Wednesday, November 26, 2014
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India’s Growth Crossroads

MANILA – As the slowdown in the world’s major industrial economies drags on, growth in developing Asia is being affected. A serious burden will likely be placed on the region’s major economies, particularly its two giants, India and China. Both countries’ external sectors have clearly been hit hard, while domestic consumption is stagnating. Fixed-asset investment in India rose by only 2.3% in the first half of 2012, compared to 9% in the year-earlier period.

Unlike China, which has shown clear signs of stabilization since mid-2012, there is no clear evidence of recovery in India yet, as delay in implementing necessary reforms, among other factors, has weakened the economy’s competitiveness. While recent government measures are expected to boost economic revival, an additional challenge is that growth must be made sustainable and more inclusive, which requires addressing four key issues.

The first is service-sector upgrades. India already has a large service sector, which has been a major source of growth. Considering the country’s young and growing population, the service sector needs to create more jobs for the millions who will join the workforce every year.

But India’s service sector has been dominated by traditional, low-wage output in informal businesses, such as restaurants and personal services. To achieve inclusive growth, India must shift toward modern services, such as Internet connectivity technology, finance, law, accountancy, and other professional business services. The authorities must reduce burdensome regulations to allow the sector to be more competitive and dynamic (recent government service sector reform is most welcome).

Second, improvements in the investment climate are vital, especially if India is to realize its potential in manufacturing. India needs to expand dramatically the sources and volume of available infrastructure financing. This will not be possible without private-sector participation, which requires, in turn, a business environment that ensures adequate return on investment, transparency in procurement, and high-quality governance and regulation.

Third, while India possesses some of the world’s best managers, scientists, and engineers, a large portion of its workforce is unskilled or semi-skilled, which may constrain the country’s ability to deliver inclusive growth. The National Policy on Skill Development marks a welcome shift from the traditional, government-led model of skill development and vocational training to one that emphasizes private-sector-led initiatives.

Finally, there is the challenge of urbanization. Migration to urban centers is causing new cities to emerge and existing ones to expand. India must seize the opportunity to adopt green urban planning early on: mass-transport systems should link satellite cities to ports and megacities, and new cities should be eco-friendly and energy-conserving. The Indian government’s recent promotion of dynamic economic corridors between major cities is a step in the right direction.

The Asian Development Bank is working on innovative mechanisms to bring more finance to the infrastructure sector, such as the recent partial credit guarantee facility set up by India Infrastructure Finance Company Limited in collaboration with the ADB. By boosting the credit ratings of infrastructure projects via credit enhancements, this facility will allow pension funds and insurers to invest in infrastructure projects.

A large share of our assistance is focused on India’s lagging states, making our work strongly inclusive. Moreover, the ADB’s support includes skills development, particularly to foster skills required by the infrastructure sectors, and strengthening skills design and delivery systems.

The ADB is also exploring possibilities for focusing a subset of our operations around a few high-priority economic corridors, which leads naturally to the issue of regional cooperation and integration. With India playing a major role, the benefits of cooperation are immense, both within South Asia and across the continent more broadly. Greater regional cooperation can help South Asia to achieve shared prosperity that is both inclusive and sustainable.

Indeed, only 5.4% of South Asia’s current trade flows are intra-regional, compared to 51% in East Asia. Major hurdles include poor transport connectivity and stifling non-tariff barriers, which impede growth and undermine welfare in Nepal, Bhutan, Bangladesh, and north-eastern India.

With strong support from India, the South Asia Subregional Economic Cooperation Program, known as SASEC, has achieved much success in prioritizing trade facilitation; developing regional road and rail projects in Nepal, Bhutan, Bangladesh, and India; and agreeing on a time-bound investment program, including investment in the Siliguri corridor connecting India’s north-eastern states with the rest of the country. Improved connectivity and trade will not only boost growth, but also promises an economic lifeline for millions of poor people.

India is expected to continue to benefit from its so-called demographic dividend and to lead global growth in the coming decades. Everybody sees the country’s enormous potential. Timely reforms on key issues will open the door to a bright future for its people.

Read more from our "Falling BRICS?" Focal Point.

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    1. CommentedKunal Kundu

      Mr. Kuroda's piece simply states the obvious. Coming from the president of ADB, one would have expected some bold suggestions. For more on the Indian economy, one may visit http://kunalsthoughts.weebly.com

    2. Commentedkiers sohn

      I don't think that we can ignore the role of corruption and domination of fractious politicking in ANYTHING India does. Governance here is a joke, not to be analyzed in technocratic macro-economic terms.

      The indian economy is at a stall because the long term incumbent government itself merely STOPPED approving new infrastructure projects in power and roads and telecom (that's a HUGE chunk of the "economy" right there), it RAISED interest rates in the name of inflation (which is systemic, this argument can be made every year), and the government SPENT its earned money from taxes on WASTEFUL subsidies which never reach farmers (ie. it took the money for itself by corrupt means), oh and it STOPPED producing coal because it found corruption there too.

      It created a crisis, so that it could push through it's silly tax increases in the latest budget (presided over by a poseur FM), meanwhile broadcasting it's intent of coming lower interest rates (betraying the fact that the Reserve Bank of India is a political institution) so that all international bond traders (FII's as they are called) could pile into Indian Debt to reap the gains of the coming rate cuts. This is an economy that really worships Hot Money Flows while the rest of the devloping world struggles against them.

      All is not what it is made out to be. Fickle "Hot Money" flows are the holy grail of Indian Finance.

    3. Commentedcaptainjohann Samuhanand

      What do you mean by Reforms Sir? Is it some way that India can be exploited by foreign monopoly capitalism?China has stopped its rare earths exports to you while India is selling its meagre output to you.It is this type selfish national interest of China which has made it as G@ while Indian capitalistas just act as agents of MNCs.Health care,Education are the key areas which should be focus especially in villages.

    4. CommentedLeo Arouet

      Yo creo que la India debe apostar mucho más y mejor por el desarrollo y fomento de la industria. La razón válida es que la industria dinamiza todos los sectores a diferencia de los servicios. La India posee un sector de servicios fuerte, sobre todo, en las tecnologías de la información, redes, cómputo, asesorías legales y estados de cuenta y renta. Por lo tanto, es necesario que se enfoque ahora ya no tanto en los servicios sino en otras actividades económicas y que ponga especial énfasis en infraestructura.

    5. CommentedMURALI KRISHNA HARI

      India is just now building Urban infrastructure. It should be sustainable development with good public transportation. If Government encourages automobile industry we may end up in chaos in Cities. Already cities are over crowded, and it is getting difficult to manage big cities. Bangalore is proved to be big failure, in 10 years of IT revolution, the beauty of city is destroyed by mindless construction works. Also more industries/service should be concentrated in tier 2/3 cities.

    6. CommentedFrank O'Callaghan

      The key to growth is the increased prosperity of the poor. Further enrichment of the wealthy is economic disaster in the long run.

    7. CommentedIDIKULA MATHEW

      Thanks for this article. I agree the facts are very clearly presented in case of India and mostly agreeable facts. However it is not clear to be how there was a clear stabilization judgement from China in the similar comparative lines as suggested to make the recovery.
      There are not conclusive facts which refer to an domestic consumption stagnation in India. But the facts suggested in terms of improvement are brilliant and very much agreeable.

    8. CommentedZsolt Hermann

      These countries are affected by the same global trend as anybody else.
      The unnatural thus unsustainable over production, over consumption economic model has entered self-destructive state.
      The model which is built on generating artificially inserted desires for goods, services and pleasures human beings have no natural inclination for in order to achieve a healthy, modern, comfortable life, pushing everybody to work more, take more credit inflating balloons all over the place, generally making everybody unhappy, overworked, indebted, and more unsatisfied as ever despite unprecedented living conditions, has exhausted the human resources, and started to exhaust natural resources.
      In the short future as this system collapses 80-90% of todays financial and economical activity will become obsolete, which will affect the still developing nations like China and India very hard.
      Paradoxically since in India still a huge part of the population lives on very simple serving jobs, or on simple "manual" agriculture, mainly doing simple daily jobs that caters for the necessity of the population, based on this India will have better foundations to absorb the shockwaves of the collapse of the present socio-economic system.
      The slower they "grow" right now, the better they will recover.

    9. CommentedVenu Madhav

      Kuroda-san: Very nice article. The trade facilitation in the north-east corridor of India and the neighbouring countries like you pointed is the key to expand the inclusive growth realm and more importantly help millions more to affordable living standards and a sustainable demand. I would be eager to learn and keen to understand how I can help on the trade facilitation front with the help of our software application.

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