K C Chakrabarty: Challenges and opportunities in a trillion dollar
economy
Address by Dr K C Chakrabarty, Deputy Governor of the Reserve Bank of India, at the
Associated Chambers of Commerce and Industry of India's (ASSOCHAM) National Banking
Conclave, New Delhi, 17 June 2011.
* * *
The assistance provided by Ms P B Rakhe in preparation of this address is gratefully acknowledged.
Shri Pranab Mukherjee, Hon'ble Finance Minister, Government of India, Dr Narendra
Jadhav, Member, Planning Commission, Shri Dilip Modi, President , ASSOCHAM, Shri R. N.
Dhoot, Senior Vice President, ASSOCHAM, and MP, Rajya Sabha, Shri J. M. Garg, Central
Vigilance Commissioner, Dr Thomas Mathew, Jt Secretary, Capital Markets, Ministry of
Finance, Shri M. Narendra, Chairperson, ASSOCHAM National Council for Banking &
Finance and CMD, Indian Overseas Bank, Shri T. M. Bhasin, CMD, Indian Bank, Shri M. V.
Tanksale, ED, PNB, Shri N. Seshadri, ED, Bank of India, Shri D. S. Rawat, Secretary
General, ASSOCHAM, distinguished guests, ladies and gentlemen.
It is a pleasure and privilege to be here at the National Banking Conclave on the theme
"Challenges and Opportunities in a Trillion Dollar Economy". As you are aware, the Indian
economy reached the trillion US dollar GDP milestone in 2007 and joined other countries of
the trillion dollar club, namely, the US, UK, Japan, Germany, China, France, Italy, Spain,
Canada, Brazil and Russia. In fact, over the period 1960 to the late 1980s, India's GDP in
US dollar terms doubled every nine years, on an average. Since then, the period for doubling
has declined to around 5 years, coinciding with the initiation of wide-ranging structural
reforms. With India's GDP at current market prices during 2010-11 already placed at around
US dollar 1.7 trillion, it is expected that the Indian economy would cross the
US dollar 3.4 trillion mark by 2015-16, i.e., well within the span of the ensuing (Twelfth) Five
Year Plan. Therefore, as policy makers and business leaders, we should be thinking about
exploiting the opportunities and preparing ourselves for the challenges of managing a
multitrillion dollar (and not a one trillion dollar) economy!
Although some argue that India catapulted to the trillion dollar league in 2007 on account of
GDP valuation based on sharply appreciated exchange rate that resulted from huge inflows
of foreign exchange, most others consider this as an emerging sign of take-off that could
accelerate the growth momentum going forward. Last year, economists at Morgan Stanley
and other long-range forecasters predicted that India's growth will start to outpace China's
within three to five years and continue at a faster rate than any other large country over the
next 20 to 25 years. Hence, I believe, and others do so too, that the Indian economy is set to
experience double digit growth during the coming two to three decades.
While the future growth outlook of the Indian economy looks promising, the challenge is to
make it more inclusive. At the grassroots level, India continues to be a poor and less
developed country in spite of years of financial and other support provided by the
Government to equity enhancing distributional programmes and the spectacular turnaround
in investment and growth. According to a Planning Commission Report on the methodology
of estimation of poverty issued in 2009, the all India poverty head count ratio was at 37.2 per
cent in 2004-05 compared to 45.3 per cent in 1993-94. Prima facie, while the slow pace of
reduction in poverty due to high population growth rate, large workforce still dependent on
agriculture and illiteracy continue to obstruct the growth potential, the paradigm that these
disabilities can be nevertheless be turned around into a winning proposition is also surely
within the realm of possibility.
In fact, many of the disadvantages which the Indian economy faced in the past has already
been waned and turned out to be advantages. To illustrate, a disadvantage that has plagued
most developing economies including India has been that of scarcity of capital. This scarcity
has hindered the investment and growth prospects of these economies in the past. This,
however, is no longer a disadvantage. With most countries including India opening their
doors to foreign investment, the question is no longer of scarcity of capital but the rate of
return that we can pay on this capital. Hence, capital is no longer a constraint in the era of
liberalization and globalization if we are able to pay the required return and are able to attract
the capital flows into our economies especially in the form of foreign direct investment.
Further, high population growth was another disadvantage faced by many developing
countries while making efforts to improve the GDP in per capita terms. However, with the
emergence of skills and knowledge as new engines of economic growth, higher population
growth is more of an opportunity than a constraint. According to Census 2011, 56.9 per cent
of India's total population belongs to the age group 15-59 years. Importantly, only 7.5 per
cent of the population belongs to the age category "60 years and above". This shows that
India is yet to experience the problem of aging. Further, it is predicted that India will see a
sharp decline in the dependency ratio over the next thirty years, which will be a major
demographic dividend for India. Moreover, it is estimated that not only India's demographic
trend would remain favourable for the next three decades but also remain better than other
BRIC economies.
We have to, however, realise that these advantages will not transform on its own to higher
economic growth. In this regard, appropriate interventions would be required to reap
maximum benefits from this favourable demographic dividend by investing in education and
skill development. In the Union budget for 2011-12, Indian Government has allocated
Rs. 52,057 crore for the education sector, which is 24 per cent higher than the 2010-11
education expenditure. However, expenditure on education as per cent of GDP is relatively
low in India when compared with some of the developed nations as also with some
developing countries (Table). Among the G-20 countries, India not only has lowest
educational indicators, but the public education system is also poor when compared with
other BRIC countries and some of the emerging market economies. In 2009, World Bank
expressed the view that acute shortage of skills especially in the area of civil engineering
shadows the growth prospects of the Indian economy. According to Prime Minister
Dr. Manmohan Singh, "around 10 per cent of the relevant age group is enrolled in any
institute of higher education as compared to 40 to 50 per cent in most developed countries".
Banks play a facilitating and enabling role in this endeavour by extending education loans
and they have a great responsibility to ensure that no deserving student is denied an
education loan. However, just providing education loan is not sufficient. Industry and bankers
would have to work together to ensure that the employability of such students is high and
that the people with the right type of education and skills are available for the industry.
Table:
Expenditure on Education
Country Spending on Country Spending on
Education as per cent Education as per cent
of GDP of GDP
Switzerland 5.8 South Africa 5.3
5.7 5.2
United States Thailand
France 5.6 Chile 4.2
5.3 4.2
UK Brazil
Malaysia 8.1 India 4.1
5.3 3.8
Mexico Russia
Note: Government education expenditure as per cent of GDP (2000-2002)
United Nations Human Development Programme
Source:
We need to recognize that the knowledge, skills and productivity of our growing young and
dynamic work force forms the backbone of our economy. This would not only require
effective implementation of developmental and poverty alleviation schemes at the bottom of
the pyramid, but also the recognition that these new factors of production, namely,
knowledge, skills and technology which have the ability to unleash the productive frontiers of
the economy in the most efficient and dramatic way. Notably, these new factors of production
which can liberate human enterprise from the binding constraints of land, labour and capital
are the engines of growth in the knowledge economies of the western hemisphere, along
with countries like Japan and Israel both of which are otherwise scarcely endowed with land
and labor. Technology is the surest and the most appropriate way of bringing inclusion in
respect of any product and / or service. Technology has revolutionized every industry in the
world by extending faster and cost-effective delivery of products and services, ensuring
affordability to those who otherwise could not, and simultaneously, ensuring viability and
profitability of producers. This has other positive spinoffs. If the cost of products and services
is brought down leveraging technology, inflation also would come down. That would lead to a
softer interest rate regime which would enable sustainable growth.
Taking cue from examples of western hemisphere, India should try to become a knowledge
economy to promote inclusive economic growth. The progress from agrarian and/or industrial
economy to that of knowledge economy is based on the ability to acquire ownership of
knowledge and to use it to create or improve goods and services. Workers in the knowledge
economy are especially distinct in so far they know what they are doing, how the work is
done and why they are doing the work. They also excel in their fields of knowledge and are
often better at their jobs than their superiors. The respect for knowledge workers leads to
most desired outcomes through change management as experimentation and innovation are
encouraged and rewarded. Thus, we must strive assiduously to convert our young work force
into potential power house of productivity and growth.
Having said that, it would be impossible to achieve these objectives in the absence of
poverty alleviation. Extreme poverty and deprivation often discourage the urge of the poor to
participate in programs that do not provide immediate support to their livelihood. To
encourage the poor to participate in these initiatives, therefore, requires that developmental
programs, at the starting point, should focus on providing opportunities for people to earn a
living and increase their incomes over time. The program can be followed up by providing
people the means for enhancement of their capabilities to exploit available opportunities.
Finally, effective mechanisms for protection against a temporary or permanent loss of
livelihood should supplement the overall program to achieve the goal of inclusive growth.
Presently, a number of intervention programs are conducted by the Government that focus
on employment creation and the flagship NREGA is one such significant initiative. One could
not, of course, belittle the excellent work being done by non-government organizations
engaged in supporting livelihoods in several poor underdeveloped hinterlands. In the
financial sector, the Reserve Bank has crafted well known programs to achieve planned,
structured and sustained financial inclusion such as adoption of Business Correspondent and
Business Facilitator Model, preparation of Board Approved Financial Inclusion Plans,
requiring banks to providing a minimum of four banking products and services including
nofrills accounts with overdrafts, and is committed to furthering the scope of these initiatives.
Collective and multipronged efforts to promote inclusive growth supplemented by some
earnest investment in human capital are the only ways by which we can move towards
becoming a knowledge economy. The second stage assimilation of knowledge, skills and
technology can be obtained from education by means of brain-gain. The virtual modes of
education through ICT and linkages to national and international information hubs can
provide the benefits of information availability without the need to be present at in certain
space or time. The benefits of brain-gain are realized from the wide-spread availability of
domain knowledge from remote locations which can transform business productivity at
minimal cost. The e-Choupal experiment of ITC, for example, showcases the possibility of
improvement in quality of produce and improved realization of returns from farming due to
availability of better information on market prices. The helpline of the Ministry of Agriculture
with experts on board has been similarly instrumental in solving day to day problems of
farmers. Further, internet based e-education portals for students offer boundary-free learning
experience. These portals provide virtual classrooms and guidance from professional
instructors on different subject areas and can have widest possible reach regardless of brick
and mortar structures.
While the initiatives being taken are laudable, there is a crying need for reforms in our
educational system which requires to be toned up to impart education that is focused on the
demands of the new millennium. Effective delivery of educational inputs in a large economy
like India requires a critical mass of volume and quality. In this regard, the Government
programmes such as Sarva Shiksha Abhiyan (SSA) in the elementary education sector and
Rashtriya Madhyamik Shiksha Abhiyan (RMSA) in the secondary education sector helped in
achieving the universalisation of education to a very large extent in terms of access to
schooling and improvement in gross enrolment ratio. Even then there is a pressing need to
further increase school enrollments, along with improvements in the quality of education.
This may be extremely important in harvesting the fruits of investment. In this regard, the
enactment of Right of Children to Free and Compulsory Education Act, 2009 and the
operationalisation of Article 21-A of the Constitution of India, are expected to address the
issues of drop out, out of school children, quality of education and availability of trained
teachers in the short to medium term. Further, a proposal to set up a National
Commission/Council for Higher Education and Research to prescribe academic quality and
advancement of knowledge in higher educational institutions is under the consideration of the
Government.
Yet another well known problem is the mismatch between quantity and quality of education.
According to the research published by the Observer Research Foundation (2010), India
recorded 10.4 per cent increase in the number of graduate engineers in 2008 compared with
9.9 per cent in China, 5.9 per cent in South Korea, 3.9 per cent in UK and -1.0 per cent in
the US. However, despite the increasingly higher numbers of engineering graduates
produced by the technical institutes in India, almost 30 per cent of fresh graduates remain
unemployed even one year after graduation. In 2005, a McKinsey-NASSCOM study
indicated that only a quarter of India's technical graduates and 10-15 per cent of general
college graduates are of employable quality in the off-shore IT and BPO industries. Further,
NASSCOM estimates that the educational system produces nine half-literate graduates for
each graduate of passable quality, reflecting the low quality of education. However, despite
discounting of the quality of education, when it comes to the number of engineers per million
people, India has only 214 with South Korea having the highest number 1435. While Japan
has 765 engineers per million people, China has 340. The research also showed that
doctorate degrees were less than 1 per cent of graduate engineering degrees in the country.
The percentage of doctorate degrees compared to engineering degrees was much higher in
most of the other countries, e.g., 9 per cent in the US, 10 per cent in the UK, 8 per cent in
Germany and 3 per cent in South Korea. Comparing Indian institutions with the well known
international centers the study also observed that most Indian institutions had not progressed
beyond undergraduate teaching institutions into graduate teaching and research institutions.
Clearly, therefore, we need a lot of catching up to do both in numbers and quality in order to
realize our goal of creating a knowledge economy with equitable and productive employment
opportunities for the youth. Besides forwarding the inclusive growth program massive
investments in education are also required by the government with participation of the private
sector which should target at the development of occupational skills based on knowledge
and technology. The participation of private sector is needed to implement educational
programs that have occupational relevance in contemporary enterprise.
To sum, in the new era of growth with knowledge, skills and technology as engines, without
knowledge workers it will be extremely difficult to shift the production frontier of any
economy. Without adequate investments in education and skill development, we will not be
able to transform our growing young population into knowledge workers and it will result in a
disaster. We thus have to work on the trinity of the issues of Inclusion, Technology and
Education to propel India to a 10 Trillion Dollar Economy and beyond, else we will not be
able to sustain even the current growth. I hope that industry representatives and bankers
present here would deliberate on these issues and work together to ensure sustainable
growth. Thank you.