management consultancy firms to
make appropriate strategy level decisions.

The C-CER team comprises senior economists with over a decade’s experience
of working with premier research institutes.
Figure 30: Private consumption in India remains high in comparison with Asian peers
% share of GDP
80

OECD average
60 Dharmakirti Joshi Chief Economist
Sunil K. Sinha Senior Economist
40
Vidya Mahambare Senior Economist
Poonam Munjal Economist
20
Parul Bhardwaj Economist
Dipti Saletore Economist
0
Vishal Belsare Economist
China Singapore Malaysia Korea Thailand Australia India Japan New Zealand Hong Kong Taiwan Indonesia Philippines United States
Source: International Monetary Fund
 CRISIL Centre for Economic Research
40

high growth rates as exports are expected to grow at a rate lower than that witnessed CRISIL Centre for Economic Research (C-CER)
in earlier decades.
The Centre for Economic Research is a division of CRISIL. Set up in April 2002,
Dealing with excessive and volatile capital inflows pose a challenge for Developing C-CER reflects CRISIL’s commitment to provide an integrated research offering
Asia to help corporates and policy makers take more informed business decisions.
Ample global liquidity on the one hand and the relatively robust growth in developing
Asia on the other hand, has fuelled capital flows to the region. According to estimates C-CER applies sound economic principles to real world applications, creating
by IMF, developing Asia is likely to receive US$135 billion worth of net private conceptual and contextual linkages that are unique to CRISIL. C-CER also
financial flows in 2010 as against US$ 38 billion in 2008. This has translated into a supports Standard & Poor’s Asia Pacific by analysing and forecasting
challenge for the region due to the continuous capital flows along with trade surpluses macroeconomic variables for 14 countries in the region.
and rising inflation risks.
C-CER’s core strengths emerge from a strong understanding of and capabilities
India's stature in Asia and the world will continue to grow in the following areas:
India is the fourth largest economy in the world (in PPP terms) and the second largest
in Developing Asia. By 2012 it is expected to overtake Japan to become the third l Macroeconomics: Regular monitoring and forecasting of macroeconomic
largest economy. India accounts for 22 per cent of GDP, 33.8 per cent of population indicators, assessment of domestic and global events, and analysis of long-
and 32.5 per cent of potential workforce in the Developing Asia. In the next 10 years it term structural changes in the economy.
will add 120 million to the region's workforce, accounting for 53 per cent of the l Financial Economics: Analysis and forecasting of interest rates and
incremental addition. exchange rates.
l Public Finance: Analysis and forecasting of central and state government
revenues, expenditures and borrowing requirements.
l Environmental Economics: Analysis of Indian firms’ impact on
environmental, social and governance parameters.

C-CER reviews developments in the Indian economy on a monthly basis and

provides its outlook on the economy through a dedicated publication
“CRISIL EcoView”. CRISIL EcoView is used by CEOs, CFOs, economists,
corporate strategy teams, marketing teams, treasuries and knowledge
management teams of various corporates and management consultancy firms to
make appropriate strategy level decisions.

The C-CER team comprises senior economists with over a decade’s experience
of working with premier research institutes.
Figure 30: Private consumption in India remains high in comparison with Asian peers
% share of GDP
80

OECD average
60 Dharmakirti Joshi Chief Economist
Sunil K. Sinha Senior Economist
40
Vidya Mahambare Senior Economist
Poonam Munjal Economist
20
Parul Bhardwaj Economist
Dipti Saletore Economist
0
Vishal Belsare Economist
China Singapore Malaysia Korea Thailand Australia India Japan New Zealand Hong Kong Taiwan Indonesia Philippines United States
Source: International Monetary Fund
About CRISIL Limited Head office

CRISIL is India’s leading Ratings, Research, Risk and Policy Advisory company. CRISIL House
Central Avenue,
CRISIL offers domestic and international customers a unique combination of local Hiranandani Business Park
Powai, Mumbai - 400 076
insights and global perspectives, delivering independent information, opinions and
Phone : 91-22-3342 3000
solutions that help them make better informed business and investment decisions, Fax : 91-22-3342 3001
improve the efficiency of markets and market participants, and help shape
infrastructure policy and projects. Its integrated range of capabilities includes credit
ratings and risk assessment; research on India’s economy, industries and companies; Regional offices in India
investment research outsourcing; fund services; risk management and infrastructure Ahmedabad
advisory services. Unit No.706, 7th Floor,
Venus Atlantis, Near Reliance Petrol Pump,
Prahladnagar, Ahmedabad 380 015.
Phone: 91-79-4024 4500
Fax: 91-79-2755 9863

Bengaluru
W-101, Sunrise Chambers,
22, Ulsoor Road,
Bengaluru - 560 042
Phone: 91 (80) 2558 0899, 2559 4802
Fax: 91 (80) 2559 4801

Chennai
Thapar House,
Disclaimer 43/44, Montieth Road,
The Centre for Economic Research, CRISIL (C-CER), a division of CRISIL Limited has taken due care in preparing this Report.
Egmore, Chennai - 600 008
Information has been obtained by C-CER from sources it considers reliable. However, CCER does not guarantee the accuracy,
adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the
Phone: 91-44-2854 6205 - 06, 2854 6093
use of such information. CRISIL Limited especially states that it has no financial liability whatsoever to the subscribers/ users/ Fax: 91-44-2854 7531
transmitters/ distributors of this Report. C-CER operates independently of and does not have access to information obtained by
CRISIL’s Ratings Division, which may in its regular operations obtain information of a confidential nature and is not available to C- New Delhi
CER. No part of this Report may be published/ reproduced in any form without CRISIL’s prior written approval. The Mira, G-1, 1st Floor, Plot No. 1 & 2
Ishwar Nagar, Mathura Road,
© 2010 - CRISIL - All rights reserved.
New Delhi - 110 065, India
Phone: +91 (11) 4250 5100, 2693 0117-121
Fax: +91 (11) 2684 2212/ 13
CRISIL Privacy Notice
Contacting us via e-mail or registering with CRISIL reveals your e-mail address and any other information you include such as phone Hyderabad
number and/or mailing address. We will use this information to help us process your registration, fulfill your request or respond to your 3rd Floor, Uma Chambers
inquiry. All of your personal information will be stored in a secure database in India. Access to this database is limited to authorized Plot No. 9&10, Nagarjuna Hills,
persons. (Near Punjagutta Cross Road)
Hyderabad - 500 482
Occasionally, we use data collected about customers and prospects to inform them about products or services from CRISIL, and our
parent company Standard & Poor’s (a subsidiary of The McGraw-Hill Companies), and reputable outside companies that may be of
Phone: 91-40-2335 8103 - 05
interest to them. Many of our customers find these e-mail promotions valuable, whether they are shopping for merchandise, taking Fax: 91-40-2335 7507
advantage of a special offer, or purchasing unique services. On rare occasions, and subject to applicable laws, CRISIL may also share
your information with outside “3rd Party” vendors who will be authorized to use this information solely to perform services (such as a Kolkata
“mailing” house) on our behalf. Horizon, Block 'B', 4th Floor
57 Chowringhee Road
If at any time you would like your name removed from lists that are shared for promotional reasons within CRISIL, Standard & Poor’s,
Kolkata - 700 071
and with other units of The McGraw-Hill Companies, or with third parties simply send a written request to privacy@crisil.com or
Privacy Official, 5th floor, CRISIL House, Central Avenue Road, Hiranandani Business Park, Powai, Mumbai - 400 076, India.
Phone: 91-33-2289 1949-50, 5529 4501
Fax: 91-33-2283 0597
You can also send a written request to privacy@crisil.com if you would like to confirm the accuracy of the information we have
collected from you, or if you have questions about the uses of this information. Pune
1187/17, Ghole Road,
For more information about The McGraw-Hill Companies Privacy Policy, please visit www.mcgrawhill.com/privacy.html.
Shivaji Nagar,
Last updated: 1 January, 2010 Pune - 411 005
Phone: 91-20-2553 9064 - 67
Fax: 91-20-4018 1930

www.crisil.com