Sunday, September 3, 2017

Pakistan: Impact of Labor Force Expansion on Savings, Investments and GDP Growth

Pakistan's labor force expansion is the 3rd biggest in the world after India and Nigeria, according to UN World Population Prospects 2017. Rising working age population and growing workforce participation of both men and women in developing nations like Pakistan will boost domestic savings and investment, according to Global Development Horizons (GDH) report. Escaping the low savings low investment trap will help accelerate the lagging GDP growth rate in Pakistan, as will increased foreign investment such as the Chinese investment in China-Pakistan Economic Corridor.

Pakistan's Total Fertility Rate 2.62 Children Per Woman. Source: Washington Post 


Labor Force Expansion:

The latest Census 2017 results show that Pakistan's population growth rate has declined to 2.34% between 1998 and 2017, down from 2.61% (from 1981 to 1998) and 3.4% (from 1961-81). Life expectancy has increased from about 62 years in 1998 to 66.5 years now. The total fertility rate has declined from 4.6 children per woman in 1998 to to 2.62 children per woman in 2017.  At the same time, Pakistan's labor force is growing at a rate of 3.6% a year, faster than the 2.34% overall population growth. Given Pakistan's human capital growth in recent years, it is a welcome situation that is expected to produce significant demographic dividend for the country.

Source: World Bank Report "More and Better Jobs in South Asia"

Pakistan's working age population in 15-64 years age bracket is expected to increase by 27.5 million people to 147.1 million in 10 years, according to Bloomberg News' analysis of data reported in UN World Population Prospects 2017.  Pakistan's increase of 27.5 million is the third largest after India's 115.9 million and Nigeria's 34.2 million increase in working age population of 15-64 years old. China's working age population in 15-64 years age group will decline by 21 million in the next 10 years.

Source: Bloomberg

Pakistan's labor force growth will continue by adding 80 million workers n 30 years' time, third only to India's 234 million and Nigeria's 130 million additional workers in 15-64 years age group. China's work force will decline by 171 million workers in this time period.

Source: Bloomberg

Savings, Investment and GDP Growth:

Currently, about a third of Pakistan's population is below the age of 15, dependent on working age adults. This high ratio of dependent population results in low savings, low investment and consequent slower economic growth and sub-par socio-economic development.

Pakistan's national savings was about 10% of GDP in 1960s. It increased to above 15% in 2000s in Musharraf years, but declined afterwards. It is well below the savings rates in South Asia region with India's 30%, Bangladesh's 28%, and Sri Lanka's 24.5%.

Higher levels of inequality in India, Bangladesh and Sri Lanka account at least partially for their higher savings rates than Pakistan's because people in higher income groups tend to save more of what they earn. But the other probably more important reason for Pakistan's lower savings rate is the larger percentage of children under the age of 15 who do  not work and depend on their parents' incomes.

Summary:

Pakistan's labor force growth is forecast to be the 3rd biggest in the world after India's and Nigeria's, according to UN World Population Prospects 2017. Rising working age population and growing workforce participation of both men and women in developing nations like Pakistan will boost domestic savings and investment, according to Global Development Horizons (GDH) report. Escaping the low savings low investment trap will help accelerate the lagging GDP growth rate in Pakistan as will increased foreign investment such as Chinese investment in China-Pakistan Economic Corridor over the next several decades.
Here's a discussion on this and other subjects:

https://youtu.be/ucopTLFQdKY




Related Links:

Haq's Musings

Pakistan's Population Growth: Blessing or Curse?

Pakistan's Expected Demographic Dividend

World Bank Report on Job Growth in Pakistan

Underinvestment Hurting Pakistan's GDP Growth

China-Pakistan Economic Corridor

Musharraf Accelerated Growth of Pakistan's Financial and Human Capital

Working Women Seeding a Silent Revolution in Pakistan

13 comments:

PTI said...

how much is our labour force currently and what's the unemployment rate?

Riaz Haq said...

PTI: "how much is our labour force currently and what's the unemployment rate?"

Pakistan's current workforce is about 120 million and unemployment rate is about 5.9%.

Most employment in Pakistan, like other countries in South Asia region, is in informal sector and it's difficult to track it exactly.

However, the level of employment depends on savings and investment needed to create jobs.

Pakistan's employment growth was the highest in South Asia region in 2000-2008, followed by Nepal, Bangladesh, India, and Sri Lanka in that order, according to a recent World Bank report titled "More and Better Jobs in South Asia". It was possible because Pakistan's savings and investment were relatively high but declined after 2008.

http://2.bp.blogspot.com/-20R8NmQSimg/Tn4J3lIXszI/AAAAAAAACBs/HML56iWALS8/s1600/South%2BAsia%2BEmployment.jpg

http://www.riazhaq.com/2011/09/pakistan-tops-south-asia-jobs-growth.html

Riaz Haq said...

Banyan: Massive #Chinese investment is a boon for #Pakistan. #CPEC #China https://www.economist.com/news/asia/21728619-china-pakistan-economic-corridor-project-carries-risks-massive-chinese-investment-boon … via @TheEconomist

Never has Pakistan been so wooed. The original promised dowry, of $46bn in Chinese grants and soft loans for infrastructure projects, has only grown, to $62bn. This munificence is dubbed the China-Pakistan Economic Corridor (CPEC), launched amid fanfare in 2015, on a visit to Pakistan by President Xi Jinping.

Most of the money is earmarked for power plants to improve Pakistan’s notoriously unreliable electricity supply. The rest is going on roads, railways, dams, industrial zones, agricultural enterprises, warehousing, pipelines and a deepwater port in the coastal settlement of Gwadar. Some of the promised money is bound not to materialise, and the claim by the interior minister, Ahsan Iqbal, of “benchmarking” Singapore and Hong Kong when turning remote, dusty Gwadar into a container-shipping hub speaks more of hope than experience. Yet over $14bn has already been spent. CPEC is very different from earlier schemes, when co-operation was promised only to run into the sands.

For Pakistan, the scale of ambition is unprecedented—a “game- and fate-changer” as overwrought locals put it. If CPEC gets electricity and goods flowing efficiently, then growth could jump by over two percentage points a year, by one estimate. Better yet, CPEC could shift the national narrative—too often dominated by coups, extremists and a chippy kind of nationalism—towards economic construction.

What is in it for China is often misunderstood, especially by Sinophobes in Delhi, Tokyo and Washington. They make much of the “corridor” in the plan, concluding that China’s chief aim is to gain access to the Indian Ocean, the better to encircle India. In fact, argues Andrew Small of the German Marshall Fund, an American think-tank, improving transport links through the mountainous neck of land that joins Pakistan to Xinjiang province in China’s far west is one of CPEC’s lesser aims. Yes, Gwadar, as a port on the Indian Ocean, interests the Chinese navy, but would have done so regardless of CPEC. Most of CPEC’s investments are aimed at improving Pakistan’s domestic economy.

China does have strategic motives, of course. A more dynamic Pakistan would certainly act as a counterbalance to the deepening security relationship between India and America, which also provides military aid to Pakistan. Then there is Islamist militancy, which spills back into Xinjiang; development might, as Li Keqiang, China’s prime minister, put it, “wean the populace from fundamentalism”. China needs new markets for its products, as well as new terrain for infrastructure and industrial projects. Most importantly, CPEC has become the main plank of Mr Xi’s ambitious “belt-and-road” initiative, whereby improved infrastructure will help to strengthen economic ties and thus spread China’s influence through Asia and beyond. As Mr Small points out, CPEC has to be seen to work for the broader scheme to seem both credible and appealing.

Even if CPEC is not the neo-imperialist exercise its critics make it out to be, it still has its flaws. The IMF warns that Pakistan may struggle to repay China’s loans, which could in turn prompt a balance-of-payments crisis. Pakistan’s central bankers have in the past deplored a lack of transparency surrounding CPEC contracts; suspicion abounds that Pakistani taxpayers have been shortchanged. And security is a problem. Just one example is the new Chinese-funded road to Gwadar, which runs through an area long gripped by insurgency in the remote, backward province of Balochistan. Mr Iqbal argues that the road and the development it is bringing will help extinguish the conflict. It might equally pour fuel on it, if locals feel excluded.

Riaz Haq said...

The rising number of its billionaires masks #India’s widening income #inequality. #Modi #BJP https://qz.com/1070450 via @qzindia

India is staring at a staggering income-inequality crisis.
A research paper published by French economist Thomas Piketty and Lucas Chancel—based on the latest income tax data—suggests that inequality in India may be at its highest level since 1922, when India introduced the income tax.
The share of national income held by the top 1% of the country’s population has increased dramatically, particularly since the 1980s, the economists say in their paper published on Sept. 05 (pdf).

“The top 1% of earners captured less than 21% of total income in the late 1930s, before dropping to 6% in the early 1980s and rising to 22% today,” the paper says.
Piketty is widely recognised for his work on income inequality, particularly through his bestselling book Capital in the Twenty-First Century. Chancel is the co-director of the World Inequality Lab and of the World Wealth & Income Database (WID.world) at the Paris School of Economics.
Their study shows that income inequality was the lowest in the 1970s and 1980s, a period when India was still a government-controlled economy and its GDP growth was quite low.
“Over the 1951-1980 period, the bottom 50% group captured 28% of total growth, and incomes of this group grew faster than the average, while (the) top 0.1% incomes decreased,” their paper says. “Over the 1980-2014 period, the situation was reversed; the top 0.1% of earners captured a higher share of total growth than the bottom 50% (12% vs. 11%), while the top 1% received a higher share of total growth than the middle 40% (29% vs. 23%).”

Last year, a report by Credit Suisse Research Institute said that the top 1% of the country’s population held 58.4% of its wealth, up from 53% in 2015. Within the BRICS group, only Russia’s wealthy controlled more of their country’s wealth. Since 2010, India has added a billionaire every 33 days and Indians’ share in the global billionaires’ club has grown from 1% to 5% over the last 20 years.
Meanwhile, Piketty has also reiterated his demand for more transparency in sharing income tax data. Access to data is crucial in measuring inequality and understanding the distribution of wealth. India used to publish the All India Income Tax Statistics until 2000. In 2016, the income tax department released tax tabulations for the period between 2012 and 2014.

https://qz.com/1070450/the-rising-number-of-its-billionaires-masks-indias-widening-income-inequality/

http://wid.world/document/chancelpiketty2017widworld/

Riaz Haq said...

ADB says Pakistan enjoys growth despite trade contraction

https://www.thenews.com.pk/print/228626-ADB-says-Pakistan-enjoys-growth-despite-trade-contraction

Pakistan has experienced economic growth despite contraction in external trade, pointing to the movement towards the localisation of supply to serve domestic demand, Asian Development Bank (ADB) said on Friday.

The country, which is one of the most populous economies in the region, recorded a decade high growth of 5.3 percent during the last fiscal year of 2016/17.

Manila-based lender, in a report, said share of exports of goods and services in GDP has been decreasing during the last six years, while share of imports has been increasing during the period.

The country’s household consumption is growing year on year. It soared 6.9 percent during the last year, ADB said in its 48th edition of ‘Key Indicators for Asia and the Pacific 2017’ report. Share of household consumption expenditure to GDP ratio stands at 80 percent.

ADB’s statistical review provides data on a comprehensive set of economic, financial, social, environmental, and sustainable development goal indicators for its 48 regional members. The Bank said private sector offtake is on the upward trend.

Banking credit to private sector is, however, one of the lowest in the region as it accounts for half of GDP as compared to more than 100 percent in Fiji, Vietnam, China, Australia and Japan, its data revealed.

Nonperforming bank loans to GDP ratio is one of the highest at 10 percent, only less than Afghanistan and Maldives. The Asian Development Bank said Pakistan is one of the region’s four largest recipients of official development assistance and other official flows to the agriculture sector, amounting to $291.7 million in 2015.

Alone South Asia’s agriculture sector received nearly $1.5 billion in dole-outs during 2015. Agriculture sector’s value addition to GDP ratio stood at 24.6 percent in 2016 in the country where acreage covers half of its land.

Forest area covers a minuscule 1.9 percent of total land area, which is one of the lowest in the region. The country has been annually receiving an average $744 million as financial and technical assistance between 2008 and 2015.

Share of gross capital formation in GDP declined during the past six years. Non-infrastructure investment accounted for 63 percent of gross fixed capital formation. Meanwhile, President Takehiko Nakao at ADB said the bank would continue to lend financial and technical support to Pakistan to improve infrastructure and regional connectivity.

“There is an immense potential for regional connectivity projects in the CAREC (Central Asia Regional Economic Cooperation) region,” Nakao said in a statement on Friday. He met with Finance Minister Ishaq Dar in Urumqi, China.

The Bank further said external debt to gross national income ratio is one of the lowest in the region, standing below 50 percent. It said stock markets in Fiji, New Zealand, and Pakistan were the region’s top performers in 2016.

“In Pakistan, an improved growth outlook—supported by better security, macroeconomic stability, and strengthened economic fundamentals—was reflected in a sovereign rating upgrade from Standard & Poor’s and significant gains in share prices of 13.2 percent on an annual basis,” it added. ADB said more than half of urban population in Pakistan lives in slums, informal settlements or inadequate housing.

The proportion, however, slid 3.2 percent during the four years for which data is available, it added. Urban population living in slums in the country dropped to 45.5 percent in 2014 from 48.7 percent in 2000. India brought this proportion down to 24 percent from 41.5 percent during the period.

https://www.adb.org/sites/default/files/publication/357006/pak.pdf

Riaz Haq said...

INDIA - Bloomberg reports that India's Youth will be the World's Future by having the strongest workforce in the world.

Half of India's population are millennials, under the age of 25 whereas two-thirds of the country's population is below the age of 35.

India's workforce is expected to increase to a billion people between the ages of 16 and 54.
The workforce is expected to derive from North India where Uttar Pradesh has a fertility rate of nearly 3 whilst its neighbouring state, Bihar boasts a fertility rate of 3.3. Taking into account Bihar's already 100 million population, the state is expected to contribute generously to the establishment of a leading workforce.

India's current demographic transition is occurring on a large scale.

Compared to China's generation mainly in their 50's who have removed their country from poverty to middle-status income, India's population in their 20's are expected to do the same.

Similarly, South Africa's increasing workforce have been trained and prepared for the workplace by Workforce Holdings this year. Independent Online reported in March that diversified services company, Workforce Holdings have trained nearly 15 000 individuals in preparation for the workplace.

The group provides a number of work-related services including temporary as well as permanent recruitment. 1 100 permanent staff are employed by Workforce Holdings and the company has 32 000 temporary contractors weekly.

Workforce Holdings is also listed on the AltX board of the JSE.


https://www.iol.co.za/business-report/india-may-soon-knock-out-chinas-workforce-11135871

Riaz Haq said...

Raghuram Rajan flags India's biggest worry that could cost Modi a win in 2019 elections: Slow Job Growth

http://economictimes.indiatimes.com/news/economy/policy/raghuram-rajan-flags-indias-biggest-worry-that-could-cost-modi-a-win-in-2019-elections/articleshow/60434472.cms

"Remember that we have what we call the population dividend. A million new people entering the labor force every month," Rajan said. "If we don’t provide these jobs that are required, you have a million dissatisfied entrants. And that could create a lot of social mischief."

Rajan is right in this aspect. India will have the world’s biggest labor force by 2027 and the millennial generation is crucial to anchor one of the fastest paces of economic growth. However, fresh employment opp ..

Under Modi, just over 10,000 jobs a month are being created instead, according to government figures from 2015.

Read more at:
http://economictimes.indiatimes.com/articleshow/60434472.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

Riaz Haq said...

Pakistan Govt not going to IMF for any bailout: Finance Division spokesman



https://www.samaa.tv/economy/2017/09/govt-not-going-imf-bailout-finance-division-spokesman/

The spokesman of the Finance Division gave following comments in response to the report:

The fact that Pakistan’s economic indicators are positive has been acknowledged internationally. Recently, the Asian Development Bank (ADB) stated that Pakistan enjoyed growth despite trade contraction.

The external sector which was under strain in the last two years due to falling exports and declining remittances has now started showing positive and impressive growth both in exports and remittances.

In August 2017, exports have witnessed a growth of 12.89 percent over the same period of 2016, while over previous month the exports are higher by 14.41 percent and imports are only 2.42 percent and during July-August, FY 2018 exports have registered a growth of 11.80 percent.

Similarly, workers’ remittances have shown a growth of 13.18% during July-August, FY 2018 and on month on month basis higher by 26.8 percent in August 2017.

These all bode well that pressure on current account will ease, going forward. The growth in FDI is also on upward trajectory. During July 2017, FDI posted a stellar growth of 162.8 percent.

With regard to taxation, it is to be noted that the share of direct taxes in total taxes has increased over the years.

In 1990-91 the direct taxes were just around 20% of total taxes, rose to 31.1 percent in 2004-05, 38.2 percent in 2012-13 and 39.1 percent in 2015-16.

In FY 2016-17 the share of direct taxes reached 40% and it has become the single largest tax collected by FBR.

The government is focused on further increasing the share of direct taxes through various policy and administrative reforms including broadening of tax base.

Substantial progress has been made to bring potential taxpayers in the tax net during the last four years. As a result of these efforts the number of income tax return filers which was around 766,000 for the tax year 2012 has risen to 1.26 million in the tax year 2016 and would further increase in coming years.

The reforms program has started paying dividends in shape of higher tax revenues, an efficient, modern, transparent and taxpayers’ friendly revenue organization.

The revenue collection has witnessed a substantial increase during last four years. The net collection increased from Rs 1,946 billion in 2012-13 to Rs 3,362 billion in FY 2016-17, registering an overall growth of around 73%.

In absolute terms revenue collection has been increased by Rs 1.4 trillion. The tax-GDP ratio of the country has reached 12.5 percent in FY 2016-17.

With regard to debt, the claim that PML(N) government borrowed record Rs 10.8 trillion is incorrect and based on incorrect projections. The actual increase in present Government’s 4 year tenure is around Rs 6.1 trillion.

Even if the year 2018 is added as projected, the total debt increase in 5 years is expected to remain around Rs 7.5 trillion until 2018. The statement is only intended to mislead the general public by propagating increase in total debt by Rs 10.8 trillion by the current government, which is based on mere projections and may include PSE debt and other external debt and liabilities as well, which are not part of total government debt.

Moreover, the contention of large borrowing from external sources is incorrect. Out of total debt, external debt proportion fell from 21.4 percent of GDP in 2013 to 20.6 percent of GDP in 2017. Against the total external debt, the largest component is multilateral and bilateral concessional debt, which constitutes around 85 percent.

External debt sustainability has increased manifold during the tenure of present government as recent debt sustainability analysis shows that external debt would remain on a downward trend over the medium term and staying well below the risk assessment benchmarks.

Riaz Haq said...

Are we entering into a "jobless" growth phase in South Asia?

By Dr. Selim Raihan, Professor, Department of Economics, University of Dhaka, Bangladesh, and Executive Director, South Asian Network on Economic Modeling (SANEM).

http://www.thedailystar.net/opinion/economics/are-we-entering-jobless-growth-phase-south-asia-1459387

The relationship between economic growth and employment is an important issue in economics discourse. Promotion of inclusive growth also requires economic growth processes to be employment friendly. The measure that captures the employment effect of economic growth is the "employment elasticity" of economic growth, which is the ratio of percentage change in employment to the percentage change in real gross domestic product (GDP).

We have calculated the employment elasticity with respect to the change in real GDP for the South Asian countries for three different periods from 2001 to 2015. There are mixed patterns among the South Asian countries. During 2001 and 2005, Maldives had the largest employment elasticities (1.39) and Sri Lanka had the lowest one (0.08). India, with a share of 75 percent of the total population in South Asia, had the employment elasticity of only 0.38, one of the lowest in South Asia. Two other large countries, Pakistan and Bangladesh, had employment elasticities of 0.70 and 0.77 respectively.

For the period of 2006-2010, India experienced a drastic fall in employment elasticity to only 0.03 despite the fact that the average GDP growth rate of India increased from 6.6 percent (2001-2005) to more than 8 percent (2006-2010). Over these periods, Bangladesh also had a similar experience where employment elasticity declined from 0.77 to 0.4 in the wake of a rising average GDP growth rate from 5 to 6 percent. While Afghanistan, Maldives, and Nepal also experienced a decline, Pakistan and Sri Lanka could increase the elasticities.

Over the recent period between 2011 and 2015, Bangladesh experienced a further fall in the employment elasticity to 0.28, while India's improvement is meagre (from 0.03 to only 0.09). Despite the slower economic growth rates during this period, Afghanistan, Maldives, Nepal, and Pakistan could increase their employment elasticities. Sri Lanka had a further fall in employment elasticity to only 0.14. During this period, India had the least employment elasticity among all South Asian countries.


The aforementioned analysis points to the concern that two major South Asian countries, India and Bangladesh, experienced a substantial reduction in employment elasticities throughout the periods of high economic growth. While during 2001 and 2005, the annual average job creation in Bangladesh and India were 1.6 million and 11.3 million respectively, in 2011-2015, such numbers declined to 1 million and 3.2 million for Bangladesh and India respectively. Most of the other South Asian countries experienced either volatile, or slow or stagnant economic growth, and therefore, despite a rise in employment elasticities, the actual employment generation in these countries had not been substantial. It is also important to mention that while SDG 8 talks about ensuring "decent" jobs for all, South Asian countries are seriously lagging far behind. In most of the South Asian countries, there are persistent employment challenges such as lack of economic diversification, poor working conditions, low productivity and a high degree of informality. This is reflected by the fact that among the top five countries in the world with very high proportion of informal employment in total employment, four are from South Asia (Bangladesh, India, Nepal, and Pakistan).

Riaz Haq said...

#India’s faltering economy poses questions for #Modi. #GDP growth 5.7% in Q1 FY18
#DeMonetization #GST https://www.ft.com/content/9dd3bff4-9871-11e7-a652-cde3f882dd7b … via @FT

Two years ago, India was indeed touted as a rare bright spot in a dim global economy. Its growth had outpaced that of a slowing China, and Mr Modi’s government briefly revelled in India’s status as the world’s fastest-growing large economy. Many expected India to enjoy a sustained economic boom. That hope was not realised. Since early 2016, Indian growth has slowed consistently. In the quarter ending June 30, gross domestic product growth fell to 5.7 per cent — its slowest since early 2014, the doldrums of the previous Congress government. July’s index of industrial production has also surprised economists, up just 1.2 per cent, with 15 of 23 industries contracting. New Delhi insists that the downturn is temporary — a wobble due to reforms such as the July 1 introduction of a national value added tax. But many economists suggest India is facing serious structural problems from which it is unlikely to recover rapidly. Companies and banks remained weighed down in high levels of stressed debt. Exports — which helped drive growth after Mr Modi took over — have faltered. Private investment has fallen steadily since early 2016 with little sign of imminent pick-up. “The reasons why corporates are not investing is because there is no demand,” says Jahangir Aziz, head of emerging markets analysis at JPMorgan. “India, like every other emerging market, is dependent on foreign demand to drive its growth. Foreign demand went down, and India did not replace it with an alternative.” Since taking power, Mr Modi’s economic vision has centred on boosting India’s appeal and competitiveness as a manufacturing base — to encourage more companies to “Make in India”. He vowed to revive long-stalled infrastructure projects, including those mired in unsustainable debt. He has talked of slashing red tape to improve the ease of doing business. His government has pushed through the new goods and services tax, which is turning the country into a genuine single market. Raghuram Rajan on India's economic slide Play video But in a world of excess global manufacturing capacity, some suggest that New Delhi’s focus on promoting India as an export-oriented manufacturing base may not deliver the expected results. “When global trade is languishing, it’s very difficult for India to stand up and say we are going to take market share away from China,” says Mr Aziz. “Everybody is fighting for a smaller and smaller pie.” It does not help that the rupee has also appreciated strongly, rising 6 per cent against the dollar this year, as relatively high interest rates compared with other markets attract capital inflows. Many economists argue the currency is overvalued — an argument so far dismissed by New Delhi. “Countries often make a mistake and take pride in the stronger currency, and that is a very risky thing,” says Kaushik Basu, who served as chief economic adviser to India’s previous Congress government. “The rupee in real terms has become strong and that is showing up in exports not doing well and imports picking up a bit too rapidly.”The introduction of India’s goods and services tax has undoubtedly damped short-term economic impact, as many manufacturers ran down their stocks amid uncertainty about how the government would give tax credits for goods made before July 1. “Everybody started reducing inventory levels,” says Gaurav Daga, whose business imports plastic polymers used to make goods ranging from shoes to cables to auto components. “Nobody had any clarity about the transition credits.” But many say India’s economy is also reeling from the aftershocks of last year’s radical demonetisation, when Mr Modi banned the use of nearly 86 per cent of the country’s cash, severely disrupting daily life and commerce. ’

Riaz Haq said...

'No Need to Panic,' Says #India's Jaitley as Firms Defer Spending Amid Slowing #GDP Growth. #Modi #DeMonetisation

https://www.bloomberg.com/news/articles/2017-09-24/-no-need-to-panic-says-india-s-jaitley-as-firms-defer-spending

Companies are going to be ‘hard nosed’ about spending: L&T CFO

Economy decelerated to 5.7% last quarter, slowest since 2014

Asia’s third-largest economy expanded at the slowest pace in three years in the quarter ended June 30 as Prime Minister Narendra Modi’s move to ban 86 percent of the nation’s cash and the country’s biggest tax reform disrupted businesses. Meanwhile loan growth is languishing near the lowest level since 1992 as companies struggling with bad debt and idle capacity await evidence of a pick up in demand before they buy machinery or hire more workers.

“Private sector is going to be hard nosed when it comes to committing investment,” Larsen’s Shankar Raman said in an interview at the sidelines of the forum on Friday. “We have already committed investment and have not seen returns flow through, so no board in their right mind will like to sanction further investment, unless there is a viable business plan around it.”

Indian factories were running at about 74 percent of capacity in October-December, business sentiment in manufacturing worsened in the April-June period and consumer confidence dipped in June. The Nikkei India Composite PMI Output Index contracted for a second month in August, a report showed earlier this month.

"We have to push for more reforms. We have to set our house in order," Niti Aayog’s Kant said at the forum. “Government alone cannot create infrastructure. Private sector participation is a must.”

The government’s revenue may be threatened in the coming months by the new goods and services tax, implemented July 1. The reform -- one of India’s biggest since the economy opened to foreigners in 1991 -- was a win for Jaitley and promises to unite India’s 1.3 billion people into a massive common market.

However, early hiccups include confusion about the method of filing receipts and the multi-layered tax structure, which contrasts with a single rate in most countries. Businessmen are also claiming hefty tax credits, which could drain government finances.

"I am concerned that after GST and cash ban, which were seen as reforms by investors, India is now seen to be slipping fiscally" said Priyanka Kishore, lead Asia analyst at Oxford Economics, Singapore.

To read more about the impact of GST on companies, click here

Any deterioration in public finances risks the wrath of rating companies such as S&P Global Ratings, which last week downgraded China for the first time since 1999 citing soaring debt. India carries the lowest investment grade rating and a cut to junk status could force some investors to dispose their Indian assets.

"How do you maintain the balancing act between continuing to spend in an economy, continue to maintain your banks and support them, and how do you maintain standard of fiscal prudence?" Jaitley said. "And this is the challenge we are facing."

Jaitley also needs funds to inject fresh capital into India’s struggling banks. The lenders are sitting on $191 billion of souring debt. Under-provisioned banks are also unwilling to lend more, which means investment by private companies may shrink this year.

Jaitley has said he expected strong banks to take over weaker ones especially in the state-run sector. Earlier this year, the government gave the Reserve Bank of India greater powers to go after defaulters and recover loans through a new bankruptcy code.

"We are looking at both consolidation and strengthening," Jaitley said, without providing a timeline.

Riaz Haq said...

Economist K. Basu on reviving #India’s #economy amid declining #investment to #GDP ratio. #Modi @inquirerdotnet

http://opinion.inquirer.net/107391/reviving-indias-economy

In the second quarter of 2017, India’s growth rate fell to 5.7 percent. It is now tied with Pakistan — behind China, Malaysia, and the Philippines — on the list of major economies for which The Economist provides basic economic data. Neighboring Bangladesh, which is not on that list, is now growing at over 7 percent per annum (and Bangladesh’s per capita income now exceeds Pakistan’s).
Given the Indian economy’s massive size and extensive global linkages, its growth slowdown is a source of serious concern both domestically and around the world. But it is not too late for India to reverse the trend. The key is to carefully craft policies that address both short- and long-term challenges.

In the short term, policymakers must address declining demand for Indian products among domestic consumers and in export markets. All signs point to falling consumer and business spending. India’s index of industrial production only grew by a meager 1.2 percent in July, compared to 4.5 percent a year earlier. Output of consumer durables fell by 1.3 percent; a year earlier, it grew by 0.2 percent.
Meanwhile, annual export growth has fallen in recent years to just 3 percent, compared to 17.8 percent in 2003-2008, India’s rapid-growth phase. This is partly a result of a stronger rupee, which has raised the price of Indian goods in foreign markets.
But there is another potential driver of the sharp rise in imports: people may be over-invoicing, in order to shift money abroad. This could indicate that big traders expect a
correction in the rupee’s exchange rate.
This should worry the Indian authorities — and spur them into action. To mitigate the rupee’s appreciation, thereby boosting external demand, the Reserve Bank of India (RBI) must be given greater policy space and autonomy.
My advice would be for the RBI to lower interest rates further, thereby aligning India’s monetary policy more closely with that of the world’s other major economies. While the current tendency toward very low interest rates is not ideal from a global perspective, the fact is that as long as India remains an outlier, it will encourage the so-called carry trade, which artificially drives up the rupee’s value.
The bigger challenge facing India will be to nurture and sustain rapid growth in the long run. It is worth considering the efforts of another major emerging economy: China.
China’s government has identified specific economic sectors to boost. India can adopt a similar approach, with health and education being two particularly promising sectors.
Despite its success, India’s medical tourism industry still has plenty of untapped potential. The income earned from such tourism could help the country shore up its own health system, ensuring that all Indians — including the poor and especially children, among whom malnourishment remains rampant—have access to quality healthcare.

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Yet India’s investment-to-GDP ratio is now slipping, from over 35 percent in the last eight years to below 30 percent today. This can be explained partly by an increase in risk aversion among banks, which are concerned about nonperforming assets. Falling business confidence may also be a factor.
If India implements policies that boost short-term growth, while laying the groundwork for long-term performance, confidence should rise naturally. Once investment picks up, India will be able to recapture its past rapid growth — and sustain it in the coming years. That outcome would benefit not just India, but the entire global economy. –Project Syndicate


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Riaz Haq said...

State Bank of Pakistan report January 2016:

While foreign savings are important in financing the
saving-investment gap, the most reliable source of
funds for investment in a country is its own saving –
Pakistan’s record in this aspect is also not encouraging.
National savings as percent of GDP were around 10
percent during 1960s, which increased to above 15
percent in 2000s, but declined afterward (Figure 7).
Pakistan’s saving rate also compares unfavorably with
that in neighboring countries: last five years average
saving rate in India was 31.9 percent, Bangladesh 29.7
percent, and Sri Lanka 24.5 percent.
Similarly, domestic savings (measured as national
savings less net factor income from abroad) also
declined from about 15 percent of GDP in 2000s, to
less than 9 percent in recent years (see Box 1 for methodology of measuring savings). Domestic savings are
imperative for sustainable growth, because inflow of income from abroad (remittances and other factor
income) is uncertain due to cyclical movements in world economies, exchange rates, and external shocks.


http://www.sbp.org.pk/publications/staff-notes/SavingInvestmentStaffNote-Jan-16.pdf