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Securing India's Growth Over the Next Decade

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Securing India's Growth Over the Next Decade SECURING INDIA’S GROWTH OVER THE NEXT DECADE Twin Pillars of Investment and Productivity Citi GPS: Global Perspectives & Solutions February 2018 Citi is one of the world’s largest fi nancial institutions, operating in all major established and emerging markets. Across these world markets, our employees conduct an ongoing multi-disciplinary conversation – accessing information, analyzing data, developing insights, and formulating advice. As our premier thought leadership product, Citi GPS is designed to help our readers navigate the global economy’s most demanding challenges and to anticipate future themes and trends in a fast-changing and interconnected world. Citi GPS accesses the best elements of our global conversation and harvests the thought leadership of a wide range of senior professionals across our fi rm. This is not a research report and does not constitute advice on investments or a solicitations to buy or sell any fi nancial instruments. For more information on Citi GPS, please visit our website at www.citi.com/citigps. Citi GPS: Global Perspectives & Solutions February 2018 Samiran Chakraborty Anurag Jha India Chief Economist India Economics Team +91-22-6175-9876 | [email protected] +91-22-6175-9877 | [email protected] Venkatesh Balasubramaniam Raashi Chopra, CFA India Electric Utilities, Capital Goods & Construction Sector India Metals & Mining Analyst +91-22-6175-9864 | [email protected] +91-22-6175-9862 | [email protected] Johanna Chua Jamshed Dadabhoy Head of Asia Pac Economic & Market Analysis India Transportation Analyst +852-2501-2357 | [email protected] +65-6657-1146 | [email protected] Ronit Ghose, CFA Surendra Goyal, CFA Global Sector Head for Bank Research Head of India Equity Research +44-20-7986-4028 | [email protected] +91-22-6175-9870 | [email protected] Saurabh Handa Rishi V Iyer India Oil & Gas Analyst IT Services & Real Estate Research Team +91-22-6175-9858 | [email protected] +91-22-6175-9871 | [email protected] Vijit Jain Gaurav Malhotra, CFA India Strategy, Telecom and Internet Teams India Telecom & Internet Analyst +91-22-6175-9887 | [email protected] +91-22-6175-9885 | [email protected] Aditya Mathur Arvind Sharma India Consumer, Retail & Media Analyst India Auto & Transport Research Team +91-22-6175-9841 | [email protected] +91-22-6175-9852 | [email protected] Atul Tiwari India Electric Utilities, Infrastructure & Property Analyst +91-22-6175-9866 | [email protected] © 2018 Citigroup February 2018 Citi GPS: Global Perspectives & Solutions 3 SECURING INDIA’S GROWTH OVER THE NEXT DECADE Twin Pillars of Investment & Productivity Kathleen Boyle, CFA When we developed the Citi GPS product, we chose to focus our interests on how Managing Editor, Citi GPS to deliver sustainable and inclusive global growth and make globalization a positive force. When we’re thinking about topics and debating over the importance of events, from climate change and gender equality to Brexit and populist elections, we try to drive the conversation back to the basic question of how whatever we’re talking about will impact global growth. If we can bring the vast amount of issues being discussed throughout the world down to an economic argument, we believe it makes the debate richer and takes it from being philosophical to being grounded in the real world. In this report, we look specifically at India and what types of pillars can be identified to drive the country’s growth over the next decade. Although the past does not guarantee future results, we thought the best place to start the journey of how India can transform itself from an emerging economy to one that grows with a sustained GDP growth rate of 8%+, is to look at the lessons learned from countries which have already succeeded in this transition. We found that growth in labor productivity of over 6%, growth in investment of over 10% and growth in the overall efficiency of production (the Total Factor Productivity) to 3% were the three primary drivers of GDP growth across our sample of countries. The final piece in the growth puzzle was that poorer economies grow faster and in 60% of cases, those countries with 8%+ GDP growth had per capita income of less than $10,000. In order to achieve investment growth in the double digits and to create employment opportunities for its swelling labor force, India will need to industrialize further and target manufacturing as a share of GDP to rise to 25% by 2025 from its currently level of 18%. To do this, a new potential leading sector in manufacturing must be identified based on size, productivity, employability, and exportability. Our analysis identifies chemicals (including pharmaceuticals and petrochemicals) as a promising candidate to move up the value chain, as well as food processing and textiles & apparel. In a previously Citi GPS report Infrastructure for Growth, we estimated that, on average, a 1% increase in infrastructure investment is associated with a 1.2% increase in GDP growth. In the case of India, we estimate that total infrastructure spend could be around $3 trillion in the next 10 years bringing the infrastructure-to- GDP ratio up to 6.5-7%. Projects in physical infrastructure (power, ports, roads, rails, telecom), reforms in input markets (land and labor), focus on soft infrastructure (healthcare reforms, education) and the harnessing of resources (oil & gas, coal, cement, iron & steel) would all lead to higher productivity and growth rates. Finally, exports as a productivity driver and employment creator could play a significant role in total factor productivity growth. If India can increase its exports-to- GDP ratio (including service exports) to at least 20% by 2021, India’s exports could reach ~$700 billion. The result of all of this growth would be higher per capita income, increasing urbanization, and a shift in consumer patterns as India moves up the ladder from a low-growth to a high-growth economy. © 2018 Citigroup Mapping out the Growth Framework for India There are three types of growth driver for the economy to get to 8%+ GDP growth: GROWTH IN INVESTMENTS NEEDS TO BE AT LEAST. GDP Growth 8% 7-8% 5-7% 3-5% 0-3% >10% 46% 41% 14% 9% 3% 10% 1 8-10% 22% 15% 15% 9% 3% 5-8% 18% 24% 42% 37% 18% 0-5% 13% 19% 26% 45% 76% 0% 1% 2% 2% 2% 2% Growth in investment in Growth GDP Growth 8% 7-8% 5-7% 3-5% 0-3% LABOR PRODUCTIVITY >6% 66% 27% 7% 1% 0% GROWTH IN 2 4-6% 25% 49% 34% 8% 1% 2-4% 6% 16% 47% 17% 41% NEEDS TO BE 0-2% 2% 6% 14% 33% 54% 0% 2% 2% 4% 10% 27% Labor productivity growth productivity Labor >6% GROWTH IN TOTAL GDP Growth 8% 7-8% 5-7% 3-5% 0-3% FACTOR >3% 60% 37% 21% 8% 2% 3 3-3% 12% 16% 20% 14% 3% PRODUCTION 1-2% 9% 13% 21% 24% 16% TFP Growth 0-1% 7% 4% 13% 22% 27% 3% 0% 13% 30% 25% 32% 53% The data in the tables represent percentage instances at different levels of GDP growth, i.e., if GDP growth is more than 8%, then in 46% of cases investment growth is more than 10%; in 66% of cases labor productivity growth is above 6%; in 60% of cases total factor productivity is above 3%. © 2018 Citigroup THE FRAMEWORK FOR ACHIEVING 8%+ GDP GROWTH INCLUDES… Increase manufacturing share of GDP to 25% by 2025 from 18% currently. Sectors to focus on include: Food Textiles and chemicals (including pharmaceuticals processing apparel and petrochemicals) 2018 2025 Complete infrastructure projects worth $3 trillion (6-7% of GDP) over Increase the exports-to-GDP ratio to at least 20% the next 10 years fi nanced through public and private fi nancing with exports reaching ~$700 billion by increasing participation in Global Value Chains $3 TRILLION 10 YEARS WHILE BEING AWARE OF POTENTIAL PITFALLS INCLUDING: Creating jobs through the shift Creating administrative Legal reforms and the Democracy and from agrarian to manufacturing and bureaucratic predictability of law political stability and during a time of increasing capacity automation 6 Citi GPS: Global Perspectives & Solutions February 2018 Contents The Growth Framework 7 Investment and Productivity as Pillars of Growth 8 How to Achieve Double-Digit Investment Growth 13 Investment: Aiming for 10% Growth 14 Private Investment – The Six Catalysts 17 Public Investments - Crowding In 21 FDI Inflows – Sustaining Momentum 25 Manufacturing: Identifying the Winners of Tomorrow 29 Manufacturing 30 Developing a Framework to Understand What to Manufacture in India 31 The Pillars of Productivity Improvement 37 Physical Infrastructure 38 The Linkage Between Growth and Infrastructure Spending 38 Power 44 Roads 48 Railways 52 Ports and Inland Waterways 56 Telecommunications 58 Harnessing Resources 62 Oil & Gas 62 Coal 66 Cement 69 Steel 71 Soft Infrastructure 74 Healthcare Reforms 74 Education and Skill Development 78 Exports as a Driver of Growth 84 Reforming Input Markets 96 Increased Efficiency of Land Markets: What Needs to be Done? 98 Labor Market Reforms 101 Radical Productivity Enhancers 111 Radical Productivity Enhancers 112 Formalization of the Economy 112 Digital Finance: India on the Frontline 119 Goods & Services Tax (GST) Reform as a Growth Enhancer 123 The Impact of High Growth 127 Changing Consumption Patterns 128 From Economic Prosperity to Urbanization Needs 136 Housing 142 Challenges to be Overcome 145 Forecasts and Uncertainty 146 Pitfalls to be Avoided 148 © 2018 Citigroup February 2018 Citi GPS: Global Perspectives & Solutions 7 The Growth Framework © 2018 Citigroup 8 Citi GPS: Global Perspectives & Solutions February 2018 Investment and Productivity as Pillars of Growth An emerging economy aspiring to grow at a sustained high gross domestic product (GDP) growth rate might gain from lessons offered by the historical growth patterns of similar economies.
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