Indian Economy, 5th edition (97 page)

As per the UNFCCC report on long-term finance, of the estimated current international climate financial flows, US$ 55 billion per year was generated from the private sector. Likewise, carbon markets help developing countries to find financial resources to proceed on their sustainability efforts. The CDM (the KP’s market mechanism) as the world’s largest carbon market has helped mobilise more than US$ 215 billion collectively so far in investments in developing countries (CDM Policy Dialogue Report). India has been an active player in the CDM, with over 2000 projects having been accorded host country approval, which has the potential of facilitating an overall inflow of approximately US $ 7.07 billion if all the projects get registered.

Both these sources, at the same time, have serious limitations in terms of predictability and adequacy of flows. It is absolutely clear that they will not deliver on the hardest things: equity, public goods, and adaptation such as climate resiliency in agriculture or offgrid distributed renewables for poor regions. They will instead prove useful for market- led goods and services for the better, such as grid-based solar and wind power, where public subsidies in one form or another will be demanded. Also private sector investment is guided by risk return. This explains the strong inclination of the private sector towards mitigation projects. Adaptation financing continues to be a concern for all developing countries with insignificant private participation as adaptation usually does not yield returns on investment.

Carbon markets on the other hand are volatile, where success is contingent on the level of collective mitigation of ambition of nations. The end of the first phase of the KP saw the CDM market collapsing with carbon prices declining around 70 per cent in the past year alone. Moreover, unilateral restrictions imposed by the authorities in some of the major carbon markets such as EU on carbon credits from major developing countries such as India have not helped matters. The prices of carbon credits are likely to remain in a trap until the global ambition improves and new market mechanisms emerges to take into account the pledge based emissions. Both the carbon markets and private money need clear and targeted signals from public policies to address the institutional and market barriers confronting them.

PROBLEMS & PROSPECTS

Though multilateral efforts on sustainable development and climate change have led to several positive outcomes, there are still areas of concern where further work is needed to safeguard the interests of developing countries in future deliberations. Some of the challenges and deliverables from India’s point of view are –

i.
Follow up and action on the Rio + 20 outcome document, and the four processes/mechanisms that were as part of it, especially on developing SDGs and the processes on the financing strategy and technology transfer.

ii.
Taking forward the climate change discussions at Doha, the key question to be addressed is to articulate equality in the evolving arrangements that will be applicable to all in the post 2020 period. We have to ensure that domestic goals continue to be nationally determined even as we contribute to the global efforts according to the principle of CBDR and respective capabilities.

iii.
Taking concrete decisions on the sectoral framework for such actions closing the possibility of both unilateral measures and actions being initiated in sectors by the respective international organisations like ICAO or IMO on their own.

iv.
Equity, fair burden sharing, and equitable access to global atmospheric resources have to be protected and addressed more adequately under the DP, India will have to fight for its fair share of carbon and development space.

The sources and channels of providing long-term finance by developed countries have not yet been clearly identified. With no certainty on funding in the coming years, it is absolutely necessary to expeditiously mobilise finance and provide initial capital to the GCF for its operations.

Based on historic emissions and responsibilities, developed countries should take the lead. However, according to a June 2011 Study
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, developing countries are pledging greater cuts in their GHG emissions than developed countries.

India is also proactive in this regard with its intentions and ambition firmly in place in its policies and programmes. One may rightly argue that with the Twelfth Plan’s focus on ‘environmental sustainability’, India is on the right track with the right enabling environment and has a number of achievements to its credit. However, the challenge while India is growing is to identify the key drivers and enablers of growth be it –

•
Infrastructure

•
Transportation sector

•
Housing, or

•
Agriculture

And finally, to make the above-given sectors grow sustainably. This leads us to the next and most
vital issue
of finding and raising new and additional resources for meeting economic well-being needs with greater environmental sustainability. More often, it is the resource crunch which is the stumbling block for developing countries like India. While it makes efforts to efficiently and expeditiously bring price signals and other policy instruments into play, India could do much more if new and additional finance and technology are made available through multilateral processes.

“Be it national or global, environmental decline and global warming occurred gradually over decades and centuries, picking up pace with time. We must remember that the clock is now ticking on the needed global action to combat and contain this decay. This action should be fair, just and equitable for all countries so that our future has ecological and economic space for sustainable development for all”.
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Moreover, mankind is faced with a situation when, by all means, it develops and selects the kind of ’technologies’ which have the minimum or least ‘fallouts’ on our eoclogy and environment in the process of promoting the cause of mankind’s development. Absence of global concensus cannot be cited by the individual nations as a refuge to sit idle and continue in the mode of ‘business as usual’. Before it is too late, the conscience of humanity must awaken from its inertia.

EPILOGUE

Hardly anything makes economic sense unless its continuance for a long time can be projected without running into absurdities.
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Growth and development can happen to a ‘limited objective’, but it cannot be stretched upto an ‘unlimited extent’. How can the ‘finite’ earth support mankind’s ‘infinite’ physical needs? – long before this was postulated by the ‘Club of Rome’ in 1972, exactly the same thing Gandhiji had said in late thirties itself, ‘Earth provides enough to satisfy every man’s need, but not for every man’s greed’. Mankind needs to introspect not only about its present needs but the way those needs are bieng met.

Besides, we also need to ‘differentiate’ between our ‘needs’ and ‘aspirations’. Our physical needs have a direct ‘link’ with the resources we have at our disposal to meet them. If mankind is to survive and prosper, we need to be aware of the repercussions of our activities on Mother nature.

INTRODUCTION

As the developed world is in the process of greying and are heading for a crunch in the ‘working population’, nations with growing population in the working age-group see this as an opportunity to employ their surplus manpower in there nations. In case of India, the situation has been considered to be highly favourable by international as well as Indian experts. But these are mere aspirations. To reap real diridends, we need to provide the required ‘quality’ to the quantity of our population. We need to strengthen our human resource development capabilities keeping in mind the future requirements. Only then the dividend of demography will be in India’s favour.

The
Economic Survey 2012-13
, on the India’s prospects of garnering demographic dividend, says, “Policymakers are usually focused on short-run economic management issues. But the short run has to be a bridge to the long run. The central long-run question facing India is ‘Where will good jobs come from?’ Productive jobs are vital for growth. And a good job is the best form of inclusion. More than half our population depends on agriculture, but the experience of other countries suggests that the number of people dependent on agriculture will have to shrink for per capita incomes in agriculture to go up substantially. While industry is creating jobs, too many such jobs are low productivity non-contractual jobs in the unorganized sector, offering low incomes, little protection, and no benefits. Service jobs have relatively high productivity, but employment growth in services has been slow in recent years. India’s challenge is to create the conditions for faster growth of productive jobs outside agriculture, especially in organised manufacturing and services, besides improving productivity in agriculture. The benefit of rising to the challenge is decades of strong inclusive growth”.

Optimism vs Pessimism

Experts with optimistic views are confident in India’s demographic dividend because of the fact that India’s dependency ratio, as measured by the share of the young and the elderly as a fraction of the population, will come down more sharply in the coming decades. More working age people will mean more workers, especially in the productive age groups, more incomes, more savings, more capital per worker, and more growth. Also, because demographic change is associated with fertility declines, the transition period may be accompanied by greater female participation in the labour force
1
.

As per the IMF, every fast-growing Asian economy in recent years has accelerated as it underwent a demographic transition. In India
2
itself, the high growth states (Tamil Nadu, Karnataka, and Gujarat) in the period 1991-2001 had a dependency ratio which was 8.7 percentage points lower than that of the low growth states (Bihar, Madhya Pradesh, and Uttar Pradesh) and an average annual growth rate that was 4.3 percentage points higher. Looking ahead, the low growth states will benefit more from the demographic dividend, as higher incomes and lower fertility alter demographics. Indeed, over the period 2001-11, the hitherto laggard states have grown at an average of around 5 per cent annually. The difference between their growth and that of the leaders in the period 2001-11 is just 1.5 percentage. So demographic transition seems to be correlated with growth, with some reasons to believe that causality flows both ways i.e., lower dependency ratios increase growth and higher growth reduces fertility and consequently dependency ratios.

These optimists point to another reason for cheer. Cross-country evidence suggest that productivity is an increasing function of age, with the age group 40-49 being the most productive because of work experience
3
. Nearly half the additions to the Indian labour force over the period 2011-30 will be in the age group 30-49, even while the share of this group in China, Korea, and the United States will be declining. That India will be expanding its most productive cohorts even while most developed countries and some developing countries like China will be contracting theirs in the coming decades can be another source of advantage.

However, the as pessimists are not convinced. A larger workforce translates into more workers only if there are productive jobs for it. Will there be enough productive jobs? One way to make progress in answering this question is to understand the commonalities as well as the differences between India’s growth path and that of other populous fast growing Asian economies. By comparing where India is today, with where those countries were at similar stages in their development, as well as by looking at what they did next, we might get a better perspective on what India might need to do. Of course, any such analysis has to be accompanied by two important caveats –

i.
First, countries differ and do not necessarily follow similar trajectories;

ii.
Second, the global environment has changed.

The opportunities India faces now are different from those that previous fast growers faced when they were at a similar stage of development. Thus, blindly replicating their trajectory may be unwise.
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COMPARING GROWTH AND TRADE

If we analyse the various economic outcomes for selected Asian countries around their dates of initial ‘takeoff’ into periods of high growth, we identify the year of takeoff for comparator Asian countries based on IMF (2006)
5
the dates are 1979, 1973, and 1967 for China, Indonesia, and Korea respectively. For India, taking the year of takeoff as 1991, when major economic reforms began, the following narrative is clear as given below :

•
India was growing at similar rates as other Asian economies before takeoff. After takeoff, it kept pace with Indonesia, but China and Korea grew faster.

•
Setting date 0 as the year the country’s per capita GDP in 2000 US dollars, crossed $500;

•
By the time India’s dependency ratio falls below 40 per cent, China’s growth is more robust under both these alternatives, while India’s matches that of Indonesia.

•
Korea’s trajectory is similar to India’s in the initial years after takeoff, though after 10 years the slope of its trajectory increases steeply.

•
By plotting an index of a country’s share of world trade, with year 0 based on our first takeoff definition (1979, 1973, 1967, and 1991 for China, Indonesia, Korea, and India respectively). interestingly, India’s growth in its share of world trade is similar to China’s and greater than Indonesia’s at similar periods after takeoff. India’s openness is also evidenced by the trade to GDP ratio, which exceeded 55 per cent in 2011. By contrast, this ratio is only 31 per cent for the United States.

•
The takeaway from the evidence examined so far is that India’s growth performance has been similar to that of some of the fast-growing Asian economies at similar stages after takeoff, but not as spectacular as China’s. Interestingly, despite being seen as a trade laggard, India has grown more open to trade at about China’s pace.

Sources of Growth

For knowing the edge India has in garnering ‘demographic dividend’, a comaprision with the other Asian economies – in the area of
sources of growth
will serve the purpose.

•
Growth in per capita income is driven by growth in labour productivity (what the average worker produces), growth in working age population (fewer the people who are in the dependent age group in the population, greater the output), growth in the fraction of those who can work and that actually look for work (labour force participation rate), and growth in those looking for work who actually find it (employment rate).

•
Because accurate employment data are hard to find for developing countries, studies typically ignore the employment rate in decomposing the sources of growth. A decomposition of per capita income growth during the 20 years after takeoff suggests that across countries, much of the increase in per capita income comes from greater labour productivity.

•
Interestingly, except for Korea,
LFP
*
(labour force participation) has fallen on an average annual basis, so it subtracts from growth.

•
Finally, the increase in the share of WAP (working age population) seems to add only a little to growth.

•
Since the increase in working age population is what we call the demographic dividend, the fact that it contributes so little to growth (on average, 0.5 percentage points for India in the 20 years since 1991) may seem a puzzle.

The puzzle can be solved this way – the increase in the fraction of people working is probably not the main consequence of the demographic dividend. Instead, the effects of the demographic dividend are channelled through the increase in labour productivity, which comes from more physical capital employed per worker (in turn resulting from greater saving and investment), more human capital per worker (which comes from more education as smaller families lead to greater spending on education per child), and greater
TFP
(total factor productivity).
**

Therefore, it is useful to see how much each of these factors contributed to labour productivity. Better
human capital
accounts for only a small part of the growth in labour productivity for Asian fast growers. Instead, the two biggest contributors are the growth in capital deployed per worker and growth in TFP. Indonesia and Korea relied much more on capital deepening. India did not have as much growth in capital per worker as these countries but had stronger growth in TFP. Finally, China grew both because of more capital deployed as well as strong increases in TFP.

Quite interestingly, in the years beyond the 20th year after takeoff which India is now entering, capital deepening slowed for both Indonesia and Korea but it increased for China. More interestingly, TFP slipped considerably for Indonesia and was not large for Korea to begin with. However, it increased for China.

Precisely speaking, the underpinnings for continued strong Chinese growth in the years beyond the second decade after takeoff are a robust investment rate as well as substantial increases in the intrinsic productivity of jobs. If India were to follow a similar path, it would need to increase savings and investment, both of which will follow from the demographic transformation. But it will also have to increase the intrinsic productivity of jobs, that is TFP.

IMF
(World Economic Outlook-2006, ‘Asia Rising: Patterns of Economic Development and Growth’, Chapter 3)
suggests that a significant portion of China’s increase in TFP has come as workers migrate from low-productivity sectors like agriculture to high-productivity sectors like manufacturing. What lies ahead for India? A recent
study
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says that LFP in agriculture is very low but it employs over half the labour force. In contrast, financial and brokerage services are the most productive sector, in the economy, but employ a tiny share of the labour force.

Labour Productivity & its Reallocation

IMF (2006) suggests that a significant portion of China’s increase in TFP has come as workers migrate from low-productivity sectors like agriculture to high-productivity sectors like manufacturing. What lies ahead for India? That so many continue to be dependent on agriculture is one reason that the government has focused on improving productivity in agriculture, even while attempting to support incomes of both farmers and workers through various programmes. Agricultural productivity remains low probably because too many agricultural workers work with relatively fixed and limited amounts of productive assets i.e., land and capital (irrigation, technology, tractors, machinery, and the like). One way to increase labour productivity, therefore, is to increase investment (and thus capital per employee) across all sectors, including agriculture
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.

An equally effective way of increasing labor productivity might be to increase TFP by moving some of those dependent on low-productivity agriculture to higher-productivity jobs in industry or services. This would also allow those who remain in agriculture to farm larger, more viable plots, employing more mechanised equipment to improve labour productivity. Clearly, more investment in worker-receiving sectors will be needed to keep up the capital per employee, but the typically greater TFP in those sectors will also mean much greater output per capita. Continuing reallocation of workers out of low-productivity sectors into higher-productivity sectors is akin to increasing TFP and can therefore be a growth engine
8
.

What has been the situation of
workers’ reallocation in India
? By plotting sectoral shares of employment and shares of value added in the years since takeoff the following situation has been shown by the
World Bank
(World Development Indicators, July 2012)
:

Situation in
Agriculture
sector –

•
India certainly has a bigger share of employment in agriculture today than the other Asian countries, but perhaps only because it has not had as many years since takeoff.

•
Employment share and value added share in agriculture in India is coming down at a similar pace as in the other Asian economies (though Korea seems to have a lower share of people in agriculture).

•
Extrapolating into the future, if India followed China’s or Indonesia’s path, about a 10 percentage point share of overall employment would move out of agriculture in the next 10 years, bringing the share of employment in agriculture down to about 40 per cent.

In sector
Industry
, greater differences are seen –

•
While the growth in India’s share of employment in industry seems to be on par with the growth of other Asian economies at similar stages (with the exception of Korea), the surprising fact is that India’s share of value added in industry has not grown to keep pace with its share of employment,basically, it has fallen.