Can Pakistan Economy Add 2 Million Jobs a Year?

[Riaz Haq]

About 20 million Pakistanis are expected to enter the labor market over the next 10 years. Can Pakistani economy add jobs at a rate of 2 million a year for the next decade to absorb all new entrants to its work force? What is Pakistan's employment elasticity? How fast must it grow to create these jobs? How much investment is needed to achieve the required growth rate?

Pakistan Labor Market:

Pakistan's work force is about 68 million, according to the World Bank. Its labor force expansion is the 3rd biggest in the world after India's and Nigeria's, according to UN World Population Prospects 2017.  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

Employment Elasticity:

Employment elasticity is a measure of the percentage of new jobs added in the economy for  each percentage point increase in GDP. Employment elasticity of 0.5 means that there is 0.5% growth in jobs for each 1% growth in GDP.

Analysis of the World Bank jobs data shows Pakistan's employment elasticity was about 0.70 in the period from 2000-2010. A little over 5% annual GDP growth enabled the economy to add jobs at a rate of 3.6% a year for the new entrants in the labor market. Since then, Pakistan's GDP growth rate has declined along with a decrease in employment elasticity to about 0.50, according to Asian Development Bank.  The ADB reports says: "With an employment elasticity of GDP growth estimated to be around 0.5, economic growth of at least 7% is required to provide sufficient jobs".

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

Savings and Investments:

Rising working age population and growing workforce participation of both men and women in developing nations like Pakistan will boost domestic savings and investments, 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. Increased savings and investments will not only enlarge the nation's tax base but also help create more jobs for the expected new entrants into the work force as it did in 2000-2010, according to a World Report titled "More and Better Jobs in South Asia".

Economic Growth Rate:

Historic data suggests that it takes investment of 4% of GDP to achieve 1% GDP growth, a capital to output ratio (COR) of 4, according to Pakistani economist Mohsin Chandna.  This COR ratio will require an investment of 28% of GDP to reach 7% economic growth necessary to create over 2 million jobs a year over the next decade.

Pakistan's current savings rate of around 13% will clearly not be sufficient to get to the goals of 28%. This gap will need to be filled by a combination of increased savings rate and substantial increase in foreign direct investment (FDI).

Rising working age population and growing workforce participation of both men and women in developing nations like Pakistan will significantly boost domestic savings and investment. Increased foreign direct investment such as Chinese investment in China-Pakistan Economic Corridor over the next several decades will help fill the gap between the national savings rate and investments required to reach 7% annual GDP growth to create over 2 million jobs a year.

Summary:

Pakistan needs to create over 2 million jobs over the next decade to absorb new workers entering the labor market. With an employment elasticity of 0.5, it will require 7% annual GDP growth. A combination of increased domestic savings and higher foreign investment flows will be needed for investment of 28% of GDP to achieve the required economic growth for sufficient job creation in the country over the next 10 years.

Here's a discussion on this and other subjects:

https://youtu.be/ucopTLFQdKY



Related Links:

Haq's Musings

Pakistan's Labor Force Expansion on Saving, Investments and GDP Growth

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

Median Income and Wealth in India and Pakistan

[Riaz Haq]

India’s faltering economy poses questions for Narendra Modi

Much-touted economic boom shows signs of wobbling

https://www.ft.com/content/9dd3bff4-9871-11e7-a652-cde3f882dd7b

Amit Shah, president of India’s ruling Bharatiya Janata party and the engineer of the party’s election victories, recently made a rare public address on a problem that threatens Prime Minister Narendra Modi’s 2019 re-election prospects: the faltering economy. “The BJP government that took office three years ago has completely transformed the thought processes of the people and has been successful in creating brand India,” Mr Shah told the Federation of Indian Chambers of Commerce and Industry, adding that business leaders should stop “grumbling”. “It is now for the Indian industry to cash in on the high pedestal that the economy has been placed.” 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. Share on Twitter (opens new window) Share on Facebook (opens new window) EmailShare this chart 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.” Share on Twitter (opens new window) Share on Facebook (opens new window) EmailShare this chart 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. RECOMMENDED India looks to have a ticket to superior returns India PM Narendra Modi shakes up his top team Delhi vows to continue search for India’s ‘black money’ Many small enterprises, which account for the vast majority of India’s jobs and traditionally have operated almost entirely in cash, were hard hit and have yet to recover, as they now wrestle with the complexities of the new tax regime. “What we are seeing over the past six months is largely driven by demonetisation,” says Mr Basu, who was also chief economist of the World Bank. “It has affected the bottom end most heavily. People’s buying power was damaged hugely. Notes are in the banks, not in people’s hands or their pockets.”  

[Riaz Haq]

2.43 million Pakistanis working in Europe

https://tribune.com.pk/story/1391730/overseas-workforce-2-43-millio...

Out of the total Pakistan’s overseas workforce, 27 per cent have jobs in European countries, revealed statistics shared by Ministry of Overseas Pakistanis and Human Resource Development with the lawmakers in the Senate.

After Saudi Arabia, United Kingdom caters to the largest overseas Pakistanis followed by Italy, France, Germany and Spain.

In response to question of senator Rozi Khan Kakar, the ministry stated that presently around 9.08 million workforce is living/working abroad, out of which, 2.43 million got job opportunities in around 25 countries of Europe.
UK at the moment has provided jobs to 1.7 million Pakistanis. Saudi Arabia continues to be the favourite destination of Pakistani workforce with 2.6 million workers. United Arab Emirates is at the fourth place in the list with 1.6 million and United States fifth with 900,350.

In Europe, Italy is providing jobs to 119,762 Pakistanis, France 104,000, Germany 90,556, Spain 82,000, Greece 70,002, Norway 38,000 and Netherlands 35,000.

Turkey is providing jobs to only 557 Pakistani workers while China has accommodated 14,355 Pakistani workers. Chile is providing jobs to 760 Pakistanis and Cuba has given job opportunities to 600 Pakistanis. Afghanistan provided jobs to 71,000 Pakistanis and India 10,000. Iran has provided jobs to 7,065 Pakistanis.

Currently, 120,216 Pakistanis have been provided jobs in Malaysia and 65,000 in Thailand.

Libya provided 12,008 Pakistanis jobs, Iraq accommodated 4,709 and Yemen 3,024. Russia gave jobs to 3,560 Pakistanis, stated the statistics.

The reply also contains that 19 Community Welfare Attaches are posted in Pakistan’s missions abroad in the countries having a sizeable concentration of Pakistanis to provide them certain facilities.

These facilities include, issuance of passports, provision of assistance in implementation of Foreign Service Agreement which is made between employee and employer and some others.

[Riaz Haq]

#Pakistan #cement sales up 11% in August 2017 to 3.8 million tons with capacity utilization at 96%. #CPEC

https://www.cemnet.com/News/story/162490/pakistan-cement-sales-up-1...

Cement sales in Pakistan rose 10.9 per cent YoY in August 2017 to 3.766Mt from 3.585Mt in August 2016. 

In the northern region, dispatches reached 2.731Mt, up from 2.495Mt in August 2016, while in the southern region dispatches rose from 0.532Mt to 0.625Mt during the same period. 

Some 307,000t of cement was exported from the north, significantly less than 355,000t reported in August 2016. Exports from the south slipped from 203,000t to 103,000t. 

Capacity utilisation in August surpassed the 96 per cent mark, according to the All Pakistan Cement Manufacturers’ Association. 

In the first two months of this financial year, Pakistani cement plants delivered 7.148Mt, up 21 per cent YoY. Domestic consumption improved 28 per cent YoY, exports declined 13 per cent YoY. 

Cement demand in the north increased by 28.5 per cent in the north and by 25.4 per cent in the south in July-August 2017. Exports in the north and south declined by 2.5 and 25.4 per cent, respectively during this period.

[Riaz Haq]

#Pakistan Auto sales up by 25% in Aug 2017. #CPEC

http://nation.com.pk/business/14-Sep-2017/auto-sales-up-by-25pc-in-aug

According to latest PAMA data, Pakistan local car assemblers, including LCVs, Vans and Jeeps, have sold 22,000 units in August 2017, an increase of 25 percent annually. These numbers are above the estimates. Experts attribute this increase to string of new models and facelift introduced recently propelling sales.

Sales of Honda (HCAR) have outperformed peers, posting 47 percent YoY growth. These are the highest monthly sales in history of the company at 4,666 units due to successful introduction of new Civic model and new SUV variant BR-V. Sales of Pak Suzuki Motor Company have increased by 32 percent YoY in August 2017 due to strong sales of Wagon-R, +75 percent YoY and new model of Cultus increased by 69 percent YoY. Mehran sales also rocketed +28 percent YoY supporting PSMC’s sales growth.

Indus Motors sold 5,541 units an uptick of 2 percent YoY. The company’s focus remained on production of higher margin Fortune whose sales have shown stellar growth of 284 percent YoY. Also, buyers have resumed purchase of corollas which have shown YoY growth of 5 percent post the recent model facelift. Tractor sales continue to exhibit upward trajectory with sales growing by 115 percent YoY in August 2017. AL Ghazi tractor (AGTL) has been the top performer in this segment with robust monthly sales growth of 26 percent.

Truck and bus sales of PAMA member companies in August 2017 remained strong, growing by 20 percent YoY.

“We foresee this trend to continue, fuelled by CPEC led growth, higher road connectivity, lower financing rate and change & enforcement of axle load limit per truck on highways by National Highway Authority (NHA).

[Riaz Haq]

#China investors to invest in #Textile joint ventures in #Pakistan for economies of scale. #CPEC #SEZ

http://www.brecorder.com/2017/09/19/370121/china-keen-to-convert-pa...

Six-member delegation from China's Hi-Tech Group, a state owned company dealing in textile and energy generation machinery, Tuesday visited FPCCI and had sector specific detailed discussion with their counter-parts on, how to upgrade Pakistan's textile industry especially the spinning mills. 

Eighty percent of yarn and other textile products will be re-exported to China for value-addition to sell the finished good at better prices in international market, Pakistani businessmen were informed. 

Led by Executive Director of the Group, Shaohul Zhang, the Chinese delegation is on 5-day visit to Pakistan from September 17. On Wednesday, they would fly to Lahore for business sessions with the textile industry people. 

Acting President, Federation of Pakistan Chambers of Commerce and Industry, Manzoor-ul-Haq Malik and senior leader of FPCCI and a leading textile industrialist and exporter Dr. Mirza Ikhtiar Baig along with other senior businessmen welcomed the Chinese team at the Federation House. Mr. Malik and Dr. Baig led the FPCCI team. 

Chinese were keen to enter joint ventures for modernization and upgrdation of Pakistan's spinning mills to make these cost efficient and competitive, Mr Zhang said. 

They wanted to start with installing one million spindles at least at one spinning mill, which was the lowest benchmark for a spinning mill in China. 

Whereas, in Pakistan majority spinning mills had spindles only in hundreds. 

For such large size spinning mills, China's Hi-Tech Group would help set up power plants to meet its power consumption demand at very reasonable price. Spinning mills are the largest power consuming industry. 

Head of the Chinese delegation informed that China wanted to relocate its textile units to Pakistan to benefit from Pakistan's low paid and well-experienced textile labour. Chinese investors were ready to set up their textile mills in Pakistan, mostly under joint ventures, especially at Special Economic Zones linked to China- Pakistan Economic Corridor (CPEC). 

" We can contribute in power supply at very favourable price. There can be very good partnership in spinning mills and power plants owners," he remarked adding that give us land, we will bring textile machinery here. 

He claimed that China's textile machinery was more suitable for Pakistan against that of Germany and Switzerland. 

He said under the proposed programme, most of the small Pakistani spinning units would have to be shutdown as those were not cost efficient and led to wastage of very good quality cotton stock. 

The main points harvested from the meeting were : there was a big demand in China for Pakistani yarn-- Pakistan should produce 8 singles cotton instead of 6 singles. Cotton yield per acre should be increased-- China wants Pakistan to shift to an economy of scale including large size spinning mills, and Chinese investors were very much interested to become partners in textile -- Pakistan's textile sector needs to corporatised instead of being confined to as family businesses. These should be listed with Pakistan Stock Exchange as public limited companies -- the policies were required to protect the existing local textile industrialists and that even the existing textile units could continue profitably if those were not be re- located-- eighty percentage of the textile products would be re- exported to China for value addition. China was the large market for yarn and Pakistan could capture a big share-- Pakistan textile sector should contact Chinese government for the support including easy financing. 

[Riaz Haq]

Value Added Sector Helps #Pakistan’s #Exports Upsurge. Textiles up 11.8%, non-textiles up 23.5% - https://pakwired.com/value-added-sector-behind-pakistans-exports-up... … via @pakwired

According to a recent report by the Pakistan Bureau of Statistics (PBS), Pakistan’s exports have shown a positive trend backed by rising exports via the value added sector. The growth pattern has been observed during the first two months of the current fiscal year 2017-18. The upward trend in the value added sector has given a significant boost to cummulative export numbers as the New Year kicked off.

Total exports during the two month period, July-August, increased to $3.49 billion as compared to $3.12 billion showing a growth of 11.8%. While the increase in non-textile goods has been registered at 23.5% reaching $1.31 billion during July-August 2017-18 versus $1.06 billion during the same period last year.

PERFORMANCE OF VALUE AND NON-VALUE ADDED TEXTILE EXPORTS

Readymade garments have given a major upward push to the overall exports pie increasing by 15.65% on a yearly basis reaching $418.63 million during July-August period. Garments in general have also surged by 16.4% showing volume based growth.

Another integral value-added product, knitwear managed to go up by 7.53% to reach $439 million during July-August. The volume based increase of knitwear exports was 8.23%. Additionally, bed wear exports grew by 8% amounting to $384.32 million while its quantity wise growth stood at 8.79%. Furthermore, the value based growth of towel exports showed 0.67% rise while its volume based growth was registered at 0.03%.

Conversely, the picture has not been equally nice for the intermediate goods like cotton yarn, as their exports slumped by 4% (value) and by 3.3% (volume). Deteriorating demand of cotton yarn and fabric from China is considered a crucial reason for their low sales. Another slump has been seen in the exports of cotton cloth, down by 7.8% in terms of value and quantity. Exports of raw cotton have also seen a downward trend with 14.7% in value and 14.15% in volume during July-August 2017-18.

A major blow has emanated from exports of non-value added products such as cotton carded, which dropped by a whopping 100% in value and volume. In addition, exports of tents and canvas declined by 22% in terms of value. On the other hand, exports of yarn slumped by 0.2% in value but increased in terms of volume.

Quick Read: When will Pakistani companies really value their human resource?

A GLANCE AT NON-TEXTILE EXPORTS

From the non-textile related goods, rice exports grew by a significant 40% during the two months. Basmati and other types of rice exports took a major leap.

From the food category, a major jump was seen in exports of wheat, sugar, fruits during the given period. Crude petroleum and petroleum naphtha registered a growth of 100% and 404% accordingly. Nonetheless, exports of sports goods and carpets saw a downward trend.

Value added leather products increased by 5.8% which was witnessing continuous slump during the last two years. Footwear showed a feeble growth of 0.1% during July-August 2017-18. Furthermore, surgical and engineering goods managed to rise by 26% and 23% respectively.

[Riaz Haq]

#Pakistan large scale manufacturing posts 4 year high growth of 12.98% in July 2017 | http://thenews.com.pk

https://www.thenews.com.pk/print/231581-LSM-posts-four-year-high-gr...

Karachi: Large scale manufacturing sector posted a four-year high growth of 12.98 percent year-on-year in the first month of the current fiscal year on infrastructure-driven boom and growing auto demand.

Pakistan Bureau of Statistics (PBS) data on Thursday showed that iron and steel production climbed 46.36 percent in July over the same month a year ago, followed by automobiles (42.56pc) and non-metallic mineral products (37.95pc).

LSM output increased 12.78 percent in September 2017 over the same month of 2016. PBS statistics revealed that production of billets soared more than 74 percent YoY to 476,000 tonnes in July.

Production of tractors more than doubled to 5,087 units in July 2017 from 2,067 units in July 2016, while output of trucks, jeeps and cars, light commercial vehicles and motorcycles increased 24.4 percent, 55.75 percent, 16.03 percent and 26.46 percent, respectively.

Other sectors that recorded growth in July included engineering products (21.95pc), food, beverages and tobacco (19.02pc), pharmaceuticals (11.14pc), paper and board (11.23pc), wood products (10.95pc), chemicals (5.13pc), coke and petroleum products (4.87pc), rubber products (4.51pc), leather products (2.52pc) and textile (0.43pc).

Fertiliser and electronics sectors, however, recorded a flat production in July over the corresponding month a year ago. Large scale manufacturing grew 4.36 percent in July over June, according to PBS.

Industrial production grew 5.02 percent in the last fiscal year of 2016/17. LSM, accounting for 80 percent of the industrial sector’s 10 percent share in GDP, posted a four-year high growth of 5.6 percent in the fiscal 2016/17. Government set LSM sector’s target at 5.7 percent for FY2018.

Infrastructure development boosted demand of iron and steel products as well as cement, which are the key industries in the country. Auto sales have also been growing in the recent past as demand of heavy vehicles in China-funded development projects, uptake of passenger vehicles and rising sales of tractors for recovering agriculture sector speeded up production in the industry.

The bureau logs trend of industrial sector on the basis of statistics from Oil Companies Advisory Committee (OCAC), ministry of industries and provincial bureaus of statistics. Ministry of industries track production trend of 36 products, Oil Companies Advisory Committee monitors 11 oil, lubricant and petroleum products and provincial authorities measure output of 65 items nationwide.

OCAC registered a 4.87 percent YoY growth in July and edged up 2.51 percent month-on-month. Production of liquefied petroleum gas surged 75.5 percent YoY to 56.29 million litres. Kerosene oil output soared 66.5 percent to 14.78 million litres in July.

Diesel production soared 41.33 percent to 2.15 million litres, while motor spirits output increased 14.6 percent to 237 million litres in July. Ministry of industries recorded a growth of 16.66 percent YoY and 8.09 percent month-on-month, said Pakistan Bureau of Statistics.

[Riaz Haq]

'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-pani...

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]

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


Read more: http://opinion.inquirer.net/107391/reviving-indias-economy#ixzz4tf0... 
Follow us: @inquirerdotnet on Twitter | inquirerdotnet on Facebook

[Riaz Haq]

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/SavingInvestmentStaf...