Sectoral developments indian economy

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What is the potential growth of various sectors in the Indian Economy and their contribution to growth

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Sectoral developments indian economy

  1. 1. National Research Seminar on Sectoral Developments and their Impact on Indian Economy UGC / K.P.B. Hinduja College of Commerce / Kirti M.Doongusree College of Arts,Science and Commerce Speech by R.Kannan 22nd February 2014 I would like to thank the organisers for inviting me and I have great pleasure in participating in the National Conference on Indian Economy , sharing some thoughts on the future options available for achieving a high economic growth going forward. The topic taken for the two national conference is very appropriate at this moment and I am happy to note that the deliberations in the last two days covered all the important sectors in the economy and the various issues relating to these important sectors and how they impact the growth rate of the Indian Economy. I learnt that lot of new perspectives had emerged from the deliberations so far which will be useful for the economic policy making in India. The recent economic performance in India caused many concerns among various stake holders and the general sentiments toward new investments and growth moved towards a moderation. After holding steady for two years after the Economic crisis, the growth in the Economy had shown signs of tapering and reached its decade low of 4.9% . Inflation in the recent past had shown a secular rising trend and recently started receding. The lower economic growth in India was due to developments in the Global economy as well as issues relating to Regulation, Environment , increased competition between political parties , increased social / Judicial activism and sensational reporting by media. In 2008, the potential for economic growth was at 10%. The conditions for higher economic growth were very favourable including ; low interest rates, robust capital markets, good corporate performance, consensus on national issues between political parties . Due to recent developments and the fast rise in inflation, the potential for economic growth is moderated to 8% now and there is a big gap between potential and the actual performance. By taking a concerted actions in collaboration with various stake holder groups in the economy, it should be possible to achieve 8% growth within a year. The solutions for accelerating the economic growth are in place and what is required is cooperation of various stake holder groups in achieving this target. In India , even today many of the sectors are growing at more than 10% p.a. But before the economic slow down, many more sectors in the economy were growing at more than 10%. By adopting and implementing sector wise action plans the desired growth could be achieved.
  2. 2. Finance Sector. This is the sector which acts as a catalyst to stimulate the economic growth since all the segments of the economy depend on external source of funding to pursue the growth objectives. Banking and Capital markets play a major role in the development of an economy. In India the value of Capital markets and bank credit are comparable but the number of IPO’s had seen a decline. Bank finance continues to play a major role. The issue of NCD’s by corporates is likely to rise and private equity capital is available for investments in several sectors. The pension sector had been opened to new players and growth in this sector will generate long term funds which could be deployed in the infrastructure sectors The issue of new licenses for banking will result in higher growth and penetration of banking . Adopting of new technologies including the mobile phone based technologies will help in meeting the objectives of financial inclusion. Through these technologies , the availability of credit could be increased in the rural areas. The share of FII’s in total market capitalisation of the companies is at a high level. The behaviour of FII investors , despite their investment is only through secondary markets, determine the stock market and index performance. As and when FII’s increase the investments, the boom in stock markets is witnessed and when there is a significant withdrawal, the markets take a beating. Considering the growth potential of India and the future capital requirements in the economy , continued flow of funds through this route would enable corporates to meet a part of their requirement through this source ( through divestments and sale of shares through secondary market). Hence it is necessary to keep the sentiments of this investor class favourable and action plans could be drawn up to sustain the interest of this investor class through favourable conditions for investment. FDI. After the Economic Crisis, only a few markets in the world continue to show a healthy growth. Despite India’s growth decelerating , the growth achieved this financial year was still one of the highest economic growth in the world. There is an increased interest from investors from all over the world to be associated with Indian market. Japanese companies are very bullish on India especially after the stellar performance by companies like Maruti, Honda. Most of the companies from Japan had drawn up plans to increase their presence in India. The companies from US, Europe and Korea have also shown keen interest to increase the investments in India. Last week, China expressed the desire to take a share of 30% in future infrastructure investments . The opening up of computer hardware industry for manufacturing including chip manufacturing augurs well for increasing the foreign investments in India. The creation of Industrial corridors will see more foreign collaborations in India and in future, the FDI inflows are likely to show a good rise from the present levels. While addressing the economic growth issues, the foreign exchange movements had become one of the main issues and the robust risk management had become very important. The imported products had contributed to higher inflation levels due to exchange depreciation. In the recent past, many new initiatives were taken by government to control both fiscal and current account deficit and there is a relief in the short term. For
  3. 3. the long term, solutions are available to ensure a good fiscal position for the country and by strengthening the financial position, it should be possible to keep the exchange rates at competitive levels . Since the oil imports are increasing , there is a need to keep the currency at the present levels. The increased Inflation in India in the last few years was due to both demand and supply factors and the supply factors had a major influence on the way the inflation behaved. The latest reported level of inflation had shown a favourable trend and we have to ensure inflation remains within 5% levels going forward to keep the economy growing at 8% growth. The government has to continuously monitor the developments in the economy and develop appropriate responses from time to time to ensure the inflation remains at healthy levels. Agriculture sector in India continues to employ the maximum number of people in India today and year on year, the share of agriculture in our GDP is showing a declining trend. As per the predictions, in the next few years, agriculture will add the maximum number of employees among all the sectors in India, despite its Share in GDP will fall further , year on year basis. The issues in agriculture include, the low productivity levels of crops compared to best in the world, the wastages at the farm / during transportation / storage , the reduced interest in Agriculture as a profession. Considering the recent developments, especially, the inflation fuelled by agri commodities at the retail level, this sector will become attractive and more corporate and individuals will look at this sector favourably to fulfil the growth ambitions. There is an immediate need to increase the crop productivity without losing much time . The reforms in distribution of agricultural commodities through amending the APMC act would help the farmers to obtain remunerative price for their produce and generate enough surplus to buy inputs at much higher prices ( without availing any subsidies ) and invest in new technology to achieve the best productivity levels witnessed in other countries. Services Sector. The loss of share of agriculture in GDP is taken by Services sector. Indian IT sector helped to create the India brand in the minds of investors from across the world and this sector continues to grow at a fast rate , creating lot of employment opportunities. The prediction going forward for this sector is also very encouraging. This sector’s contribution in GDP growth is very high , since value addition in this sector is one of the highest among all the sectors in the economy. India has one of the large education systems in the world producing large number of Engineers, Doctors and Graduates. Despite most of them are not job ready, the companies which recruit them give a good training. The government has drawn up a skill development plan with a target to train more than 500 mn by 2020 in various sectors / skills, where the demand supply gap is high and likely to become higher. Government is taking steps to increase the enrolment ratio at higher education level and various action plans were in place to develop skilled personnel.
  4. 4. The future projections for media sector indicate that this sector would continue to grow at more than 10% and the technological developments in this sector will lead to many changes in the way we consume media offerings. The business models will undergo a major change. The health , tourism, aviation , banking and financial services will continue to grow at more than 10% going forward. The penetration of mobile communication in rural areas is going to change the customer preferences in rural areas and even in rural areas, the growth in services will be higher than the growth in other sectors. This sector will continue to support the higher economic growth going forward. Manufacturing contribution to GDP is India is very low and the government has set a target to take this to 25% of GDP from the present level of 15%. This will happen through liberalisation of more sectors and entry of several MNC’s in India to set up their manufacturing operations. Achieving this target requires the basic condition of simplified procedures to do business and moving up the rank in ease of doing business. To achieve higher economic growth, the continued investment in infrastructure is necessary. Despite savings level is very high in India, not all savings is invested in financial assets . There is big demand supply gap in financing infrastructure and from the present resources available within India, it would not be possible to create an infrastructure which will support an economic growth of 8% p.a. There is a need to create new sources of funding and tap the foreign funds. Government has already created enabling conditions to attract funds and increased the limits of foreign investors to invest in various financial instruments. New instruments are being introduced to address this need. But in the last few years, the attractiveness of this sector reduced due to environmental concerns , profitability of projects and availability of funds. Apart from Traditional funding sources like multi lateral financial institutions and LOC, the scope for raising funds from Pension funds and Sovereign Wealth funds is being explored. By increasing the investment in financial instruments from the domestic savings through innovative financial instruments, the required funds could be raised. The present issues constraining our economic growth are short term. The solutions are available to achieve a higher growth. The starting point could be revival of mining in India through creating a mechanism to sort out the issues which resulted in closing of many mines in India. Only through mining of Iron ore, Coal and other resources, the industrial growth could be revived. This has to be taken up on a priority basis and it is possible to bring solutions which is acceptable to all the stake holders. Government procedures. Over the years, the procedures have become cumbersome, resulting in a huge delay in approval of projects. The creation of CCI at Centre and project monitoring group has helped to address the needs of projects having investments of above Rs.1000 cr. Similar system is being introduced in states to fast track projects. There is an immediate need to simplify the approval procedures and time bound targets for various
  5. 5. procedures to be declared by government and they have to stick to this schedule for all the projects. Capital is one of the major inputs to doing business and since the main source of funding in India today is bank funding, there is a need to reduce the interest rates. This will help all segments including government, corporates and individuals and increase the purchasing power. Land. After the recent high economic growth , the land has become scarce in both urban and rural areas. The cost has become prohibitive. There is a need to evolve policies, procedures by which land is made available for businesses at affordable rates. Increased co-operation between all the stake holders. This is the need of the hour today. Part of the poor performance was due to increased activism by all the stake holders without realising the impact it has on the Economic Growth, Inflation, Interest rates and Unemployment. All the stake holders need to work towards the common target of 8% Economic growth. Finally, it is very important for every sector to contribute to the economic growth of the nation. Despite , the potential for growth is different for different sectors, in India , there is still a huge gap between the potential and actual growth. Many more sectors in India can grow at more than 10% in the years to come. To achieve the desired growth, sector wise , policies and systems are to be introduced and implemented very effectively by the government and support of all the stake holders is necessary. Let us all strive towards achieving this growth potential through our initiatives and actions. Thank you.

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