India's Economy Stalling?

According to an OECD report published in 2007, India generated 11.3 million new jobs per year on an average during 2000-2005.

India’s phenomenal growth and job creation of the last five years were fueled in large part by huge inflow of cash and investment. Investment accounted for about 39 percent of the country’s gross domestic product in fiscal year 2008, up from 25 percent five years ago. At its peak, more than a third of investment came from abroad, according to Credit Suisse. But in the last three months of last year, foreign loans and direct investment fell by nearly a third, to their lowest level in more than two years, according to a report in New York Times.

The decline in foreign investment has taken a big toll on sectors like real estate, manufacturing and infrastructure. In the last quarter of 2008, the economy’s growth rate plummeted to about 5.3 percent, the lowest in five years. While consumer demand has kept the economy growing so far, the sudden slowing in the flow of foreign funds and rising unemployment will make it harder for the country to grow fast enough to pull hundreds of millions of people out of grinding poverty.

With the economy expected to slow to about 5%, employment generation in India has fallen by 49 percent during January-March this year, largely due to a slow growth of services industries like IT and banking, according to an industry lobby survey.

"The Assocham placement parameter (APP) Index (the body’s index for measuring employment generation) has shown a steep fall of 49 percent and has came down to 509.72 from the base value of 1,000," the Associated Chambers of Commerce and Industry (Assocham) said in a statement.

The APP index Series consist of 26 sectoral indices and a composite index giving an overall picture. The composite index is developed on the principle of weighted average quarterly job creation and has a base value of 1,000.

The study, which tracked employment generation across various sectors throughout metro and non-metro cities, said most of the highest employment generating sectors have curtailed their hiring.

The worst performer in terms of job creation is the IT sector, with its share in the overall index falling to 34 percent from 41 percent, the original allocation for the segment in the base value.

"The IT sector is facing major challenges with contracted demand due to recession in the primary client countries of the US and Europe. The value of the APP IT index has substantially declined by 50.8 percent," the report said.

The sectors that have recorded maximum decline in employment generation include education, hospitality, IT and IT enabled services, real estate, banking, media, textiles, auto, construction, and engineering.

However, some sectors like telecom and fast moving consumer goods (FMCG) have bucked the trend and created more jobs during the same period.

The telecom sector was a leading job generator with its share in the composite index rising from 3 percent to 3.35 percent during the period.

"The pressure on employment, confidence and price levels would be more burdensome than in the past... Moreover, India could be impacted by the return of migrant workers or declining remittances," Citigroup India economist Rohini Malkani said in a recent report.

Citi further said that the Ministry of Labor has indicated that over 5,00,000 jobs were lost during October-December 2008, with export-oriented sectors such as gems and jewelery, autos, and textiles being most impacted.

However, the Citi report stated that this statistic only covers the organized sector, which comprises just 10 per cent of the country's workforce of close to 385 million.

Pakistan, too, has a huge youthful population as India: roughly 105 million out of 170 million Pakistanis are under 25 years old. It will be these people who drive Pakistan's economy in the decades ahead, according Pakistani economist Salman Shah, who talked with the Wall Street Journal recently.

Like India, Pakistan had an economic boom led by construction, manufacturing, telecom, banking and consumers during 2001-2007, under Musharraf-Aziz administration. With annual economic growth approaching 7-8%, it created about 2.5m jobs a year during this period. Talking about foreign direct investment (FDI) in emerging economies, former US Federal Reserve Chief Alan Greenspan said in his book titled "The Age of Turbulence" : “But clearly the Licence Raj (in India) has discouraged foreign direct investment. India received $7 billion in FDI in 2005, a sum dwarfed by China’s $72 billion. India’s cumulative stock of FDI at 6 per cent of GDP at the end of 2005 compares with 9 per cent for Pakistan, 14 per cent for China, and 61 per cent for Vietnam. The reason FDI has lagged badly in India is perhaps no better illustrated than by India’s unwillingness to fully embrace market forces. That is all too evident in India’s often statist response to economic problems. Faced with rising food inflation in early 2007, the response was not to allow rising prices to prompt an increase in supply, but to ban wheat exports for the rest of the year and suspend futures trading to ‘curb speculation’ — the very market forces that the Indian economy needs to break the stranglehold of bureaucracy.” (p. 322 of "The Age of Turbulence" by Alan Greenspan.)

But recently, as with so much else in Pakistan, it's economy has gone awry. The current administration nixed the international money-raising program, even before the seize-up in global markets could do the job for it.

The rapidly rising unemployment and skyrocketing inflation together have dramatically increased hunger and poverty among the most vulnerable in Pakistan. At 33%, the sum of unemployment rate and inflation, known as the misery index, stands at its highest level in Pakistan's history, and it is likely to increase social strife and hurt the chances of recovery.

International investors, not surprisingly, also have bailed: Pakistan fails to meet the definition of a low-risk investment that is attracting money in today's environment with the ongoing financial crisis. As a result, its economy is slowing dramatically, expected to grow only about 1% this year. In part that's because the central bank has kept interest rates in double digits to control inflation, as required by the IMF conditions for Pakistan's bailout. There is a crisis of confidence in the country's leadership that is affecting consumers, investors and businesses. The sensational news headlines about the Taliban advance toward Islamabad are also scaring away the investors. As a result of this economic slowdown, job losses have mounted across almost all sectors of the economy. Few new jobs are being created.

And Pakistan's future, as India's, lies in the nation's ability to move workers from farms to manufacturing and in engaging more with the world rather than retreating from it. Pakistan, like India, also is relatively light on exports as a part of the overall economy. In Pakistan, exports account for less than 15% of gross domestic product, according to Shah, compared with about 25% in India and 40% in China. While India's economy must create 11-12 million new million jobs a year, Pakistan's economy needs to add 2.5-3 million jobs annually to employ all the young people entering the job market each year.

Unemployment in both India and Pakistan is expected to rise further with home coming of migrant workers losing their jobs overseas.

Given strong underlying growth dynamics in South Asia, the negative feedback effects of the global financial crisis are expected to be temporary. A relatively rapid rebound is expected in 2010, with a projected revival of GDP growth to 7.2 per cent, spurring job growth again.

Related Links:

Declining Economy Hurts Pakistani Workers

Global Slowdown Hits Foreign Workers

Pakistan's Foreign Visitors Pleasantly Surprised

Start-ups Drive a Boom in Pakistan

Pakistan Conducting Research in Antartica

Pakistan's Telecom Boom

ITU Internet Data

NEDUET Progress Report 2008

Pakistani Entrepreneurs in Silicon Valley

Musharraf's Economic Legacy

Should Pakistanis be Proud of Their Country?


Anonymous said…
now it is agian 6.1% growth and lot of areas picking up especailly infrastructure, energy and BFSI so can you now write the article about this sigs of recovery. The fact is You Pakistanis are jealous of india..whenever Pakistani points ( if any ) scores more over india who referece it and obviously most of it not then you put comparasion with China.. What you are trying to convey with this article ?
Riaz Haq said…
Here's an Economist mag piece titled "Farewell to Incredible India":

IN A world economy as troubled as today’s, news that India’s growth rate has fallen to 5.3% may not seem important. But the rate is the lowest in seven years, and the sputtering of India’s economic miracle carries social costs that could surpass the pain in the euro zone. The near double-digit pace of growth that India enjoyed in 2004-08, if sustained, promised to lift hundreds of millions of Indians out of poverty—and quickly. Jobs would be created for all the young people who will reach working age in the coming decades, one of the biggest, and potentially scariest, demographic bulges the world has seen.

But now, after a slump in the currency, a drying up of private investment and those GDP figures, the miracle feels like a mirage. Whether India can return to a path of high growth depends on its politicians—and, in the end, its voters. The omens, frankly, are not good.
Is it time for a change at the top? Mr Singh has plainly run out of steam, but there are no appealing candidates to replace him. Mrs Gandhi’s son, Rahul, has been a disappointment. What about a change of government? The opposition BJP is split and has been wildly inconsistent about reform. Its best administrator, Narendra Modi, chief minister of Gujarat, is divisive and authoritarian. If it formed a government tomorrow, the BJP would also have to rely on fickle smaller parties.

Some reformers pray for a financial crisis that will shake the politicians from their stupor, as happened in 1991, allowing Mr Singh to sneak through his changes. Though India’s banks face bad debts, its cloistered financial system, high foreign-exchange reserves and capable central bank mean it is not about to keel over. A short, sharp shock would indeed be useful, but a full-blown crisis should not be wished for, because of the harm that it would do to the poor.

Instead the dreary conclusion is that India’s feeble politics are now ushering in several years of feebler economic growth. Indeed, the politicians’ most complacent belief is that voters will just put up with lower growth—because they supposedly care only about state handouts, the next meal, cricket and religion. But as Indians discover that slower growth means fewer jobs and more poverty, they will become angry. Perhaps that might be no bad thing, if it makes them vote for change.

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