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India Economic Summit 2006

  1. 1. WORLD ECONOMIC FORUM India Economic Summit Meeting New Expectations New Delhi, 26-28 November 2006 INSIGHTS
  2. 2. This publication is also available in electronic form on the World Economic Forum website at the following address: India Economic Summit report: (HTML) The electronic version of this report allows access to a richer level of content from meeting, including the weblog, photographs and session summaries. The report is also available as a PDF: (PDF) Other specific information on the India Economic Summit, New Delhi, 26-28 November 2006 can be found at the following links: Meeting News Session Summaries Photographs Programme Interviews Partners Weblog The views expressed in this publication do not necessarily reflect those of the World Economic Forum. World Economic Forum 91-93 route de la Capite CH-1223 Cologny/Geneva Switzerland Tel.: +41 (0)22 869 1212 Fax: +41 (0)22 786 2744 E-mail: © 2006 World Economic Forum All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, including photocopying and recording, or by any information storage and retrieval system. REF: 221206
  3. 3. Contents Preface 3 Summary – Meeting New Expectations 4 State and National Competitiveness 7 Managing Growth 12 Infrastructure Development 15 Risk Management 18 The Creative Imperative in India 21 Acknowledgements 23 1 India Economic Summit
  4. 4. Preface The theme, “Meeting New Expectations” clearly captured the imagination of the 600 leaders from government, business, media and civil society who joined together in New Delhi for the 22nd India Economic Summit. India’s growth rate has averaged over 7% over the last three years, which has clearly raised expectations economically, politically and developmentally. And the consensus going forward is that the economy will achieve 10% growth and higher over the next several years. But the mood at this year’s Summit was neither that of complacency nor that of hubris; instead it could be characterized as one of responsibility. The challenge of spreading high growth across more state economies, infant industries and into rural communities was what galvanized the various stakeholders this year. Moreover, participants from India and from abroad understood that high growth was not synonymous with either inclusive or equitable growth, both of which are at the foundation of any market-based democracy. Sonia Gandhi, Chairperson, United Progressive Alliance and President, Indian National Congress, reminded us all that “the economic growth we are experiencing must not be at the cost of social awareness and social responsibility.” The result was frank and open discussions that highlighted the need for greater alignment of India’s public policy, development and industry agendas at multiple levels. As has been the tradition for over 20 years, we introduced innovations aimed at building a stronger consensus among business, civil society and government on critical growth challenges. For example we launched our “India@Risk” report in collaboration with the Confederation of Indian Industry (CII). Building from the Forum’s Global Risk Network, this project identified six major global risks that have the greatest impact on India’s future growth and development. At the opening plenary, the Indian Finance Minister Palaniappan Chidambaram identified HIV/AIDS as the most “frightening” among the six risks. Later in the Summit, mitigating this risk was explored in depth with Dr Anbumani Ramadoss, Minister of Health and Family Welfare of India, in a session on partnership models for business action on HIV and TB – epidemics that kill approximately 1,000 people each day in India. One such successful model discussed at the Summit was the India Business Alliance to Stop TB, a public-private partnership supported by both the Forum and CII and their respective member companies. And for the second consecutive year, the Schwab Foundation presented the 2006 India Social Entrepreneur of the Year Award on the occasion of the Summit. Vikram Akula, Founder and CEO of SKS Microfinance Private Limited received the award from Sonia Gandhi. SKS Microfinance has been hailed as the “Starbucks of Microfinance” for adopting global business practices in microfinance leading to over US$ 71.6 million in loans benefiting 1.5 million Indians. As you read the thematic essays and data presented in this report, three important conclusions emerge as we prepare for the 23rd India Economic Summit, scheduled for 2-4 December 2007. First, India must now seize the opportunity to strengthen the foundation of its remarkable growth by developing its rural economy, as agriculture contributes over 20% of GDP and employs roughly 70% of the population. Second, India must remain in the vanguard of globalization. Indian Minister of Commerce and Industry Kamal Nath remarked in the closing plenary: “The great champions of globalization have now started shirking it, but we in India trumpet globalization because we are getting globally competitive.” And third, to maintain this competitiveness, most of the burden will fall on state governments. It is at the state and municipal levels where most of the barriers that impede investment into agriculture, power, transportation and, most importantly, human development are to be found. Lee Howell Director, Head of Asia 3 India Economic Summit
  5. 5. Summary – Meeting New Expectations “The economic growth we are experiencing must not be at the cost of social awareness and social responsibility.” Sonia Gandhi Chairperson, United Progressive Alliance and President, Indian National Congress This has been India’s year. Perhaps no other economy It became clear through the discussions that much of the has enjoyed such a buzz over its prospects or such impetus would need to come from state governments. A celebration over its progress. The irony of this notoriety is thicket of regulations from state to state is impeding that it only raises the pressure on policy-makers to do investment into agriculture, power, transportation, and even better, particularly for India’s thousands of most importantly, human development. While India has impoverished rural communities, where news of the managed to create a sizeable urban middle class, the country’s growing prosperity has also arrived. Meeting fastest growing segment of its population, its rural farming their expectations will require that governments and the community, is also the poorest. With two-thirds of the private sector focus on four issues identified as top population still working on farms and agriculture shrinking priorities at the India Economic Summit: as a percentage of the economy, the need to give the rural poor the tools to upgrade is clear. • Improving higher education standards and technical training, and broadening learning opportunities All the biggest risks to India’s development ultimately nationwide come back to how they might exacerbate the plight of • Recruiting, managing and retaining the most skilled and this group – and whether their protest would manifest talented workers itself at the ballot box or in social unrest. If there was one • Reversing environmental degradation in terms of climate message that permeated all the discussions at this year’s change and water scarcity Summit, it was the urgent need for better education from • Improving the national supply chain by upgrading the smallest primary school to the biggest universities. physical infrastructure and introducing administrative and tariff reforms Now, thrust somewhat reluctantly into the vanguard of globalization, India must seize the opportunity to strengthen the foundations of its remarkable growth by uplifting its rural poor. “The economic growth we are experiencing must not be at the cost of social awareness and social responsibility,” stated Sonia Gandhi, Chairperson, United Progressive Alliance and President, Indian National Congress. 4 India Economic Summit
  6. 6. Managing Growth State and National Competitiveness India aims to boost economic growth from 8 to 10% India’s global competitiveness compares well with those by 2010 but a number of obstacles stand in the way. of China, Brazil and Russia. But if the Indian economy is to achieve and sustain 10% growth, a number of • Poor infrastructure, a weak agriculture sector and shortcomings have to be addressed, particularly in skills shortages are placing constraints on growth. education, governance and the rural economy. • India will need to double growth in the farm sector to 4%, if it is to meet its goals and achieve more • India’s states are the principal shareholders in India’s inclusive growth. development. Given India’s democratic system, • Educational reforms are vital for alleviating a India’s future competitiveness will depend on the states shortage of labour that has pushed IT salaries up and their capacity to adopt reforms and tackle their 20% a year. respective problems. The competition among the states • To promote innovation, India must make it easier for for investment will spur them into action. companies to access capital and encourage • India aims to replicate across the rest of the economy enterprises to go global to improve competitiveness. the successes attained in the IT, pharmaceutical and telecommunications sectors. India’s competitive advantage may be its ability to deliver innovative, quality goods and services at a low price. • Increasing the productivity and efficiency of the rural economy is essential. The goal is to create a domestic common market through supply chain management and regulatory reform that resolves the anomalies that characterize cross-state commerce. • Improving higher education standards and technical training is critical if India is to improve its global competitiveness by confronting the range of challenges it faces. Activators and Innovators: The Role of Business in HIVAIDS and TB in India – Jo Johnson, K. Srinath Reddy, Anbumani Ramadoss, Leonard Tauro and Jamshyd N. Godrej 5 India Economic Summit
  7. 7. Infrastructure Risk Management Improving India’s inadequate infrastructure is essential to The risks to economic growth are urgent, requiring sustaining economic growth and reducing disparities in tailored solutions. income. • Healthcare should be seen as an investment • Energy and water remain two crucial areas for opportunity; priority should be given to HIV and TB investment. India needs to find more domestic sources awareness, diagnosis and treatment. of natural gas and promote investment in power plants, • Protectionist forces are rising, emphasizing the need for water treatment and irrigation. stronger ties with trading partners in the West and • Growing trade has created an urgent need for South Asia. investment in logistics, particularly roads, ports and • Oil prices and air pollution are also rising; India must railways. Customs facilities need to operate around- invest in alternative energy sources and in supplies the-clock. overseas. • Private investment is crucial. Special purpose vehicles • Global climate change threatens India’s fragile water should be used to manage infrastructure projects and supply, raising the need to conserve, discourage waste eliminate red tape. and price water to reflect its scarcity. • The maze of state regulations still needs trimming. The • India’s youth is a positive force but its schools need an financial industry should be further deregulated to overhaul if it wants to truly leverage its demographic facilitate fund-raising and risk management. dividend. Companies should invest in vocational training and help design college curricula. Vikram Badshah, Head of Public Policy, Confederation of Indian Industry, India; Pawan Munjal, Managing Director and Chief Executive Officer, Hero Group, India; Rahul Bajaj, Chairman, Bajaj Auto, India; Sunil Kant Munjal, Chairman, Hero Corporate Service Limited, India 6 India Economic Summit
  8. 8. State and National Competitiveness “The great champions of “We have a low-cost globalization have now economy and a high-quality started shirking it, but we resource base so we will be in India trumpet able to produce quality globalization because we goods at a low price. But are getting globally we need to build that competitive.” resource base further.” Kamal Nath, Minister of Kapil Sibal, Minister of Science Commerce and Industry, India and Technology and Earth Sciences, India At the India Economic Summit, many participants it, but we in India trumpet globalization because we called for India to repeat in other sectors the are getting globally competitive.” successes it has achieved in IT, pharmaceuticals and But India’s drive for competitiveness is complicated by telecommunications. Its move towards greater its federal system. A lot depends on the states – and innovation capabilities has been significant. how they address the competitive pressures they face (See Figure 1) The message of this refrain: that India will be critical to determining India’s global should find new drivers of growth, reform and open up competitiveness. After all, the states are the principal its markets further, and find niches in which it can shine shareholders in Indian development, as Montek S. internationally. India’s global competitiveness – it is Ahluwalia, Deputy Chairman of India’s Planning 43rd on the World Economic Forum’s latest Commission, once described them. Explaining why competitiveness ranking – compares well with those the national government cannot issue fiats to state of the three other large, emerging economies with governments to resolve nagging problems such as which it is often grouped: China (54th), Russia (62nd) supply chain complications resulting from the array of and Brazil (66th). India’s rise has turned it into a taxes and fees that hamper cross-state commerce, globalization booster, said Indian Minister of Nath acknowledged that “some things possible in Commerce and Industry Kamal Nath. “The great China aren’t possible in India.” He added, however, champions of globalization have now started shirking that in India, “states are [now] looking for revenues [and so] we are inducing and counselling states to make them see the larger growth picture.” Figure 1. India Transforming into an Innovation- Driven Economy Some states have started rationalizing their tax systems, spurring others to act, Nath noted. States differ widely in income level, quality of infrastructure and governance standards. Foreign investors are increasingly more discriminating in their choice of state to target. As in China, this has naturally sparked rivalries. Said Nath: “The new thing that is happening is the competitive atmosphere among the states.” The more responsive are taking stock and adopting better governance practices, eschewing knee-jerk ideology for solid results. Indeed, some of the more pragmatic states have come to understand the value of forging public-private partnerships with the private sector to address their shortcomings in areas such as infrastructure, water management, healthcare and education that are crucial to attracting investors. 7 India Economic Summit
  9. 9. “Running a state is like “We need to revamp the running a business.” higher education system. We have no talent going through the postgraduate Vasundhara Raje programme.” Chief Minister of Rajasthan Hari S. Bhartia Co-Chairman and Managing Director, Jubilant Organosys, India environment. Even a poorer state such as Bihar is The aspirations of citizens are much higher and they mobilizing to create an investor-friendly business climate. demand much more of their leaders, Vasundhara Raje, It is focusing on developing its agro-processing and Chief Minister of Rajasthan, acknowledged. “Running a tourism sectors and improving healthcare and education state is like running a business,” she said. Rajasthan has facilities, as well as roads and other infrastructure. put a lot of emphasis on developing its already established tourism sector and on improving The states and the competitive spirit they generate will infrastructure. Power production is being privatized and certainly be instrumental in helping India within five years wind power projects expanded. The state expects to have to achieve and sustain 10% growth, the level where China a surplus of power within two years. Meanwhile, the Chief is today. India will need their contribution and Minister of the National Capital Territory of Delhi, Sheila collaboration to address serious competitive Dikshit, stressed the need for privatization and better shortcomings, particularly in education and human management of resources. The private sector can be resources, governance and the rural economy. The instrumental in multiplying the positive effects of reforms. country as a whole will also need to exploit its competitive For example, while power sector liberalization has advantages, especially its youthful demographics – over significantly improved the quality of service and half the population is under the age of 25 – and the value- distribution, consumers still feel their needs are not being for-money proposition that won it 85% of the global met, Dikshit explained. Private companies can step in to business process outsourcing (BPO) market or more than raise service standards even higher. US$ 6 billion in revenues. “Every consumer in the world wants a product at the lowest possible price and at the For his part, the Chief Minister of Maharashtra, Vilasrao highest quality,” said the Indian Minister of Science and Deshmukh, told participants that his government is Technology and Earth Sciences, Kapil Sibal. “We have a “cutting red tape and rolling out the red carpet.” Already a low-cost economy and a high-quality resource base so major recipient of FDI, his state contributes 13% of the we will be able to produce quality goods at a low price. national GDP. It was the first state in the nation to set But we need to build that resource base further.” aside 25% of live water storage capacity for domestic and industrial use. It is also aiming to maintain its power It is a unique business plan, one that builds on India’s surplus position by investing US$ 13 billion in the sector. recent successes, particularly in IT services and The state is also pushing the development of special pharmaceuticals. Indeed, India’s pharmaceutical firms are economic zones (SEZs) that will offer world-class moving beyond generic production to innovative R&D in infrastructure, liberal tax regimes, one-stop-shop partnership with global companies to develop new drugs. clearance procedures and a hospitable working 8 India Economic Summit
  10. 10. The same is true in software development. In the BPO Technologies, India. “To create that single market market, India is expanding its repertoire to include so- requires government intervention if you are going to called knowledge process outsourcing (KPO), or the reform all of this. There are a lot of stakeholders with a offshoring of high-end knowledge work in various claim on these taxes.” fields including engineering, design, medicine, finance and law. And India is aiming to develop an effective This is a crucial challenge to which the states hold the innovation ecosystem. “Innovation is not buying up key. But there are doubts that this stumbling block technology,” reckoned Sibal. “It may be quality, but it’s can be effectively addressed soon, given India’s not affordable. We need to partner with industry to federal structure and democratic political system. Yet adapt technology and innovate to meet the needs of relying on the market and the competition among the common folk.” states to produce better governance may be the best – and perhaps the only – approach that democratic It is all about competitiveness through increased India can take. Indian companies, meanwhile, are efficiency. “What makes Indian firms more competitive working around the problems. The automotive parts is that they can absorb technology,” said Rajiv Kumar, sector, for example, has managed to build up a 7% Chief Executive and Director, Indian Council for share of the global market, supplying components to Research on International Economic Relations BMW, DaimlerChrysler and other global automakers. (ICRIER). “We are increasingly a productivity-driven economy.” The main reason behind such successes is the availability of the right skills and talent. All of India’s Yet India’s competitiveness drive has long been competitive ambitions really depend on its ability to stymied by its poor infrastructure and lack of viable improve higher education standards and technical supply chains. Rural development and agriculture training. “We need to revamp the higher education have suffered without adequate transport, storage and system,” Hari S. Bhartia, Co-Chairman and Managing handling facilities. India’s supply chain, said Pankaj Director, Jubilant Organosys, India, said, noting the Chandra, Professor, Operations and Technology low number of Indian PhD students. ”We have no Management, Indian Institute of Management, is talent going through the postgraduate programme.” “fragmented, complex and lacks discipline.” Added India’s low R&D spending relative to GNP is also Hans-Joachim Körber, Chairman and Chief Executive hampering the development of its innovation Officer, Metro, Germany: “If we get a proper supply ecosystem. (See Figure 2) chain, then the vision of India as the food factory of the world may be possible.” Figure 2. R&D Spending Not Keeping Pace with Economy That future for India’s agribusiness sector depends not just on the building of the physical infrastructure needed in rural areas, but also on other issues including the modernization of the retailing sector and distribution networks, and how effectively India can resolve the anomalies that characterize cross-state commerce, the software of supply chain management. These problems are also hampering growth in the manufacturing sector. A major obstacle: the variety of tariffs and fees levied on goods and transport entering states. It can take eight days for a truck to deliver goods from Kolkata to Mumbai, a distance of approximately 2,000 kilometres. “The goal is to create a single Indian common market,” said India Economic Summit Co-Chair Nandan M. Nilekani, President, Chief Executive Officer and Managing Director, Infosys 9 India Economic Summit
  11. 11. Other participants hailed India’s educational achievements That plea to focus on the poor and remote neatly sums so far, while acknowledging that there is enormous room up the two factors that will determine India’s future for improvement. “We should really give some credit that competitiveness: how well the nation as a whole and the the Indian education system has done something,” states in particular can develop their resources, argued Mohamed A. Alabbar, Chairman, Emaar particularly their people’s skills and talents, to meet the Properties, United Arab Emirates and Co-Chair of the country’s growth and equity goals as well as the demands India Economic Summit. Said Jaggi Vasudev, Sadhguru of globalization, and how well Indians can tap the vast and Founder, Isha Foundation, India: “The important thing potential of the rural economy. Concluded R. Seshasayee, is that there is a huge volume of intelligence in the rural Managing Director, Ashok Leyland, India, and President, area – 70% of the intelligence is out there – so we are not Confederation of Indian Industry (CII): “You can’t attack really increasing our knowledge base.” Certainly the the top end unless you nurture the bottom end.” relationship between GDP per capita and the number of regional polytechnic institutes is significant. (See Figure 3) “The depth of education needs to continue for India Figure 3. Polytechnic Institutes Play a Role in to remain competitive.” State Economic Development Sir Michael Rake International Chairman KPMG United Kingdom 10 India Economic Summit
  12. 12. India’s Economic Competitiveness India ranked 43rd overall in the World Economic Forum’s Global Competitiveness Report 2006-2007. The subcontinent received excellent scores in capacity for innovation and sophistication of firm operations. The Report noted that while firm use of technology and rates of technology transfer were high, penetration rates of the latest technologies are still quite low by international standards. This reflects India’s low levels of per capita income and high incidence of poverty, the Report concluded. “The quality of the business environment in India has improved tangibly in recent years, with goods, labour and financial markets making gains in efficiency. There have also been substantial improvements in the underlying institutional climate in such areas as property rights, the operation of the judicial system and other indicators which capture essential aspects of building a sound investment climate,” noted Jennifer Blanke, Senior Economist at the World Economic Forum. Further progress in fiscal consolidation should enhance the ability of the government to respond to pressing needs, particularly in the areas of education, public health and infrastructure. Insufficient health services and education as well as a poorly developed infrastructure are limiting a more equitable distribution of the benefits of India’s high growth rates. The available evidence suggests that the Indian economy may have entered a high growth plateau. The challenge for the authorities will be to ensure that this process is sustained and that it precipitates further progress in poverty reduction, the Report noted. The Most Problematic Factors for Doing Business 11 India Economic Summit
  13. 13. Managing Growth “The demand for people is “Many years ago people just going through the roof. used to doubt whether we Many industries are simply knew how to grow fast. competing for the same Now the question is can we pool of labour.” make growth inclusive.” Nandan M. Nilekani, President, Montek S. Ahluwalia, Deputy Chief Executive Officer and Chairman, Planning Managing Director, Infosys Commission, India Technologies, India; Co-Chair, India Economic Summit 2006 India’s economy grew by 9.2% in the third quarter of It will take strong partnerships between the public and 2006, the sixth time in the past seven quarters in which private sectors and better political and corporate GDP growth has surpassed 8%. The economy is clearly governance to address the drags and disparities that climbing to a higher altitude. “Our overall macroeconomic could spoil India’s ambitions. “Industry will do what is position is very strong,” said Montek S. Ahluwalia, Deputy necessary to achieve the targets we set provided we do Chairman of India’s Planning Commission. “The external what we can to provide them a decent level of position is very strong; Indian business has gained a lot of infrastructure,” Ahluwalia reckoned. But the government self-confidence; and international perceptions of India are alone cannot come up with the US$ 350 billion in better than they were four years ago.” The good news investment needed over the next five years to construct or has prompted Ahluwalia and his team to target 9% upgrade the airports, ports, bridges, roads, ports and growth for the first three years of the next five-year plan to other facilities it needs to support 10% growth. Public- be launched in 2007 and then aim for 10% for the private partnerships and significant private investment are remaining time covered by the blueprint. Achievable goals essential. – but is such growth sustainable? Figure 1. Poverty in India Varies Greatly by State The trouble is that as India manages its growth higher, the going will only get tougher. Constraints such as poor infrastructure, the underperformance of the agriculture sector and the shortage of skills will make it more difficult to sustain the fast pace unless significant progress is made in resolving bottleneck problems. It will be even more difficult to ensure that growth is equitable, the top priority for India’s leaders. “Many years ago people used to doubt whether we knew how to grow fast,” Ahluwalia observed. “Now the question is can we make growth inclusive.” (See Figure 1) 12 India Economic Summit
  14. 14. “The agriculture sector will “If you want to develop the be India’s powerhouse.” agricultural sector, one of the preconditions is a Jyotiraditya Scindia proper supply chain.” Indian Member of Parliament Hans-Joachim Körber, Chairman and Chief Executive Officer, Metro, Germany if the health and education facilities and programmes Another critical factor is agriculture, which still employs the country requires are to push ahead, and if the 70% of the population. The sector has slowed down economy’s knowledge base is to widen, what India since the mid-1990s and is currently growing at just needs are workers with the skills to carry out this 2%. For the economy to achieve 10% growth, ambitious growth agenda. “The demand for people is agriculture will have to grow by at least 4%. “The just going through the roof,” said India Economic agriculture sector will be India’s powerhouse,” Summit Co-Chair Nandan M. Nilekani, President, predicted Indian Member of Parliament Jyotiraditya Chief Executive Officer and Managing Director, Infosys Scindia. But for this to come true will require Technologies, India. “Many industries are simply significant restructuring. The sector must diversify competing for the same pool of labour.” beyond traditional cereal production into more high- The onus is on the education sector, particularly value businesses such as horticulture, floriculture and India’s universities. “You can’t have rapid growth or fisheries. But this will involve the production, inclusive growth unless the education system is distribution and marketing of perishable products. providing enough expansion of the relative skills,” Rural supply chains today are highly inefficient. About explained Ahluwalia. “As we move towards 9% or 40% of Indian produce is wasted due to insufficient 10% growth, the constraint in terms of available skills transport, storage and handling facilities. “If you want will become marked in certain areas.” Added Sunil to develop the agricultural sector, one of the Kant Munjal, Chairman, Hero Corporate Service, India: preconditions is a proper supply chain,” said Hans- “For India, innovation will be the key to moving Joachim Körber, Chairman and Chief Executive Officer, forward. Our labour costs are already not that low Metro, Germany. “It is still very difficult to move food when you compare them to some other nations. The and vegetables from one state to another. There should supply of people is large, but what matters is our be a focus on the supply chain to secure future growth.” ability to train people. It’s not just formal education; it’s all manner of skills and vocational education.” A further constraint on growth is human resources. Pay increases in IT are running at a staggering 20%, Again, the participation of the private sector will be indicating how tight the labour market is in India’s vital. At the closing plenary, Indian Minister of flagship services sector. Companies complain of Commerce and Industry Kamal Nath announced that inadequate talent among graduates and difficulties the cabinet is moving to introduce legislation to allow retaining personnel after spending money and foreign educational institutions to set up in India. The resources on their training. If manufacturing and twin aims: to boost the quality of education by agriculture are to expand, if the retail sector is to opening the market to foreign competition, and to modernize to cater to the expanding ranks of middle- attract accomplished Indian educators at universities class consumers and to the untapped rural market, if abroad to come home. the infrastructure the nation badly needs is to be built, 13 India Economic Summit
  15. 15. Metro in partnership with local firms. It means letting the This landmark measure is the sort of bold decision that private sector step forward and promoting a wide range the government has to make to eliminate or at least of public-private partnerships. “The private entrepreneurial reduce the obstacles to sustaining 10% growth and to spirit that has come out of economic reforms is a genie ensure that the benefits of high growth are fairly shared. that has been let out of the bottle and is impossible to put “There are many countries that use education as an back in,” said Rajiv Kumar, Chief Executive and Director of excuse for an underperforming economy,” said Graham the Indian Council for Research on International Economic Mackay, Chief Executive, SABMiller, United Kingdom, who Relations (ICRIER). was also a Summit Co-Chair. “Most of the time the question is whether there is an enabling environment for India, to be sure, is in “a new growth trajectory,” Kumar growth. Is there a business-friendly enabling concluded. “While 10% growth is very possible, anyone environment?” The key is good governance, Mackay who assumes that it is a given is being complacent.” In argued. (See Figure 2) managing the growth of this large, sprawling economy of over a billion people, there is certainly no room for Unfortunately, India’s record so far is patchy, he reckoned. complacency. India can do better. The battle to get the economy in shape to sustain 10% growth is inextricably linked to the drive to improve state and national competitiveness. While making workhorse sectors perform better and more efficiently, India needs to find new sources of growth. This means making it easier for companies to access capital and encouraging capable enterprises to go global to hone their competitiveness. It means further reform of the financial services sector, including the deepening of the bond markets. (See Figure 3) It means modernizing the retail sector to trigger a consumer revolution with the participation of international players such as Wal-Mart and Figure 3. India’s Corporate Bond Market Lagging Figure 2. States Perceived as Most Corrupt Tend to Have Lower Per Capita State GDP 14 India Economic Summit
  16. 16. Infrastructure Development “We are cutting red tape “There is progress, but a lot and rolling out the red more needs to be done.” carpet.” Peter Bakker, Chief Executive Vilasrao Deshmukh Officer, TNT, Netherlands; Co- Chief Minister of Maharashtra, Chair, India Economic Summit India 2006 Poor infrastructure may be the single most important For the nation’s teeming cities, the government has issue India faces. Despite impressive economic created a US$ 110 million programme to revamp growth, India’s dilapidated roads, congested ports, urban infrastructure in exchange for legal reforms. The inadequate power and labyrinth of state regulations state of Maharashtra, for example, will repeal a law are braking development. It can take up to eight days restricting land ownership, said Vilasrao Deshmukh, to truck goods from Kolkata to Mumbai. Steven Okun, Chief Minister of Maharashtra, India, to gain roughly Vice-President, Public Affairs, UPS, Singapore, said it US$ 80 million in infrastructure funding for Mumbai. took him more time to travel from Delhi to Mumbai than to go from Singapore to Hong Kong. Such “There is progress, but a lot more needs to be done,” experiences do little to encourage investment. said Peter Bakker, Chief Executive Officer, TNT, Netherlands and Summit Co-Chair. Indeed, the list of Improving India’s infrastructure would propel economic areas where India needs to invest is only growing, as growth, create jobs, boost domestic consumption, antiquated infrastructure creaks under the burden lower costs and stimulate exports. If its infrastructure imposed by accelerating growth. were better, the country’s impoverished rural sector could even be transformed into a leading exporter. On Burgeoning trade and travel have clogged India’s the other hand, if infrastructure improvements ports and rail system. Customs facilities, likewise, continue to lag, foreign investment could stall and need to operate around the clock. Power demand is development would concentrate in service industries such as IT outsourcing. This would exacerbate income disparities, feed social pressures and raise the potential for unrest. Figure 1. Wealthier States Tend to Have Broader Power Grids The government has ambitious plans to improve the situation. Montek S. Ahluwalia, Deputy Chairman, Planning Commission, India, outlined the government’s aim, as detailed in its 11th Five-Year Plan, to raise infrastructure spending from 4.7% to 8% of GDP. The government has committed to developing 35 new airports by 2009 and has embarked on a project to add 6,000 kilometres of highways connecting Delhi, Chennai, Kolkata and Mumbai. And, recognizing the link between a broad power grid and state wealth, the government announced in October it will sell stakes in its four largest power companies to help finance expansion of the nation’s power supply. (See Figure 1) 15 India Economic Summit
  17. 17. “We’re amazed by the “Over the next 30 to 40 years we’ll be building a new achievements made by Delhi every year,” said Ashok Khosla, Chairman, India over the past 10 years.” Development Alternatives, India. “There are plenty of places we can go to put our cities that won’t compete Hoang Trung Hai Minister of Industry of Vietnam with agriculture.” The government estimates it will need US$ 350 billion to meet the goals of the five-year plan, at least US$ 100 billion of which will need to come from private investors. But many investors remain uncertain about whether the rewards of investing in infrastructure projects that could span decades will compensate them for the risks of partnering with governments who face election pressures surging, yet half of the country’s villages still lack electricity every few years. and industry cannot rely on the existing power grid. India depends on expensive imported oil and polluting This mismatch in performance horizons is made trickier domestic coal, yet natural gas-fired plants operate below by the fact that governments – both state and national – capacity for want of fuel. More investment is needed in want to retain control over key public assets. As a result, finding domestic sources of natural gas and building infrastructure aims will require public-private partnerships networks to distribute it to consumers. that bridge the gap in expectations. India is establishing special economic zones as one solution; another The nation’s water supply is shrinking and India needs suggestion is the creation of special purpose vehicles that billions of dollars in irrigation pumps, dams, rainwater would provide investors with a single public partner able harvesting facilities, water treatment and desalination to cut through the red tape for them. plants. (See Figure 2) Turning over more of the task of financing and executing Villages need schools and all but the top universities are big infrastructure projects would leave more money for in disrepair. India’s cities require a massive overhaul of governments to spend on India’s social infrastructure, their transport and waste systems, yet are growing so fast improving education and healthcare, said Ajay Dua, that some participants recommended India should begin Secretary, Department of Industrial Policy and Promotion, scouting out sites to start building cities from scratch. Ministry of Commerce and Industry, India. (See Figure 3) Figure 3. Commitment to Social Safety Figure 2. Access to Renewable Water Dropping Net Varies by State 16 India Economic Summit
  18. 18. India also needs to develop more robust financial Investors say more also needs to be done to remove markets, particularly a market for corporate bonds, to impediments to investment, including reducing expand its fund-raising capabilities and better spread regulations, lowering taxes, eliminating subsidies and project risk. Deregulating the insurance industry would harmonizing the various forms of all three which they help, as would putting more of India’s state-controlled encounter from state to state. “We need to create an banks under private management. “We’re all so Indian common economic market,” said Summit Co- euphoric about our stock market today, but we have a Chair Nandan M. Nilekani, President, Chief Executive non-existent debt market,” said Gautam Thapar, Officer and Managing Director, Infosys Technologies, Chairman, Ballarpur Industries, India. “If we only have India. half a financial market, we’re not going to get the investment we need.” India’s Supply Chain Challenge Whether it is hand-woven saris from Madhya Pradesh or cow’s KOLKATA TO MUMBAI – 2,150 km (The Economist, milk from Punjab, getting any product from one point to another 3 June 2006) in India can be a trial. Consider a typical truck run from Kolkata to Mumbai, a distance of approximately 2,150 km. The trip can take WEDNESDAY 14.00 about eight days, including stops at state borders to pay tariffs The lorry is loaded in Kolkata. It cannot depart because of day- and fees and complete formalities or to wait for crossings to time road restrictions on heavy vehicles. open, as well as other delays. No wonder 40% of India’s produce spoils before delivery (see column opposite). THURSDAY 04.00 The lorry reaches National Highway 6 after a traffic jam within the India urgently needs reliable and efficient supply chains – not just city. so that fashionable Delhi ladies can pick out a traditional Chanderi sari from their local boutique, or the school child in THURSDAY 20.00 Chennai can get his daily carton of Nestlé milk. A good supply The lorry reaches the border between West Bengal and Jharkard. chain, of course, benefits the consumer. Goods are fresher, more The border is closed for the night. choice is available, and prices should be lower. A modern retailing industry can develop, creating jobs in both urban and FRIDAY 05.00 rural areas, though perhaps at the expense of some of the The lorry joins the border queue and it takes two hours to clear millions of small convenience shops that have so far been the the documents and two more to clear the border. main retailing experience most Indians have had. “Retail has the potential to be an absolute revolution just like what we achieved FRIDAY 18.00 in telecom,” said Mukesh Ambani, Chairman and Managing After a 200km journey across Orissa, the lorry stops for the night Director, Reliance Industries Limited, India; Co-Chair of the India as the road is closed due to the threat of attacks by bandits or Economic Summit. Maoist insurgents. But the real dividend will be at the front end of the supply chain. SATURDAY 05.00 Better, more efficient infrastructure, transport, storage, handling After a 12 hour drive to reach the Chhattisgarh border, there is a and distribution will cut down the middlemen and bring buyers, four hour queue to cross the border, which is open at night. retailers and consumers closer to the farmers or the weavers. In the food sector, this will empower the farmer and transform the SUNDAY 06.00 rural economy. “There is a huge mindset change,” explained The lorry arrives in Maharshtra and must go through 12 toll Ambani, whose company in November 2006 launched its first booths and inspection points (on top of the previous 14). retailing venture, opening 11 stores in Hyderabad under the brand ‘Reliance Fresh’. “Corporations wouldn’t go directly to the TUESDAY 10.00 farmer. All that is gone and I see a huge amount of enthusiasm. The lorry arrives in Mumbai and the driver telephones the Octroi We have the potential to increase the income of the farmer agent to get forms processed which takes all night. multifold.” Increasing farmers’ incomes will contribute significantly to boosting equitable growth in a country that, for all its recent WEDNESDAY 10.00 success in IT services, remains predominantly an agricultural The lorry reaches the customer. economy. TOTAL 8 days; an average 11 km/hr; 32 hours waiting at toll booths and check points. 17 India Economic Summit
  19. 19. Risk Management “Every risk is an “Our intensity of energy opportunity for innovation usage has to come down.” and change. Risk gives impetus for technological R. Seshasayee change so I would regard Managing Director risks not merely as risks Ashok Leyland but as opportunities to India move ahead at a swifter President of the Confederation pace.” of Indian Industry Palaniappan Chidambaram, Minister of Finance of India The risks to India’s progress span the development Chidambaram, Minister of Finance of India. “But our spectrum, from the immediate perils of poor nations to democracy is a great pressure valve.” the long-term challenges of affluent economies. While problems of water, the rural poor and disease have India needs to improve its educational systems from the plagued India since before independence, they are being primary level through to the universities. Industry needs to joined by modern-day challenges, including volatile oil play its part as well, providing vocational training and prices, the threat of international protectionism and global helping universities design more practical studies. climate change. Companies can also play an important role in rural development by helping to set up schools, creating agro- The potential impact of these problems rises as the ventures or helping local government beef up their economy grows. So India’s early stage of development technological capabilities. gives it the chance to confront them early and devise novel solutions. “Every risk is an opportunity for innovation Added to India’s burden is the scourge of HIV and and change,” said Palaniappan Chidambaram, Minister of tuberculosis. The government estimates that as many as Finance of India. 5.7 million Indians are HIV-positive and almost 2 million have TB, with many cases unreported as the two mutually One of the greatest risks is the one posed by India’s reinforcing diseases spread beyond high-risk groups. The young and growing population. If India fails to adequately government has shifted from preaching abstinence to feed, school and employ this swelling group, its distributing condoms and now offers free HIV treatment “demographic dividend” could become a demographic and a TB programme that is reckoned as one of the disadvantage. Later, India will face the same problem now world’s most successful. vexing Europe and Japan – how to support an ageing population. The government aims to increase spending on healthcare, but this an area where companies can play a direct role: As many as two-thirds of India’s population live in a there are no restrictions to private sector investment in shrinking agricultural sector, uneducated and unskilled, healthcare. Ultimately, though, one of the most powerful driving more into the cities by the year. Thus, even as weapons will be overcoming taboos to increase companies complain of a skills shortage, growing awareness. disparities in income could stoke social unrest. The collapse of the Doha Round has underscored the growing risk to India, among others, of a rise in Ultimately, India’s democracy may prove the lever that protectionism, which could hurt India’s trade in goods and forces policy-makers to address these needs and avert a services. “The great champions of globalization have social crisis. “If you don’t have democracy, there is a started shirking it, but we in India trumpet globalization grave danger of social unrest,” said Palaniappan 18 India Economic Summit
  20. 20. because we are getting globally competitive,” said “There are gas projects we’ve had to put on hold Kamal Nath, Minister for Commerce and Industry. But due to volatility in prices India faces its own backlash if the poor continue to be and uncertainty in availability of gas.” left behind by globalization. T. Sankaralingam, Chairman and Managing Director, NTPC, India India should deepen its relationships with the EU and US, but also with its immediate neighbours to raise its clout in trade negotiations. “To be at the global table you must be able to carry the region,” said Rajat M. Nag, Director-General, Southeast Asia Department and Special Adviser to the President, Asian Development Bank, Manila. (See Figure 1) India is particularly vulnerable to an oil price shock. Though it lies close to rich gas fields and relies on domestic coal for most of its energy, India is a net oil importer and subsidizes fuel prices. India is already Perhaps the biggest risk facing India, however, is the short of natural gas. “There are gas projects we’ve impact of global climate change, particularly on its had to put on hold due to volatility in prices and worsening water situation. India already suffers from uncertainty in availability of gas,” said T. the effects of deforestation and air pollution thanks to Sankaralingam, Chairman and Managing Director, its reliance on coal. Droughts and floods are on the NTPC, India. rise and glaciers are retreating. The impact of these problems globally appears to be contributing to more Chidambaram estimated that high oil prices cost India severe weather, potentially affecting the monsoons roughly 1 percentage point of annual economic that are critical to the nation’s agriculture and water growth. India needs to secure its energy supply, invest supply. in a strategic oil reserve and start taking stakes in foreign supplies as China has done. It must continue Shortages of water pose perhaps the greatest risk of to develop alternative sources of energy at home, social unrest. Almost a third of India’s people lack such as solar, wind and biofuel. Equally important, access to quality drinking water and the numbers are India needs to waste less energy. “Our intensity of growing as water supplies shrink. “That is a shocking energy usage has to come down,” said R. indictment,” said Ravi Narayanan, Adviser, Arghyam Seshasayee, Managing Director, Ashok Leyland, India, Foundation, India. (See Figure 2) and President of the Confederation of Indian Industry. Figure 1. Trade with US and ASEAN Nations Rising Figure 2. Overall Water Supplies Falling Behind 19 India Economic Summit
  21. 21. In addition to massive investments in water-related infrastructure such as desalination plants and drip irrigation, policies should discourage the growth of water- Spread of HIV and TB Threaten intensive crops in dry areas. Cities must conserve and India’s Economy recycle water to reduce their burden on rural supplies. Mechanisms also need to be developed to price water to The spread of HIV/AIDS in India, fuelled by co-infection with reflect its scarcity. tuberculosis, is threatening India’s economy. The Minister of Finance of India, Palaniappan Chidambaram identified the HIV/AIDS and Tuberculosis risks listed in the World Economic Forum’s India@Risk 2006 report as having the The Environment Risk to Growth most “frightening propensity to get out of hand.” India carries the highest burden of the twin epidemics of HIV Environmental concerns ranked high on the agenda of and TB which are predicted to be a significant drag on India’s decision-makers at the India Economic Summit. India’s future economic growth as they continue to affect Vulnerability to climate change and a decline in freshwater millions of working age adults, reducing workforces, quantity and quality in particular were at the core of diminishing productivity and cutting household incomes. concerns discussed. Water issues, warned Indian Finance Minister Palaniappan Chidambaram, are the biggest risk to The World Economic Forum’s India Business Alliance to Stop India’s development. Chief Minister Vasundhara Raje of TB (IBA) is a model private sector response to the disease Rajasthan highlighted the challenges of balancing efficient which kills more than 1,000 people a day in India. Judging pricing with equitable access, and Ralph Peterson, Chairman by the early successes of the IBA, which is the world’s and Chief Executive Officer, CH2M Hill Companies, USA, largest private sector effort to control TB, tackling the illness proposed models for downstream financing of upstream is an achievable goal. The IBA was set up in 2004 by the efficiency. World Economic Forum’s Global Health Initiative (GHI) to increase the involvement of the private sector in TB control. India’s place in the global fight to mitigate climate change remains unclear, with significant resistance to emission cuts 32 Indian companies joined forces under the auspices of being balanced by real opportunities to benefit from Clean GHI in partnership with the Revised National TB Control Development Mechanism projects. Whatever role India plays, Programme, the Confederation of Indian Industry, the World the threat posed by a warming climate is real for the region Health Organization and the Stop TB Partnership in an and poses particular risks to Indian agriculture and communities Alliance that now reaches more than 4 million people. exposed to flooding, a development reflected in increased interest in agricultural risk management tools. (See Figure 1) Figure 1. Insurance Covering a Larger Portion of Agricultural Land during the Monsoon Season India Business Alliance to Stop TB: achievements since 2004 • More than 4 million people reached with TB control programmes • More than 7,000 people now on TB treatment Mitigating these environmental risks will be an essential part • 32 companies now committed to TB control activities of ensuring the sustainable growth of India’s economy and • Leading companies: Reliance, TATA, Aditya Birla involved building a more equitable and dynamic subcontinent. • Unique public private partnership model with business as healthcare provider 20 India Economic Summit
  22. 22. The Creative Imperative in India Since its Annual Meeting 2006 in Davos, the World “Science and technology is Economic Forum has been pursuing the “creative the key for innovation and economic growth. But also imperative” through the interactive sessions and important is social workshops in regional meetings across the globe, innovation, changing including this year’s India Economic Summit. The aim mindset to take risks.” is to tap the combined knowledge of Forum partners, Kiyoshi Kurokawa, Science members and meeting participants – business, Adviser to the Prime Minister, government and civil society leaders from around the and Professor, National Graduate Institute for Policy world – to identify innovative approaches to Studies (GRIPS), Japan addressing international issues and problems, from the lack of water to ageing demographics, from imbalances in the global economy to the threat of terrorism. Many of these captured ideas will fuel the discussions and brainstorming at the Annual Meeting 2007 and help shape its agenda. Efforts must be made to address the problem of These are some examples of the creative ideas and unemployment among graduates and postgraduates out-of-box insights that participants at the India in rural areas who are unable to get a job. Not attuned Economic Summit discussed in New Delhi: to urban living, they are similarly unsuited to village life or rural employment. The private sector should make State and National Competitiveness use of these talents in their efforts to develop rural It is critical for India to shape its competitive niches in markets. the global economy. It must further cultivate the comparative advantage it has already exploited in the India and its neighbours should do more to promote business process outsourcing market. This means South Asia as an economically integrated region. “We producing high-quality goods and services at a low really underplay our neighbourhood at our own cost,” cost. India can collaborate with developed countries said Rajiv Kumar, Chief Executive and Director, Indian to “extend” the niche competitiveness of those Council for Research on International Economic economies. Indian Minister of Science and Technology Relations (ICRIER), India. “The region from Chittagong and Earth Sciences Kipal Sibal, for example, has (in Bangladesh) to Kabul (in Afghanistan) is and will proposed to Norway that it set up marine engineering remain an integrated economic space – trade, training facilities in India and then outsource business migration, population, the labour force. We [India] take to trained Indian personnel. This would allow Norway responsibility for building that economic space. If to maintain its leading position in the marine others are afraid of our size, we must make them feel engineering sector, while providing new skills to Indian secure.” workers. As Minister Sibal put it: “You build your future; we build our human capital.” Such collaborative To create an Indian common market, a single point-of- arrangements would provide India with the know-how departure process should replace the repeated it requires such as energy conservation techniques formalities and levies on cross-border commerce and and technology. traffic. Ways should be explored to divide the revenues fairly among states with valid claims. “India has to focus on how to monetize innovation. The cost of failure is low in India and that is something we should use to our advantage.” Kiran Mazumdar-Shaw Chairperson and Managing Director, Biocon India, India 21 India Economic Summit
  23. 23. Risk Management Managing Growth “India is being robbed of at least 1% growth because of While some accomplished Indian academics, engineers high oil prices,” said Palaniappan Chidambaram, the and scientists who have gone abroad have returned, Minister of Finance of India. He called for oil-producing many still do not come home, unwilling to accept local countries to meet high oil-consuming nations, proposing pay scales and conditions. The proposed legislation to that the two groups set a pricing band for petroleum. allow foreign educational institutions to enter the Indian Chidambaram also called on developed countries to market could provide a mechanism for attracting Indian provide funding and technology to developing economies R&D talent back. But this initiative will have to be to help them reduce energy consumption and increase bolstered by new grant programmes, investment from the energy efficiency. private sector in education and the creation of public- private partnerships to support higher learning and India needs to examine new ways of water conservation research. such as rain harvesting in urban areas. To empower women and expand opportunities for them in the workplace, Indian companies should consider adapting flexible work schemes that have been used in countries such as Japan that have also had to address gender inequality. Infrastructure Development To construct the infrastructure India needs will require investment of US$ 350 billion over the next five years. As the government will not be able to provide all the necessary funding, the private sector will have to cover the shortfall. In a session on financial markets, participants discussed the need for alternative sources of capital. Deregulation of the insurance sector and pension reforms could unlock funds that may then be invested in infrastructure development. In addition, the creation of dedicated public vehicles for investing in infrastructure projects would centralize the tendering and approval process, thereby eliminating the confusion investors typically face. The Key Challenges Ahead: R. Seshasayee, Mohamed A. Alabbar, Kamal Nath, Michael Rake, Nandan M. Nilekani and Graham Mackay 22 India Economic Summit
  24. 24. Acknowledgements The India Economic Summit is held in cooperation with the Confederation of Indian Industry (CII). The World Economic Forum wishes to acknowledge the support of the following companies as Partners: Strategic Partners Summit Supporters Accenture CH2M HILL AIG Department of Industrial Policy and Promotion, AMD Ministry of Commerce and Industry of India Apax Partners Emaar Audi Financial Technologies Avaya India Brand Equity Foundation Bain & Company SABMiller Bombardier TNT NV BT Cisco Systems Citigroup Service Provider The Coca-Cola Company Deloitte Taj Palace Hotel Deutsche Bank Ernst & Young Intel Corporation KPMG Manpower Marsh & McLennan Companies The World Economic Forum would also like to Merck & Co. thank Kamal Nath, Minister of Commerce and Merrill Lynch Industry, and Vilasrao Deshmukh, Chief Minister of Metro Maharashtra for their generous hosting of activities Nestlé during the India Economic Summit. PricewaterhouseCoopers Siemens Regional Partners GeoPost International UPS 23 India Economic Summit
  25. 25. Contributors Peter Torreele is Managing Director of the World Economic Forum. Lee Howell is Director, Head of Asia, at the Forum. The India Economic Summit was under his direct responsibility, with Colette Mather, Senior Adviser, South Asia; Shruti Bhatia, Senior Manager, India; Satyadeep Rajan, Senior Member Relations Manager, Asia; and Samantha Gianora, Event Manager, Summit Coordinator. Samantha Tonkin, Senior Media Manager at the World Economic Forum worked with Wayne Arnold and Alejandro Reyes to produce this report. The World Economic Forum would like to express its appreciation to the summary writers for their work at the Summit. Session summaries are available at Associate Principal, Editing: Nancy Tranchet Design and Layout: Kamal Kimaoui, Associate Principal, Production and Design Photographs: Prabhas Roy Special thanks to PricewaterhouseCoopers for their help in preparing data and statistics underpinning this report. 24 India Economic Summit
  26. 26. The World Economic Forum is an independent international organization committed to improving the state of the world by engaging leaders in partnerships to shape global, regional and industry agendas. Incorporated as a foundation in 1971, and based in Geneva, Switzerland, the World Economic Forum is impartial and not-for-profit; it is tied to no political, partisan or national interests. (