Dr. Tarun Das, Eco.adviser. Mof

Economic Environment and Insurance, Part-2 Dr. Tarun Das, Eco.Adviser. MOF

Economic Situation by Dr. Tarun Das

1

Contents of this presentation Strengths, challenges and Prospects 1. 2. 3. 4. 5. 6.

Fiscal sustainability Demographic transition Strengths Constraints Economic Outlook Role of Managers

Economic Situation by Dr. Tarun Das

2

4 Fiscal and Financial Situation

Economic Situation by Dr. Tarun Das

3

4.1Medium Term Fiscal Indicators (As % of GDP) Items 1.Revenue Deficit 2.Fiscal Deficit 3.Gross tax rev. 4.Year-end debt stock

2004-05 2005- 2006- 2007-08 RE 06 BE 07 Tar Tar 2.7 2.7 2.0 1.1 4.5 4.3 3.8 3.1 9.8 68.8

10.6 68.6

Economic Situation by Dr. Tarun Das

11.1 68.2

12.6 67.3

4

4.2 Trend of Public Debt Status in June 1991 • Public debt as percentage of GDP (a) Central govt 61% - Internal 50% - External 12% (b) States 19% - Internal 19% (c )General govt 68% - Internal 56% - External 12%

Status in March 2005 • Public debt as percentage of GDP (a) Central govt 67% - Internal 61% - External 6% (b) States 29% - Internal 29% (c )General govt 96% - Internal 90% - External 6%

Economic Situation by Dr. Tarun Das

5

4.3 Progress of Fiscal Reforms Status in March 2005

Status in June 1991 Fiscal Deficit was financed by: (a) RBI Ad Hoc TBs at 4.6% interest (b) Banks through SLR holdings at 38.5% and CRR 25% (c ) Market borrowings (d) Public funds (e) External debt

(a) Ad hocs replaced by WMAs at market rate (b) SLR reduced to 25% (c )Govt. securities are sold at market rates and CRR 4.5% (d) Reduction of interest rates for public funds (e) Less dependence on External debt

Economic Situation by Dr. Tarun Das

6

4.4 Progress of Fiscal Reforms Status in March 2005

Status in June 1991 High duty & tax rates Maximum rates Excise duty 110% Import duty 400% Income tax 54% Corporate taxes: Domestic COs. 49% and 54% Foreign COs. 65%

Duties & taxes reduced Maximum rates Excise duty 16% Cenvat + 16% SED Import duty 15% Income tax 30%+(10% sur

Corporate taxes: Domestic COs. 30% + 10% surcharge Foreign COs. 40%+2.5% surcharge

Economic Situation by Dr. Tarun Das

7

4.5 Progress of Fiscal Reforms Status in March 2005

Status in June 1991 • • No service tax • No MinAlternativeTax • • • No transactions tax • • No tariff value • • Dividend tax on both individuals & Cos. • • Existence of gift tax • • Limited cases of taxholidays • • No fringe benefit tax

Service tax @10% MAT introduced Trans. tax @0.02% Tariff value introduced Dividend tax on only companies Gift tax abolished Tax holidays widened to many infrastructure FBT proposed

Economic Situation by Dr. Tarun Das

8

4.6 Progress of Fiscal Reforms Status in March 2005

Status in June 1991 • No MRP linked excise duties

• No estimated income scheme for retail traders • No presumptive tax

• Concept of MRP introduced for consumer goods • Estimated income scheme introduced for retail traders. • Presumptive income tax scheme introduced • State level VAT to be introduced wef April 05

• No state level VAT

Economic Situation by Dr. Tarun Das

9

4.7 Central Government Deficit (% of GDP) Year Revenue 1990-91 3.3 1991-92 2.5 1995-96 2.5 2000-01 4.1 2001-02 4.4 2002-03 4.4 2003-04 3.5 2004-05RE 2.7 2005-06BE 2.7

Fiscal 6.6 4.7 4.2 5.7 6.2 5.9 4.5 4.5 4.3

Economic Situation by Dr. Tarun Das

Primary 2.8 0.7 0.0 0.9 1.5 1.1 0.0 0.4 0.5 10

4.8 State Governments Deficit (% of GDP) Year Revenue 1990-91 0.9 1991-92 0.9 1995-96 0.7 2000-01 2.5 2001-02 2.6 2002-03 2.5 2003-04RE 2.6 2004-05BE 1.4

Fiscal 3.3 2.9 2.6 4.3 4.2 4.7 5.1 3.6

Economic Situation by Dr. Tarun Das

Primary 1.8 1.2 0.8 1.8 1.5 1.7 2.1 0.7 11

4.9 General Govt Deficit (% of GDP) Year Revenue 1990-91 4.2 1991-92 3.4 1995-96 3.2 2000-01 6.6 2001-02 5.9 2002-03 6.7 2003-04RE 6.1 2004-05BE 4.1

Fiscal 9.4 7.1 6.5 9.5 9.9 10.1 9.6 8.1

Economic Situation by Dr. Tarun Das

Primary 5.0 4.5 1.3 3.7 3.7 3.6 2.1 1.1 12

4.1 Number of 60+ People in India Year

Million

Ratio

1951

20

5.4%

2000

77

7.6%

2025

168

12.7%

2050

326

20.6%

Economic Situation by Dr. Tarun Das

13

4.2 Ratio of Population Aged 60+

Figure I:

Proportion of population aged 60 and over 30.0

25.0 PACIFIC

Percentage

20.0

WORLD

ASIA

15.0

10.0

5.0

0.0 1950

1975

2000

2025

Economic Situation by Dr. Tarun Das

2050

Years

14

4.3 Factors for population aging Figure II. Life expectancy and fertility trends 90.0

7.0 Life expectancy

80.0

Pacific

Asia

Asia

6.0

W orld

Life expectancy (years)

W orld

5.0

60.0 Pacific

4.0

50.0

40.0

3.0 Fertility rate

30.0 2.0 20.0

Fertility rate (number of children per woman)

70.0

1.0 10.0

0.0

0.0 1950-1955

1975-1980

2000-2005

2025-2030

2045-2050

time period

Economic Situation by Dr. Tarun Das

15

4.4 Decline of Infant Mortality and Total Fertility Rates (%) in developing countries Item

1950-1975

19752000

20002025

Infant mortality rate

-58

-41

-42

Total fertility rate

-27

-29

-27

Economic Situation by Dr. Tarun Das

16

4.5 Total Fertility Rate Region

19501955 5.9

19751980 4.4

20002005 2.5

20252030 2.1

20452050 2.1

% drop

--

-28.8

-40.5

-16.0

0.0

Pacific

3.9

2.8

2.4

2.2

2.1

% drop

--

-28.2

-14.3

-8.3

-4.5

Asia

Economic Situation by Dr. Tarun Das

17

4.6 Share 60+ population in total population World Asia-Pacific China India Indonesia Japan

10.0 8.8 10.1 7.6 7.6 23.2

2000 2050 21.1 22.6 29.9 20.6 22.3 42.3

Economic Situation by Dr. Tarun Das

18

4.7 Share of 65+ population in world 65+ population Region/ Country

2000

2050

China

20.9

22.8

Indonesia

2.4

3.5

India

12.0

16.0

Russian Federation

4.3

2.0

Japan

5.2

2.7

Rest of Asia Pacific

11.7

16.0

Rest of world

43.5

37.1

Economic Situation by Dr. Tarun Das

19

4.8 Share of 80+ population in world 80+ population Region/ Country

2000

2050

China

16.6

26.2

Indonesia

1.6

2.7

India

8.8

12.7

Russian Federation

4.2

2.0

Japan

6.9

4.4

Rest of Asia Pacific

12.4

11.6

Rest of world

49.5

40.4

Economic Situation by Dr. Tarun Das

20

4.9 Rising share of female in aged F ig u re V I 12

S h a r e o f m a l e a n d f e m a l e p o p u l a t i o n a g e d 6 5 + t o t o t aSl h a r e o f m a l e a n d f e m a l e p o p u l a t i o n a g e d 8 0 + t o t p o p u la tio n in E S C A P c o u n tr ie s 1 9 5 0 -2 0 5 0 p o p u la tio n in E S C A P c o u n tr ie s 1 9 5 0 -2 0 5 0 3 .5 F e m a le

10

Percentage of total population

Percentage of total population

2 .5

M a le

8 6 4 2 0 1950

1975

2000

2025

2050 Y e a rs

F e m a le

3 .0

2 .0

M a le

1 .5 1 .0 0 .5 0 .0 1950

1975

Economic Situation by Dr. Tarun Das

2000

2025

2050 Y e a rs

21

4.10 Old age dependency ratio Figure VII. Old age dependency ratio in Asia-Pacific and selected countries 80

Japan 70

Old age d ependen cy rat io

60

Republ Kore 50 Singapore

Russian Federation

40 China Armenia 30

Pacific Asia

20

10

0 1950

1975

2000

Economic Situation by Dr. Tarun Das

2025

Y

2050

22

4.11 Ratio of Working Population Figure VIII: Dynamics of working age population in selected economies Population aged 15-59 for selected Asia-Pacific economies 1950-2050

70

65

India

60

Percentage

Asia Pacific 55 China

50

Republic of Korea

Japan

45

40 1950

1975

2000

2025

Economic Situation by Dr. Tarun Das

2050

Years

23

4.12 Implications of population ageing • Decline of share of working age population in Asia from 62% in 2025 to 58% in 2050 • Higher consumption • Lower savings, investment and growth • Lower contributions to pension funds, but increase of number of pensioners • Higher expenditures on pensions, old age health care, institutional and social care • Rising demand for medical services for old age and high medical cost Economic Situation by Dr. Tarun Das

24

4.13 Impact on Capital Markets and Insurance • Shift from Pay As You Go pension system to defined contributory pension schemes • Emergence of pre-funded private and public pension systems and insurance schemes • Strengthening of health insurance schemes • Professional and innovative management of pension, provident and insurance funds • On the other hand, lower savings may have adverse effects on capital and share markets

Economic Situation by Dr. Tarun Das

25

4.14 Policy Options

• Multi-pillar pension schemes- mandated publicly managed defined benefits scheme, privately managed and funded defined contribution scheme and retirement provisions on a voluntary basis. • Increase retirement age • Limit early retirement windows • Autonomy in the management of pension, provident and insurance funds • Make pensions portable and improve labour market flexibility • Contributory medical insurance schemes

Economic Situation by Dr. Tarun Das

26

Strengths, Challenges and Prospects

Economic Situation by Dr. Tarun Das

27

5.1 Strengths of Indian Economy

 Fourth largest economy in terms of PPPadjusted GDP after USA, China and Japan  Largest pool of technical manpower  Largest English speaking population  Huge domestic market with second largest population, democracy, free press, independent judiciary  Rich natural resources, well established financial system, wide spread infrastructure, dynamic private sector Economic Situation by Dr. Tarun Das

28

5.2 Constraints to Growth Decline in agriculture growth Growing infrastructure constraints

High energy intensity Low real deposit rates Slowdown of economic reforms Weak regulatory institutions Outdated laws on business Inflexible Land and Labour markets High fiscal deficit Economic Situation by Dr. Tarun Das

29

5.3 Economic Outlook for 200506 • Monsoon rainfall 98% of normal rainfall. • We are expecting overall GDP growth at 7% in 2005-06 aided by agricultural growth of 3%, industry 8% and services 8.5%. • Inflation within 5% to 5.5%. • Money supply growth 14.5%. Economic Situation by Dr. Tarun Das

30

5.4 Implications for Managers  World is a global village  Knowledge and IT are the most valuable assets  Wider choice of resources- domestic/ foreign, debt/ equity/ portfolio etc.  Greater Risk- Currency, exchange rate, interest rate, commodity prices, markets  Emphasis on decentralisation, consultation and risk sharing

Economic Situation by Dr. Tarun Das

31

5.5 To strengthen Systems for  Management information system  Asset-Liability Management  Good corporate governance  International best practices  Performance Audit  Assessment, monitoring and management of risk  Policy Audit Economic Situation by Dr. Tarun Das

32

5.6 Concluding Remarks  As first generation reforms take root and second generation reforms unfold, India is emerging as a favourite destination for investment and a land of immense opportunity for all.  Carried to their logical ends, reforms would make India as one of the most dynamic economies of Asia by 2010.  India is “an economic miracle” waiting to happen.  All of us have to play a distinct role in that exciting process of development. Economic Situation by Dr. Tarun Das

33

Thank you

Economic Situation by Dr. Tarun Das

34