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India Economic Summit 2007

  1. 1. India Economic Summit Building Centres of Excellence New Delhi, 2-4 December 2007 Report
  2. 2. This publication is also available in electronic form on the World Economic Forum website at the following address: India Economic Summit Web report: (HTML) The electronic version of this report allows access to a richer level of content from the meeting, including photographs and session summaries. The report is also available as a PDF: (PDF) Other specific information on the India Economic Summit, New Delhi, 2-4 December 2007, can be found at the following links: Photographs can be found at the following link: 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: © 2008 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: 150108
  3. 3. Contents Page 3 Preface Page 4 Summary: Building Centres of Excellence Page 8 State and National Competitiveness Page 10 Inclusive Growth Page 14 Infrastructure Development Page 18 Risk Management Page 22 Building Centres of Excellence in the WorkSpace Page 24 Acknowledgements
  4. 4. 2 | India Economic Summit
  5. 5. Preface The theme of the 23rd India Economic Summit, and global insight from among its community of Building Centres of Excellence, acknowledged India’s stakeholders. There was perhaps no better symbol of remarkable achievements in creating highly competitive this spirit than the introduction of the WorkSpace to the and innovative companies. But more importantly, it also India Economic Summit, which offered a unique underscored the challenge of extending that success collaborative environment for decision-makers to co- beyond traditional industry, urban and academic design responses to address the big challenges of today centres to rural communities, where 70% of the and tomorrow. A series of highly interactive and population still resides. The record 800 leaders from professionally facilitated WorkSpace sessions focused on business, government and civil society, representing such topics as expanding India’s competitive edge, over 40 countries, were in strong agreement that, developing a strategy for climate change, leveraging without building centres of excellence in new domains innovations from social entrepreneurs and building the and states, the country’s economic and demographic new Indian multinational. We also published the strengths could transform quickly into weaknesses in a India@Risk 2007 report in collaboration with the highly-competitive global economy. Confederation of Indian Industry (CII). And, for the third consecutive year, the Schwab Foundation for Social Tellingly, there was no evidence of complacency setting Entrepreneurship presented the India Social Entrepreneur in as a result of the country’s record GDP growth, of the Year Award for 2007 on the occasion of the strengthening currency and historically high equity Summit. We look forward to continuing to build on these markets. Indeed, the challenge of spreading higher successful initiatives in the coming years. growth across more state economies and developing industries, and into rural areas, was seen as remaining As you read the key points and data presented in this for a generation or more. Therefore, the mood at this report, we look forward to hearing your thoughts and year’s Summit was about how to get things done in welcome your suggestions as we prepare the these areas, sooner and faster. programme for the 24th India Economic Summit, scheduled for 16-18 November 2008. The challenges Discussions did not focus, as in the recent past, on faced by India, and the world for that matter, are more how to achieve greater consensus among industry, complex, interrelated and intractable than ever before. state and national leaders around key growth With over two decades of commitment to addressing challenges, but were directed instead at adopting and these challenges, we hope that the India Economic scaling grassroots innovations that are delivering faster Summit can continue to serve you as an important and greater results on the ground. platform for collaborative thinking and creative solutions. It was in this spirit of getting things done faster that the W. Lee Howell India Economic Summit programme was designed to Senior Director tap into the collective intellect, on-the-ground experience Head of Asia and Global Agenda 3 | India Economic Summit
  6. 6. Summary: Building Centres of Excellence “ “ As long as advanced and developed The greatest challenge facing India is economies have an edge over to build an effective, efficient, scaleable “ developing countries in knowledge, and sustainable infrastructure for this financial and material resources, fast-emerging economy. “ I do not think we should rush to the Hector de J. Ruiz, Chairman of the Board and Chief Executive conclusion that power has shifted. Officer, AMD (Advanced Micro Devices), USA; Co-Chair of the India Economic Summit Palaniappan Chidambaram, Minister of Finance of India At the end of the Summit, participants agreed on the While there was confidence among the participants at areas in which action will have the greatest impact. the 23rd India Economic Summit, there was no The agenda of priorities for the coming year includes complacency. India’s Finance Minister Palaniappan skills development, improving governance, upgrading Chidambaram, for example, was candid in his education, building public-private partnerships (PPPs) assessment of the challenges ahead. Despite all the in infrastructure, and addressing environmental progress India has made in recent years, particularly degradation and water scarcity. All are enormous as a result of substantial investment and spending tasks, but perhaps the most challenging will be the growth, “my worry is whether we are getting bang for development of India’s enormous human resources the buck,” he said. “While outlays have increased through skills training and education. In many of the manyfold from 2003-2004 to 2008, are these outlays sessions, time after time, participants stressed that it resulting in outcomes in the field?” is critical for India to take full advantage of its demographic advantages by providing the schooling That was the main question on participants’ minds: Is and instruction necessary to raise the skill levels of its India getting the results it needs now that it is expanding workforce and to create the millions of jobs achieving 8-9% growth a year and foreign investment necessary to allow them to be productive and has risen sharply? It was not enough to recognize contribute to inclusive economic growth. problems; participants focused on finding solutions to the root causes of India’s competitiveness deficiencies. India will be able to build the many centres of Minister Chidambaram, for his part, pinpointed the excellence it needs to sustain high growth with equity lack of sufficient restructuring in the financial sector as over the long term only if it can educate and train its an obvious failing. “The financial sector is the heart of people to be productive at all levels of society and in the economy and we haven’t been able to push both the rural and urban areas. “What we now need through reforms; that’s a disappointment.” to do is roll up our sleeves and deliver on the 4 | India Economic Summit
  7. 7. “ A key to future growth is the enormous domestic market and the consumption-led economy, which has powered India’s growth “ and provided a degree of resilience and protection from global ebbs and flows. Orit Gadiesh, Chairman, Bain & Company, USA; Member of the Foundation Board of the World Economic Forum; Co-Chair of the India Economic Summit “ India has always been outside the State and National Competitiveness epicentre of events and yet we get drawn “ India has become one of the most successful in by the sheer gravitational pull of our economies in the world in attracting the attention of geography, resources and potential. global business strategists and investors. But to improve its competitiveness in the long term, it will Anand G. Mahindra, Vice-Chairman and Managing Director, have to address its economic weaknesses. The most Mahindra & Mahindra, India; Co-Chair of the India Economic Summit pressing among them is the need to increase skills training to better prepare its young population to enter expectations for India that exist around the world,” the workforce. stated Anand G. Mahindra, Vice-Chairman and Managing Director, Mahindra & Mahindra, India, and Poor infrastructure, differences in regulatory and policy Co-Chair of the India Economic Summit. He added regimes across states, the absence of a single that the country needs to develop the competencies national market, deficiencies in the manufacturing that will deliver on the promise of India. sector, bureaucratic red tape and corruption are among the key obstacles to improving India’s global The India Economic Summit, convened in partnership competitiveness. with the Confederation of Indian Industry (CII), was organized under four sub-themes: State and National • A major priority is the skills deficit. While labour Competitiveness, Inclusive Growth, Infrastructure productivity has improved, India does not have the Development and Risk Management. In addition, for skill levels to sustain 9% growth. the first time at the India meeting, four WorkSpace • Training young people for vocational work is critical sessions were held on the following topics: Innovative if India is to take full advantage of the demographic Models: Expanding India’s Competitive Advantage, dividend it can gain from its fast-growing Getting Ahead of the Climate Change Curve, Excellence workforce. Despite the Odds: The Social Entrepreneur in India • Government-controlled education and vocational and Unlocking the DNA of an Indian Multinational. schemes may not be sufficient to address the problem. The private sector must be involved to create jobs for new entrants. • Investors should be encouraged or even required to set up training institutes in their respective sectors. 5 | India Economic Summit
  8. 8. “ “ There are great opportunities in India, You need to take the untapped human but don’t take anything for granted. resources and bring them to fruition; “ “ Keep investing in education and otherwise, India will have a different address infrastructure. value proposition. Edward J. Zander, Chairman and Chief Executive Officer, Ben J. Verwaayen, Chief Executive Officer, BT, United Kingdom; Motorola, USA; Co-Chair of the India Economic Summit Co-Chair of the India Economic Summit Inclusive Growth • The private sector has a role to play. Banks, for example, can promote microfinance and provide India faces a major challenge in dealing with its urban rural Indians with education on the basics of poor and the even larger numbers of people who live finance. in poverty in rural areas. As India aims for growth with • The government must raise incomes in the equity, it may be difficult to improve conditions in the countryside without accelerating the rush to the countryside without making the situation worse in the cities. Tools to achieve this include technology to cities. turn rural India into a service centre for urban areas and regulations and incentives to encourage • About a quarter of Indians live below the poverty companies to “ruralize”. line, while almost 70% of the population is in the countryside. Infrastructure Development • The rising discontent among the poor has led to a political backlash, including violent protests and insurgency. The growth of regional parties is, in One of the biggest challenges India faces is to part, a result of the need for the disadvantaged to address its lack of adequate and well-maintained have their voices heard. infrastructure. Infrastructure investment must rise to • To address the concerns of the poor and around 9% if India is to sustain 10% growth. The disenfranchised, the government and national challenge: to forge the public-private partnerships parties will need to embrace local interests. A key necessary to marshal the resources and expertise priority must be to increase spending on rural needed to dramatically improve the situation. infrastructure. 6 | India Economic Summit
  9. 9. Kamal Nath, Minister of Commerce and Industry of India “ Within India, the challenge is how Risk Management “ to create 100 million new jobs in In managing the risks that threaten its current the next 15 years. expansion, India must aim to turn some of the threats into opportunities. Although the rest of the world Mukesh Ambani, Chairman and Managing Director, Reliance considers India to be an emerging superpower, it is in Industries, India; Co-Chair of the India Economic Summit the country’s strategic interest to resist complacency and to avoid hubris. • The public sector has insufficient resources to tackle the infrastructure deficit, while the private • Economic success should not be narrowly defined by sector has funding and talent issues of its own. the middle class, white-collar ideal. India needs to fill • The successful completion of the National Highways the burgeoning demand for skilled, blue-collar labour. Authority’s Golden Quadrilateral project is an example • India must address global problems such as of a public-private revenue sharing agreement. HIV/AIDS and global warming. • Even if clearly defined projects existed, pricing and • Climate change is exacerbating the rapid decline of risk management, especially between public and India’s freshwater supplies. India must focus on private entities, need more sophistication and building the necessary infrastructure to harness should move away from the traditional “cheapest rainfall and floodwaters for productive use. supplier” mindset. • Protectionism, both at home and abroad, is • Cross-sector government cooperation must be another looming risk to India’s growth. improved so that an integrated approach may be • The prospect of a US economic slowdown may taken in constructing infrastructure projects such also have a negative impact, but India may be as airports, which will need roads and transport better insulated from a recession in America than links to allow easy access. East Asian economies. • India does not have sufficient capacity to execute • India could risk raising social tensions if not enough multiple mega-construction projects due to the lack jobs are created to absorb the increase in the of qualified engineering firms and the paucity of workforce. A major challenge is to provide young trained manpower. people the skills they need to be productively employed. 7 | India Economic Summit
  10. 10. State and National Competitiveness “ Labour productivity has been rising but our skill levels “ have been abysmal. The skill levels of the labour force are lower than what we need for 9% growth. Suman Bery, Director-General, National Council of Applied Economic Research, India In recent years, India has clearly been one of the most Figure 2: India's Competitiveness successful economies in the world in attracting the India shares characteristics of both factor- and innovation-driven economies Institutions attention of global business strategists and drawing in Infrastructure Innovation foreign investment (see Figure 1). According to official Business sophistication Macroeconomic stability figures, FDI in the financial year 2006-2007 totalled Innovation-driven economies India Factor-driven economies US$ 19.5 billion, up from US$ 7.7 billion the year Health and primary Market size education before. The government expects US$ 30 billion for 2007-2008, an ambitious target that is still only about Higher education Technological and training readiness half the inflow to China. The Planning Commission Goods market efficiency Financial market sophistication Labor market efficiency forecasts that the economy will grow by 8.5% to 9% over the current financial year to March 2008. The goal Source: World Economic Forum going forward: sustained 9% growth that is inclusive. regimes across states, the absence of a single national To get there will require addressing serious market, the need to develop the manufacturing sector, constraints. At this and previous India Economic bureaucratic red tape and corruption. Each pressing Summits, participants have identified and debated the problem requires urgent attention. The divide among widely recognized challenges confronting India as it states, for example, is already leading to dangerous seeks to boost its global competitiveness and achieve social tensions and anti-government protests. According China-level growth rates (see Figure 2). These familiar to a recent study by Lehman Brothers, the poorest obstacles to raising productivity include poor five states, where about 40% of the total Indian infrastructure, differences in regulatory and policy population lives, account for just a quarter of national output, while the five richest, with only about 26% of the population, produce more than 40% of the output. Figure 1: Foreign Investment in India Portfolio inflows for the first half of fiscal year 2008 greater than 2006 and 2007 combined At this Summit, a spotlight was trained on one glaring Foreign portfolio investment inflows (US$, millions) $25,000 deficiency that has not received as much attention in 20,000 previous meetings: the need to increase vocational 15,000 training and technical skills in the workforce. India’s 10,000 achievements in IT and pharmaceuticals, as well as the cadres of top managers who have spread across the 5,000 world are testament to the talent that India has 0 produced. What India lacks are people with the skills to -5,000 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008* keep its economy humming – the masons, carpenters, hotel waiters and armies of workers who are the Source: Reserve Bank of India Note: * Years are fiscal years ending March. 2008 data includes FII flows through 19 Oct 2007, foundation of any economy. “Labour productivity has and ADRs/GDRs through July 2007. 8 | India Economic Summit
  11. 11. “ “ “ “ Young people want to learn and We need skills development become skilled. as a major initiative. Ambika Soni, Minister of Tourism and Culture of India Sunil Bharti Mittal, Chairman and Group Chief Executive Officer, Bharti Enterprises; President, Confederation of Indian Industry (CII), India been rising but our skill levels have been abysmal,” said “The government needs to let go of its control over Suman Bery, Director-General, National Council of the education system,” said Shiv Nadar, Founder, Applied Economic Research, India. “The skill levels of the HCL; Chairman and Chief Strategy Officer, HCL labour force are lower than what we need for 9% growth.” Technologies, India. Syllabus-driven state schools do not give students the skills they need to compete. Much has been made of India’s youthful demographics “We need skills development as a major initiative,” where over half the population is under the age of 25 Sunil Bharti Mittal, Chairman and Group Chief (see Figure 3). According to Goldman Sachs, the Executive Officer of Bharti Enterprises and President number of people of working age (15-60 years old) will of the Confederation of Indian Industry (CII), agreed. peak at about 64% around 2020. This can be a significant global competitive advantage, but only if the Colette Mathur, Senior Adviser at the World Economic jobs are created to accommodate the bulge in the Forum, offered a practical proposal with respect to the workforce. It all starts with education, Indian Finance development of special economic zones: require Minister Palaniappan Chidambaram told participants. investors to set up a training institute for workers in “India can reap the benefit of its demographic their sector. Ambika Soni, Minister of Tourism and dividend and avoid it turning into a demographic Culture of India, supported the idea. “Young people liability by ensuring that every child can access quality want to learn and become skilled,” she said, noting education and stay in school for at least 10 years.” the need for training facilities in such fields as tourism, hotel management and healthcare. There are It also requires a concerted effort to provide skills opportunities for investors, the minister concluded. training. The government acknowledges this critical task. “For every one of our people to benefit from new employment opportunities being created across the Figure 3: India Younger Than Many Asian Peers economy, we must ensure that every Indian is educated and skilled,” said Prime Minister Manmohan Over half the population is younger than 25 years old Singh in his Independence Day message to the nation 100% 7% 6% 6% 9% 9% 21% 16% 17% 90 16% 17% 21% 20% in August this year. Singh announced the launch of a Percentage of population, 2005 80 24% 29% 24% 22% 23% Vocational Education Mission to open 1,600 industrial 70 26% 28% 60 24% training institutes and polytechnics, 10,000 vocational 20% 19% 50 19% 20% 18% 40 schools and 50,000 skills development centres. Every 18% 15% 35% 35% 34% 30 15% 27% year, he said, over 10 million students will receive 20 23% 22% 16% 10 vocational training, four times the number today. “We 0 Japan Australia South Korea China Indonesia Malaysia India will seek the active help of the private sector in this 60+ years old 40-59 25-39 15-24 0-14 initiative so that they not only assist in the training, but Source: Asian Demographics Ltd also lend a hand in providing employment opportunities.” 9 | India Economic Summit
  12. 12. Inclusive Growth “ If we can take opportunities to rural The rising discontent of these have-nots has already produced a political backlash. A radical Maoist India, there’s no reason why rural “ insurrection, Naxalism, has spread through some India would wish to come like states while, across the country, regional political lemmings to urban India. parties are growing in strength, upsetting the dominance of national parties and forcing them to Mani Shankar Aiyar, Minister of Panchayati Raj and Youth cobble together coalition governments – like the one Affairs and Sports of India now in power in New Delhi (see Figure 1). There are two types of poor in India: the millions packed into India’s growing urban slums and the even While these new political parties offer an important greater number eking out life in its rural heartland. The voice for those disenfranchised or displaced by conundrum the country faces is that improving the economic development, they often base their appeal situation in the countryside will likely make matters on caste and the personality of their leader, making worse in the city. them divisive and raising concerns about corruption. “They can muster big crowds but they are perceived “What do migrants want?” asked Anand G. Mahindra, to be not very honourable,” said Arun Jaitley, Member Vice-Chairman and Managing Director, Mahindra & of Parliament and General Secretary, Bharatiya Janata Mahindra, India; Co-Chair of the India Economic Party, India. Summit. “They want diversity of income, sanitation, drinking water, power, roads. But even when they get Figure 1: India's Parliamentary Parties those, they will still want the life they see on their Parliamentary power now spread among more political parties televisions. Human beings like to live in cities; they 14 Average number of parties winning seats have done so for thousands of years.” 12 for elections in 5 largest states 10 It is no secret that India needs to make its tremendous 8 economic growth more equitable, to spread it more 6 fairly among society – not just wealth, but 4 infrastructure and educational opportunities. Roughly 2 one quarter of Indians live below the poverty line, and 0 1985-89 1990-94 1995-99 2000-04 2005-07 For elections occurring during periods (parliamentary almost 70% of Indians live in rural areas, where terms not aligned across the five states) desperate farmers too often find solace in suicide. Source: Election Commission of India 10 | India Economic Summit
  13. 13. Ben J. Verwaayen, Chief Executive Officer, BT, United Kingdom; Co-Chair of the India Economic Summit; Mani Shankar Aiyar, Minister of Panchayati Raj and Youth Affairs and Sports of India; Anand G. Mahindra, Vice-Chairman and Managing Director, Mahindra & Mahindra, India; Co-Chair of the India Economic Summit and Mohamed A. Alabbar, Chairman, Emaar Properties, United Arab Emirates listen to Nik Gowing, Main Presenter, BBC World, United Kingdom “ What do migrants want? They want broadens access by farmers to credit. In doing so, it is helping to plug a gaping hole in funding for connecting diversity of income, sanitation, drinking rural Indians to the mainstream economy. water, power, roads. But even when they get those, they will still want the The private sector is also making great strides through life they see on their televisions. Human microfinance, providing rural development capital while “ freeing many rural people from the grip of beings like to live in cities; they have moneylenders. Instead, microfinance offers the rural done so for thousands of years. poor a way to leverage their own industry and thrift by popularizing not only debt but also savings accounts. Anand G. Mahindra, Vice-Chairman and Managing Director, Mahindra & Mahindra, India; Co-Chair of the India Economic “The bank account has become a status symbol in Summit the villages,” said M. R. Rao, Chief Operating Officer, SKS Microfinance, India. The proliferation of coalition governments that rely on consensus decision-making could also have a To realize the potential microfinance has tapped, diminished ability to formulate and implement effective however, India needs greater deregulation. Existing rules, policies. “Coalition government has its own for example, prevent bankers from tying up with compulsions and its own limitations,” said Vilasrao telecommunications companies to use established Deshmukh, Chief Minister of Maharashtra, India. “It cellular customer networks to distribute financial services. can delay decisions.” Figure 2: Rural Infrastructure Investment To achieve a broader mandate and regain political Rural irrigation expected to receive 15% of public infrastructure funds momentum, national parties need to boost regional 1,500,000 Projected infrastructure investment, 2007-12 (Rs, crore) chapters to embrace local interests; likewise, regional Electricity Water supply/Sanitation 1,250,000 Rural parties need to develop more robust national agendas. Rural roads Telecoms 1,000,000 Achieving inclusive economic growth is a priority for 750,000 India’s current government. Its latest budget includes Irrigation Urban a 31% increase in spending on rural infrastructure – 500,000 15% of public infrastructure funds are expected to be 250,000 allocated to rural irrigation (see Figure 2) – and 0 Source: Government Planning Commission 11 | India Economic Summit
  14. 14. Palaniappan Chidambaram, Minister of Finance of India and Sunil Bharti Mittal, Chairman and Group Chief Executive Officer, Bharti Enterprises; President, Confederation of Indian Industry (CII), India “ The war for talent is such that we Bankers concede, however, that their industry is also guilty of holding back. Microfinance typically charges have hundreds of millions of people relatively high interest rates, yet default rates among who cannot monetize their skills today micro-borrowers remain near zero, indicating what because we haven’t connected them. “ bankers say is excessive caution on the part of micro- It’s in everyone’s interest that we lenders. Part of that caution, they say, stems from the fact that there is no credit bureau to keep track of unleash that capability and that talent. rural borrowers, nor a reliable way – such as driving Ben J. Verwaayen, Chief Executive Officer, BT, United licenses or birth certificates – to even identify them. Kingdom; Co-Chair of the India Economic Summit Some have called for the government to issue national voter registration cards. Bankers also have an important role to play in filling The good news for India is that its economy is largely the rural education gap, by teaching rural Indians the driven by domestic demand as opposed to exports. basics of finance. To be sure, education often serves The rural population, therefore, represents a critical as a politically correct panacea in debates about source of new labour for India’s services-led growth. poverty relief, but this year’s Summit broke from the platitudes by outlining practical areas where education But solving the riddle of how to raise income levels in can have an immediate impact. Improved vocational the countryside without accelerating the rush to the training was singled out as a critical necessity for India cities requires new thinking on what urbanization means. that would address its growing shortage of skilled In short, convincing rural Indians not to move to big trades workers while recognizing that a higher degree cities will require moving the city closer to them. “If we may not be a realistic aspiration for the bulk of the can take opportunities to rural India, there’s no reason country’s youth. Vocational training is an area, why rural India would wish to come like lemmings to moreover, where companies can get more immediate urban India,” said Mani Shankar Aiyar, Minister of returns on their investment, either by conducting their Panchayati Raj and Youth Affairs and Sports of India. own training, financing vocational programmes or helping to develop curricula. 12 | India Economic Summit
  15. 15. Ajit Gulabchand, Chairman and Managing Director, Hindustan Construction Company, India, speaking at the SlimCity private session Transformation – Sustainable Industries that rely on rural inputs – food processing, City Development and Inclusive biofuel production and handicrafts – should move closer to their production centres. Doing so will Urban Growth encourage the creation of new urban centres, turning villages into towns, and towns into small cities. Technology can also be used to turn rural India into a At a session on the new SlimCity initiative of the World service centre for urban India in the same way that Economic Forum, business leaders concluded that far- India has become a service centre for the world. “The reaching change is imperative in order for India’s cities to war for talent is such that we have hundreds of achieve sustainable development and provide inclusive millions of people who cannot monetize their skills growth for its citizens. today because we haven’t connected them,” said Ben J. Verwaayen, Chief Executive Officer, BT, United Accountability, coordination and resources were identified Kingdom; Co-Chair of the India Economic Summit. as the three core areas in need of transformation. “It’s in everyone’s interest that we unleash that Participants underlined the success of the Delhi Metro capability and that talent.” development as a widely recognized example of the overwhelming advantages of clear accountability in city Ultimately, it may take a more concerted push by governance and transparent, coordinated public sector government to make this shift out of the cities project management. Participants highlighted the fact happen. Regulations and incentives may be needed to that India possesses world-class resources, but its encourage companies to “ruralize”. But it is clear that economic and inclusive growth can only continue if India can no longer afford to let investment and leaders from the public and private sectors rise to the commerce remain confined within the city limits. challenge of putting these resources in the hands of “Rural and urban are not separate; both are those who need them. connected, said Aiyar. “Until we see that, India will become prosperous and Indians will remain poor.” The World Economic Forum’s SlimCity initiative is a global partnership of leading city mayors and private sector board executives, supported by the World Bank, the International Energy Agency, UH-Habitat and ICLEI. The initiative provides a risk-free, dynamic, multistakeholder environment within which cities and the private sector can pursue the development of energy and resource efficiency in cities. 13 | India Economic Summit
  16. 16. Infrastructure Development “ At the end of the day it’s easier annum, most analysts agree its lack of infrastructure “ costs the economy between 1.5% and 2% of GDP to build a road than it is to build per annum. This equates to between US$ 95 billion a democracy. and US$ 134 billion lost in cumulative GDP by 2012. Nandan M. Nilekani, Executive Co-Chairman, Infosys Technologies, India; Member of the Foundation Board of the The Indian government recognizes that it faces a World Economic Forum significant task. On one hand, public sector borrowing restrictions and the lack of construction resources “The greatest challenge facing India is to build an mean it has to approach the private sector to help effective, efficient, scalable and sustainable fund and implement their plans. On the other hand, infrastructure,” noted Hector de J. Ruiz, Chairman of the private sector faces significant resource and talent the Board and Chief Executive Officer, AMD issues of its own to cope with extra demand for (Advanced Micro Devices), USA; Co-Chair of the India construction. The current five-year plan for Economic Summit. As India’s economy continues its infrastructure sets aside an average of 30% (US$ 145 high growth trajectory, its lack of infrastructure billion over five years) in PPPs and purely private becomes an ever-increasing concern. infrastructure-related projects. Telecommunications, roads, ports and airports are the main targets for the To sustain and realize India’s growth potential, the higher share of private funding, reflecting recent government of India has tabled ambitious plans to significant steps taken by the government towards boost infrastructure investment from historic levels of embracing the private sector (see Figure 1). 3-4% of GDP to around 9% by 2012. The Planning Commission’s current infrastructure investment Figure 1: Infrastructure Investment, by Sector estimate within the 11th Five-Year Plan period stands Private sector contribution expected to be 0% of irrigation funds, but nearly three-quarters of ports spending at US$ 490 billion. These plans do not include private 100% capital expenditure investments, which will lead to an Private infrastructure investment, 2007-12 75 even greater demand for infrastructure-related Projected share of total services and products. But many business people States 50 harbour doubts that these plans will come to fruition because of resource gaps faced by the public and 25 Centre private sectors. 0 Irrigation Water supply/ Sanitation Railways Electricity Gas Roads Storage Airports Telecom Ports But the cost to the economy of not dramatically improving infrastructure will be huge. Even though Source: Government Planning Commission India’s US$ 1 trillion economy is growing at 8-10% per 14 | India Economic Summit
  17. 17. Rajat M. Nag, Managing Director-General, Asian Development Bank, Manila The National Highways Authority of India has led the great deal for the government, it has unwittingly way by successfully completing the Golden introduced unsustainable pricing and risk policies that Quadrilateral project through revenue sharing may deter future private players from bidding by such arrangements with private contractors, introducing risk distortion. model concession agreements as well as acquiring land in a practical manner. The government did not interfere Indeed, more broadly, public and private entities need when the telecommunications private sector innovated to reflect on their respective abilities to manage and by introducing leapfrogging technology to eliminate control the variety of development, construction, the need to lay an expensive network of land cables. financial structuring and market risks, and allocate them appropriately within PPP frameworks. And the Further, the government has “pre-approved” 11 social consequential risks need addressing too, international and domestic consultancies to advise on especially regarding the resettlement and rehabilitation infrastructure related projects to make the bidding of affected voting populations. process simultaneously quicker and more transparent. Additionally, it has authorized a viability-gap financing Complicating the picture further, cross-sector mechanism for projects that do not meet purely government cooperation is not strong. Silo-led return-oriented targets, and recently set aside a US$ developments, rather than integrated approaches, 100 million fund to finance the exploration and design lead to stunning examples of where nearly-built of designated projects. structures, such as Bangalore’s international airport, will have no quality roads leading to or from them However, there are many areas that still lack clarity when they open. and need attention. First among these is the lack of “bankable” projects. General project funding But blame is too easily put on the government. requirements are easy to determine, but private sector Consumer mindsets are also a problem. Central players complain there are no clearly articulated projects government ministers as well as state chiefs are rightly defined in a way that they can readily start executing. afraid to place a price on commodities seen as essential to rural area welfare, for fear of a voting Even if clearly defined projects existed, pricing and risk backlash. Rural areas, in particular, expect water to be management, especially between public and private provided without cost. Some experts have suggested entities, will need more sophistication and should introducing a “water credits” system similar to carbon move away from a traditional “cheapest supplier” credits to discover the price of increasingly scarce mindset. For example, two ultra-megawatt power potable supplies. But the Planning Commission does facilities have been negotiated on 40-year fixed price not envisage much private participation in either contracts. While in the short term this may seem like a irrigation or water supply. 15 | India Economic Summit
  18. 18. “ The government regards infrastructure inevitably lead to improperly planned projects risking high alteration costs and poor quality execution. Thus, as a critical constraint. It is our view the commonly held perception that India is an abundant that the target we have set for the oasis of engineering talent is plainly false. As Chaly C. economy which is to accelerate to an K. Mah, Chief Executive Officer, Asia Pacific, Deloitte, average of 9% growth cannot be Singapore, noted, “When you talk about skilled labour, “ there is a massive shortage in India and the core is to achieved if we fail to make efforts in ensure you have a solid education system.” infrastructure. Even though the engineering and construction Montek S. Ahluwalia, Deputy Chairman, Planning Commission, India industry in India employs over 32 million people, it has not until recently been recognized as an industry. Dispute resolution needs to be significantly streamlined. However proud India is of its centres of education Complex decision-making jurisdictions that are excellence, they only cater to a minute proportion of constitutionally mandated within national, state and local the population. The rest of the “educable” workforce, power seats add significant cost and time overruns to as N. K. Singh, Deputy Chairman, Planning infrastructure projects that cross boundaries and Commission, Government of Bihar, India, dubbed encroach on several sovereignties. A properly functioning them, are not emerging with the right skills, leaving and responsible arbitration mechanism is generally many enlightened companies to take the initiative to absent with non-binding decisions and cases waylaid in train them “on the job” and issue skill certificates. courts or automatically referred to the Supreme Court. Government officials and private sector players agree But even if mindsets shift significantly, will there be on one thing, though: comparisons between China sufficient capacity to execute? First, large engineering and India regarding infrastructure development should and construction companies with mega-project stop, since the two systems are so unlike one another management capabilities in India are few in number. when it comes to large-scale planning. Indian officials The industry lacks not only size but also appropriately- like to portray China as a centralized polity that has no trained manpower. Of the 500,000 total engineering problem or issue with moving large populations to make graduates, only 5% are civil engineers. And even way for critical infrastructure projects. Of course, this those graduating are lured by higher wages in other view misses the underlying tensions between centre non-infrastructure-related sectors such as call centres or and provinces. But one thing is clear, and put best by jobs in the Middle East offering much higher salaries. Nandan M. Nilekani, Executive Co-Chairman, Infosys Especially acute is the shortage of talent at the Technologies, India; Member of the Foundation Board of planning, design and maintenance levels – particularly the World Economic Forum: “At the end of the day, it’s at the middle-management stage – which will easier to build a road than it is to build a democracy.” 16 | India Economic Summit
  19. 19. Rajiv Lall, Managing Director and Chief Executive Officer, Infrastructure Development Finance Company, India; Montek S. Ahluwalia, Deputy Chairman, Planning Commission, India; Rajat M. Nag, Managing Director-General, Asian Development Bank, Manila; Ajit Gulabchand, Chairman and Managing Director, Hindustan Construction Company, India Meeting India’s Infrastructure Challenge The current state of the country’s infrastructure and the Building on the findings of the World Economic Forum’s government’s new proposals to increase expenditure to Engineering & Construction: Scenarios to 2020, 9% of GDP by 2012 (see chart) formed the basis of a participants noted that the central government has workshop organized by the World Economic Forum made a lot of progress on changing mindsets by and the Confederation for Indian Industry (CII) ahead of actively involving the private sector and making the the India Economic Summit. The private meeting bidding process for projects more transparent. comprised a broad array of stakeholder groups Financing for projects in general did not seem to be an including government officials, private sector players, issue, but participants called for greater depth in global engineering firms, consultants, financial private sector bonds to match project tenures. intermediaries and multilateral organizations, including the World Bank. Private sector participants also called for more clarity on the range of detailed projects envisaged by the government to assist in their planning and more detail Infrastructure Spending regarding the mechanism of public-private Overall infrastructure investment expected to increase from $201 billion in the 10th plan, to $492 billion in the 11th partnerships. They also highlighted the fact that Water supply/ Sanitation Storage Airports different sectors should learn from others in terms of Ports Gas best practice. In addition, they commented that, given Electricity RoadsBridges Telecom Railways Irrigation 11th plan the growing number of options for investment (FY07-12) opportunities globally, India needs to focus on making it easier for multinational companies to work on infrastructure projects. 10th plan (FY02-07) Finally, the group mandated that the Forum and CII 300 400 $500 $0 100 200 Anticipated investment (US$, billions) produce a series of case studies highlighting Source: Government Planning Commission; Lehman Brothers infrastructure solutions already being implemented around the country. This, they said, would help share best practices within India and shed light on the Indian infrastructure situation for global companies. 17 | India Economic Summit
  20. 20. Risk Management “ The real economy, including needs to fill the burgeoning demand for skilled labour. “The concept of dignity of labour has to be manufacturing, is what is important and “ established to a much greater degree than we have,” the appreciation of the rupee is making said Anjali Raina, Country Training Director, Citibank, that economy suffer. India. And as large and complex as it is, India cannot afford to turn its back on the world’s problems – they Rahul Bajaj, Chairman, Bajaj Auto; Member of Parliament, India have historically had a way of pulling India in. HIV/AIDS is an example of an imported problem that India’s boom is replete with risk. The World Economic will require Indian solutions to solve. With at least 5.7 Forum’s India@Risk 2007 report outlined just six of the million HIV-positive people, India last year overtook major global risks to the country, including the loss of South Africa as the country with the largest number of freshwater, economic shocks and oil peaks, the people infected with the virus that causes AIDS. economic impact of demographics, globalization vs protectionism, climate change and infectious diseases. Global warming, meanwhile, is exacerbating the rapid Most people associate risks with jeopardy, but risk is decline in India’s freshwater supplies (see Figure 1). By an essential ingredient in success. “Risk is not identical 2025, India’s per capita supply of renewable water is to threat,” explained Sean M. Cleary, Chairman, projected to drop to only a quarter of what it was in Strategic Concepts, South Africa. “Risk lies on the 1975. India, however, receives more rainfall than it can cusp between threat and opportunity. The challenge manage, which often results in flooding. Harnessing when addressing risk is to turn it into an opportunity.” those floodwaters will require that India build dams To do that, it is important not to see India’s problems Figure 1: Access to Renewable Water Dropping as insoluble, nor to take India’s success as 2025 per capita water supply in India is expected preordained. Indeed, talk of India as a new economic to be less than half the supply in 1975 superpower may be premature, warned Palaniappan 3,500 Renewable water per capita (cubic metres) Chidambaram, Minister of Finance of India. He added 3,000 that a superpower is a magnet for knowledge, a 2,500 financial centre and has access to abundant natural 2,000 resources. India has yet to secure these things and so 1,500 must avoid hubris or chauvinism. 1,000 500 India must not, therefore, let economic success be 0 1975 2000 2025 narrowly defined by the middle class ideal as seen on (medium estimate) television. Between peasantry and prosperity, India Source: United Nations Food and Agricultural Organisation 18 | India Economic Summit
  21. 21. “ Along with national security, the three Protectionism, both at home and abroad, is another looming risk to India’s growth. India has its own pillars of security – human, economic opponents to free trade and capital flows, and many and physical – need to be raised to Indians who are afraid of displacement want to block bring the economy to a position where the creation of special economic zones that stand to the challenges can be met. The risks boost investment and create centres of job growth outside major cities. In the United States, a growing were identified because of their “ number of people see the rise of India and China as a interconnectedness, which magnifies threat to their own prosperity. their impact. India is fortunate in that, relative to export-dependent Shamsher S. Mehta, Director-General, Confederation of Indian East Asia, it is somewhat insulated from the market Industry (CII), India turmoil emanating from the troubled US housing market. India relies largely on coal for its energy, and and reservoirs, as China has built infrastructure such its economic growth is driven primarily by domestic as the Three Gorges dam. “India must summon that demand rather than exports. kind of determination and will to execute the projects,” said Chidambaram. Nonetheless, India relies on imports for as much as 80% of its fuel needs and is trying to substitute coal Many worry that the government has adopted a short- with cleaner, but imported, natural gas. Rising oil sighted approach to the environment, however, prices have repercussions for India, and India has rejecting calls to cap emissions growth despite room to play a more assertive diplomatic role where abundant evidence that India is choking on its its energy supply is concerned. pollution. While critics agree with India that the West must lead the world in cutting emissions, many say The prospect of a US economic slowdown next year, India shouldn’t use development as an excuse for while of greater concern to East Asia’s exporters, also repeating the West’s mistakes. Instead, said Stuart has a potentially negative impact for India. Already this Popham, Senior Partner, Clifford Chance, United year, the US dollar has fallen dramatically against the Kingdom, India has an opportunity to leapfrog ahead, rupee, making it harder for Indian exporters to “and formulate regulations that might be the template compete overseas and luring speculative investments for the rest of the world”. into India, which is in turn pushing the rupee up even 19 | India Economic Summit