India Economic Summit 2006

Meeting New Expectations New Delhi, 26-28 November 2006

INSIGHTS

WORLD ECONOMIC FORUM

India Economic Summit

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Contents

Preface

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Summary – Meeting New Expectations

4

State and National Competitiveness

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Managing Growth

12

Infrastructure Development

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Risk Management

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The Creative Imperative in India

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Acknowledgements

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Preface The theme, “Meeting New Expectations” clearly captured the imagination of the 600 leaders from government, business, media and civil society who joined together in New Delhi for the 22nd India Economic Summit. India’s growth rate has averaged over 7% over the last three years, which has clearly raised expectations economically, politically and developmentally. And the consensus going forward is that the economy will achieve 10% growth and higher over the next several years. But the mood at this year’s Summit was neither that of complacency nor that of hubris; instead it could be characterized as one of responsibility. The challenge of spreading high growth across more state economies, infant industries and into rural communities was what galvanized the various stakeholders this year. Moreover, participants from India and from abroad understood that high growth was not synonymous with either inclusive or equitable growth, both of which are at the foundation of any market-based democracy. Sonia Gandhi, Chairperson, United Progressive Alliance and President, Indian National Congress, reminded us all that “the economic growth we are experiencing must not be at the cost of social awareness and social responsibility.” The result was frank and open discussions that highlighted the need for greater alignment of India’s public policy, development and industry agendas at multiple levels. As has been the tradition for over 20 years, we introduced innovations aimed at building a stronger consensus among business, civil society and government on critical growth challenges. For example we launched our “India@Risk” report in collaboration with the Confederation of Indian Industry (CII). Building from the Forum’s Global Risk Network, this project identified six major global risks that have the greatest impact on India’s future growth and development. At the opening plenary, the Indian Finance Minister Palaniappan Chidambaram identified HIV/AIDS as the most “frightening” among the six risks. Later in the Summit, mitigating this risk was explored in depth with Dr Anbumani Ramadoss, Minister of Health and Family Welfare of India, in a session on partnership models for business action on HIV and TB – epidemics that kill approximately 1,000 people each day in India. One such successful model discussed at the Summit was the India Business Alliance to Stop TB, a public-private partnership supported by both the Forum and CII and their respective member companies. And for the second consecutive year, the Schwab Foundation presented the 2006 India Social Entrepreneur of the Year Award on the occasion of the Summit. Vikram Akula, Founder and CEO of SKS Microfinance Private Limited received the award from Sonia Gandhi. SKS Microfinance has been hailed as the “Starbucks of Microfinance” for adopting global business practices in microfinance leading to over US$ 71.6 million in loans benefiting 1.5 million Indians. As you read the thematic essays and data presented in this report, three important conclusions emerge as we prepare for the 23rd India Economic Summit, scheduled for 2-4 December 2007. First, India must now seize the opportunity to strengthen the foundation of its remarkable growth by developing its rural economy, as agriculture contributes over 20% of GDP and employs roughly 70% of the population. Second, India must remain in the vanguard of globalization. Indian Minister of Commerce and Industry Kamal Nath remarked in the closing plenary: “The great champions of globalization have now started shirking it, but we in India trumpet globalization because we are getting globally competitive.” And third, to maintain this competitiveness, most of the burden will fall on state governments. It is at the state and municipal levels where most of the barriers that impede investment into agriculture, power, transportation and, most importantly, human development are to be found. Lee Howell Director, Head of Asia India Economic Summit

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Summary – Meeting New Expectations

“The economic growth we are experiencing must not be at the cost of social awareness and social responsibility.” Sonia Gandhi Chairperson, United Progressive Alliance and President, Indian National Congress

This has been India’s year. Perhaps no other economy has enjoyed such a buzz over its prospects or such celebration over its progress. The irony of this notoriety is that it only raises the pressure on policy-makers to do even better, particularly for India’s thousands of impoverished rural communities, where news of the country’s growing prosperity has also arrived. Meeting their expectations will require that governments and the private sector focus on four issues identified as top priorities at the India Economic Summit: • Improving higher education standards and technical training, and broadening learning opportunities nationwide • Recruiting, managing and retaining the most skilled and talented workers • Reversing environmental degradation in terms of climate change and water scarcity • Improving the national supply chain by upgrading physical infrastructure and introducing administrative and tariff reforms

It became clear through the discussions that much of the impetus would need to come from state governments. A thicket of regulations from state to state is impeding investment into agriculture, power, transportation, and most importantly, human development. While India has managed to create a sizeable urban middle class, the fastest growing segment of its population, its rural farming community, is also the poorest. With two-thirds of the population still working on farms and agriculture shrinking as a percentage of the economy, the need to give the rural poor the tools to upgrade is clear. All the biggest risks to India’s development ultimately come back to how they might exacerbate the plight of this group – and whether their protest would manifest itself at the ballot box or in social unrest. If there was one message that permeated all the discussions at this year’s Summit, it was the urgent need for better education from the smallest primary school to the biggest universities.

Now, thrust somewhat reluctantly into the vanguard of globalization, India must seize the opportunity to strengthen the foundations of its remarkable growth by uplifting its rural poor. “The economic growth we are experiencing must not be at the cost of social awareness and social responsibility,” stated Sonia Gandhi, Chairperson, United Progressive Alliance and President, Indian National Congress.

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Managing Growth

State and National Competitiveness

India aims to boost economic growth from 8 to 10% by 2010 but a number of obstacles stand in the way.

India’s global competitiveness compares well with those of China, Brazil and Russia. But if the Indian economy is to achieve and sustain 10% growth, a number of shortcomings have to be addressed, particularly in education, governance and the rural economy.

• Poor infrastructure, a weak agriculture sector and skills shortages are placing constraints on growth. • India will need to double growth in the farm sector to 4%, if it is to meet its goals and achieve more inclusive growth. • Educational reforms are vital for alleviating a shortage of labour that has pushed IT salaries up 20% a year. • To promote innovation, India must make it easier for companies to access capital and encourage enterprises to go global to improve competitiveness.

• India’s states are the principal shareholders in India’s development. Given India’s democratic system, India’s future competitiveness will depend on the states and their capacity to adopt reforms and tackle their respective problems. The competition among the states for investment will spur them into action. • India aims to replicate across the rest of the economy the successes attained in the IT, pharmaceutical and telecommunications sectors. India’s competitive advantage may be its ability to deliver innovative, quality goods and services at a low price. • Increasing the productivity and efficiency of the rural economy is essential. The goal is to create a domestic common market through supply chain management and regulatory reform that resolves the anomalies that characterize cross-state commerce. • Improving higher education standards and technical training is critical if India is to improve its global competitiveness by confronting the range of challenges it faces.

Activators and Innovators: The Role of Business in HIVAIDS and TB in India – Jo Johnson, K. Srinath Reddy, Anbumani Ramadoss, Leonard Tauro and Jamshyd N. Godrej

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Infrastructure

Risk Management

Improving India’s inadequate infrastructure is essential to sustaining economic growth and reducing disparities in income.

The risks to economic growth are urgent, requiring tailored solutions.

• Energy and water remain two crucial areas for investment. India needs to find more domestic sources of natural gas and promote investment in power plants, water treatment and irrigation. • Growing trade has created an urgent need for investment in logistics, particularly roads, ports and railways. Customs facilities need to operate aroundthe-clock. • Private investment is crucial. Special purpose vehicles should be used to manage infrastructure projects and eliminate red tape. • The maze of state regulations still needs trimming. The financial industry should be further deregulated to facilitate fund-raising and risk management.

• Healthcare should be seen as an investment opportunity; priority should be given to HIV and TB awareness, diagnosis and treatment. • Protectionist forces are rising, emphasizing the need for stronger ties with trading partners in the West and South Asia. • Oil prices and air pollution are also rising; India must invest in alternative energy sources and in supplies overseas. • Global climate change threatens India’s fragile water supply, raising the need to conserve, discourage waste and price water to reflect its scarcity. • India’s youth is a positive force but its schools need an overhaul if it wants to truly leverage its demographic dividend. Companies should invest in vocational training and help design college curricula.

Vikram Badshah, Head of Public Policy, Confederation of Indian Industry, India; Pawan Munjal, Managing Director and Chief Executive Officer, Hero Group, India; Rahul Bajaj, Chairman, Bajaj Auto, India; Sunil Kant Munjal, Chairman, Hero Corporate Service Limited, India

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India Economic Summit

State and National Competitiveness

“The great champions of globalization have now started shirking it, but we in India trumpet globalization because we are getting globally competitive.”

“We have a low-cost economy and a high-quality resource base so we will be able to produce quality goods at a low price. But we need to build that resource base further.”

Kamal Nath, Minister of Commerce and Industry, India

Kapil Sibal, Minister of Science and Technology and Earth Sciences, India

At the India Economic Summit, many participants called for India to repeat in other sectors the successes it has achieved in IT, pharmaceuticals and telecommunications. Its move towards greater innovation capabilities has been significant. (See Figure 1) The message of this refrain: that India should find new drivers of growth, reform and open up its markets further, and find niches in which it can shine internationally. India’s global competitiveness – it is 43rd on the World Economic Forum’s latest competitiveness ranking – compares well with those of the three other large, emerging economies with which it is often grouped: China (54th), Russia (62nd) and Brazil (66th). India’s rise has turned it into a globalization booster, said Indian Minister of Commerce and Industry Kamal Nath. “The great champions of globalization have now started shirking

Figure 1. India Transforming into an InnovationDriven Economy

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it, but we in India trumpet globalization because we are getting globally competitive.” But India’s drive for competitiveness is complicated by its federal system. A lot depends on the states – and how they address the competitive pressures they face will be critical to determining India’s global competitiveness. After all, the states are the principal shareholders in Indian development, as Montek S. Ahluwalia, Deputy Chairman of India’s Planning Commission, once described them. Explaining why the national government cannot issue fiats to state governments to resolve nagging problems such as supply chain complications resulting from the array of taxes and fees that hamper cross-state commerce, Nath acknowledged that “some things possible in China aren’t possible in India.” He added, however, that in India, “states are [now] looking for revenues [and so] we are inducing and counselling states to make them see the larger growth picture.” Some states have started rationalizing their tax systems, spurring others to act, Nath noted. States differ widely in income level, quality of infrastructure and governance standards. Foreign investors are increasingly more discriminating in their choice of state to target. As in China, this has naturally sparked rivalries. Said Nath: “The new thing that is happening is the competitive atmosphere among the states.” The more responsive are taking stock and adopting better governance practices, eschewing knee-jerk ideology for solid results. Indeed, some of the more pragmatic states have come to understand the value of forging public-private partnerships with the private sector to address their shortcomings in areas such as infrastructure, water management, healthcare and education that are crucial to attracting investors. 7

“Running a state is like running a business.” Vasundhara Raje Chief Minister of Rajasthan

“We need to revamp the higher education system. We have no talent going through the postgraduate programme.” Hari S. Bhartia Co-Chairman and Managing Director, Jubilant Organosys, India

The aspirations of citizens are much higher and they demand much more of their leaders, Vasundhara Raje, Chief Minister of Rajasthan, acknowledged. “Running a state is like running a business,” she said. Rajasthan has put a lot of emphasis on developing its already established tourism sector and on improving infrastructure. Power production is being privatized and wind power projects expanded. The state expects to have a surplus of power within two years. Meanwhile, the Chief Minister of the National Capital Territory of Delhi, Sheila Dikshit, stressed the need for privatization and better management of resources. The private sector can be instrumental in multiplying the positive effects of reforms. For example, while power sector liberalization has significantly improved the quality of service and distribution, consumers still feel their needs are not being met, Dikshit explained. Private companies can step in to raise service standards even higher. For his part, the Chief Minister of Maharashtra, Vilasrao Deshmukh, told participants that his government is “cutting red tape and rolling out the red carpet.” Already a major recipient of FDI, his state contributes 13% of the national GDP. It was the first state in the nation to set aside 25% of live water storage capacity for domestic and industrial use. It is also aiming to maintain its power surplus position by investing US$ 13 billion in the sector. The state is also pushing the development of special economic zones (SEZs) that will offer world-class infrastructure, liberal tax regimes, one-stop-shop clearance procedures and a hospitable working

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environment. Even a poorer state such as Bihar is mobilizing to create an investor-friendly business climate. It is focusing on developing its agro-processing and tourism sectors and improving healthcare and education facilities, as well as roads and other infrastructure. The states and the competitive spirit they generate will certainly be instrumental in helping India within five years to achieve and sustain 10% growth, the level where China is today. India will need their contribution and collaboration to address serious competitive shortcomings, particularly in education and human resources, governance and the rural economy. The country as a whole will also need to exploit its competitive advantages, especially its youthful demographics – over half the population is under the age of 25 – and the valuefor-money proposition that won it 85% of the global business process outsourcing (BPO) market or more than US$ 6 billion in revenues. “Every consumer in the world wants a product at the lowest possible price and at the highest quality,” said the Indian Minister of Science and Technology and Earth Sciences, Kapil Sibal. “We have a low-cost economy and a high-quality resource base so we will be able to produce quality goods at a low price. But we need to build that resource base further.” It is a unique business plan, one that builds on India’s recent successes, particularly in IT services and pharmaceuticals. Indeed, India’s pharmaceutical firms are moving beyond generic production to innovative R&D in partnership with global companies to develop new drugs.

India Economic Summit

The same is true in software development. In the BPO market, India is expanding its repertoire to include socalled knowledge process outsourcing (KPO), or the offshoring of high-end knowledge work in various fields including engineering, design, medicine, finance and law. And India is aiming to develop an effective innovation ecosystem. “Innovation is not buying up technology,” reckoned Sibal. “It may be quality, but it’s not affordable. We need to partner with industry to adapt technology and innovate to meet the needs of the common folk.” It is all about competitiveness through increased efficiency. “What makes Indian firms more competitive is that they can absorb technology,” said Rajiv Kumar, Chief Executive and Director, Indian Council for Research on International Economic Relations (ICRIER). “We are increasingly a productivity-driven economy.” Yet India’s competitiveness drive has long been stymied by its poor infrastructure and lack of viable supply chains. Rural development and agriculture have suffered without adequate transport, storage and handling facilities. India’s supply chain, said Pankaj Chandra, Professor, Operations and Technology Management, Indian Institute of Management, is “fragmented, complex and lacks discipline.” Added Hans-Joachim Körber, Chairman and Chief Executive Officer, Metro, Germany: “If we get a proper supply chain, then the vision of India as the food factory of the world may be possible.”

Technologies, India. “To create that single market requires government intervention if you are going to reform all of this. There are a lot of stakeholders with a claim on these taxes.” This is a crucial challenge to which the states hold the key. But there are doubts that this stumbling block can be effectively addressed soon, given India’s federal structure and democratic political system. Yet relying on the market and the competition among states to produce better governance may be the best – and perhaps the only – approach that democratic India can take. Indian companies, meanwhile, are working around the problems. The automotive parts sector, for example, has managed to build up a 7% share of the global market, supplying components to BMW, DaimlerChrysler and other global automakers. The main reason behind such successes is the availability of the right skills and talent. All of India’s competitive ambitions really depend on its ability to improve higher education standards and technical training. “We need to revamp the higher education system,” Hari S. Bhartia, Co-Chairman and Managing Director, Jubilant Organosys, India, said, noting the low number of Indian PhD students. ”We have no talent going through the postgraduate programme.” India’s low R&D spending relative to GNP is also hampering the development of its innovation ecosystem. (See Figure 2) Figure 2. R&D Spending Not Keeping Pace with Economy

That future for India’s agribusiness sector depends not just on the building of the physical infrastructure needed in rural areas, but also on other issues including the modernization of the retailing sector and distribution networks, and how effectively India can resolve the anomalies that characterize cross-state commerce, the software of supply chain management. These problems are also hampering growth in the manufacturing sector. A major obstacle: the variety of tariffs and fees levied on goods and transport entering states. It can take eight days for a truck to deliver goods from Kolkata to Mumbai, a distance of approximately 2,000 kilometres. “The goal is to create a single Indian common market,” said India Economic Summit Co-Chair Nandan M. Nilekani, President, Chief Executive Officer and Managing Director, Infosys

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Other participants hailed India’s educational achievements so far, while acknowledging that there is enormous room for improvement. “We should really give some credit that the Indian education system has done something,” argued Mohamed A. Alabbar, Chairman, Emaar Properties, United Arab Emirates and Co-Chair of the India Economic Summit. Said Jaggi Vasudev, Sadhguru and Founder, Isha Foundation, India: “The important thing is that there is a huge volume of intelligence in the rural area – 70% of the intelligence is out there – so we are not really increasing our knowledge base.” Certainly the relationship between GDP per capita and the number of regional polytechnic institutes is significant. (See Figure 3)

Figure 3. Polytechnic Institutes Play a Role in State Economic Development

That plea to focus on the poor and remote neatly sums up the two factors that will determine India’s future competitiveness: how well the nation as a whole and the states in particular can develop their resources, particularly their people’s skills and talents, to meet the country’s growth and equity goals as well as the demands of globalization, and how well Indians can tap the vast potential of the rural economy. Concluded R. Seshasayee, Managing Director, Ashok Leyland, India, and President, Confederation of Indian Industry (CII): “You can’t attack the top end unless you nurture the bottom end.”

“The depth of education needs to continue for India to remain competitive.” Sir Michael Rake International Chairman KPMG United Kingdom

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India Economic Summit

India’s Economic Competitiveness

India ranked 43rd overall in the World Economic Forum’s Global Competitiveness Report 2006-2007. The subcontinent received excellent scores in capacity for innovation and sophistication of firm operations. The Report noted that while firm use of technology and rates of technology transfer were high, penetration rates of the latest technologies are still quite low by international standards. This reflects India’s low levels of per capita income and high incidence of poverty, the Report concluded. “The quality of the business environment in India has improved tangibly in recent years, with goods, labour and financial markets making gains in efficiency. There have also been substantial improvements in the underlying institutional climate in such areas as property rights, the operation of the judicial system and other indicators which capture essential aspects of building a sound investment climate,” noted Jennifer Blanke, Senior Economist at the World Economic Forum. Further progress in fiscal consolidation should enhance the ability of the government to respond to pressing needs, particularly in the areas of education, public health and infrastructure. Insufficient health services and education as well as a poorly developed infrastructure are limiting a more equitable distribution of the benefits of India’s high growth rates. The available evidence suggests that the Indian economy may have entered a high growth plateau. The challenge for the authorities will be to ensure that this process is sustained and that it precipitates further progress in poverty reduction, the Report noted.

The Most Problematic Factors for Doing Business

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Managing Growth

“The demand for people is just going through the roof. Many industries are simply competing for the same pool of labour.”

“Many years ago people used to doubt whether we knew how to grow fast. Now the question is can we make growth inclusive.”

Nandan M. Nilekani, President, Chief Executive Officer and Managing Director, Infosys Technologies, India; Co-Chair, India Economic Summit 2006

Montek S. Ahluwalia, Deputy Chairman, Planning Commission, India

India’s economy grew by 9.2% in the third quarter of 2006, the sixth time in the past seven quarters in which GDP growth has surpassed 8%. The economy is clearly climbing to a higher altitude. “Our overall macroeconomic position is very strong,” said Montek S. Ahluwalia, Deputy Chairman of India’s Planning Commission. “The external position is very strong; Indian business has gained a lot of self-confidence; and international perceptions of India are better than they were four years ago.” The good news has prompted Ahluwalia and his team to target 9% growth for the first three years of the next five-year plan to be launched in 2007 and then aim for 10% for the remaining time covered by the blueprint. Achievable goals – but is such growth sustainable? The trouble is that as India manages its growth higher, the going will only get tougher. Constraints such as poor infrastructure, the underperformance of the agriculture sector and the shortage of skills will make it more difficult to sustain the fast pace unless significant progress is made in resolving bottleneck problems. It will be even more difficult to ensure that growth is equitable, the top priority for India’s leaders. “Many years ago people used to doubt whether we knew how to grow fast,” Ahluwalia observed. “Now the question is can we make growth inclusive.” (See Figure 1)

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It will take strong partnerships between the public and private sectors and better political and corporate governance to address the drags and disparities that could spoil India’s ambitions. “Industry will do what is necessary to achieve the targets we set provided we do what we can to provide them a decent level of infrastructure,” Ahluwalia reckoned. But the government alone cannot come up with the US$ 350 billion in investment needed over the next five years to construct or upgrade the airports, ports, bridges, roads, ports and other facilities it needs to support 10% growth. Publicprivate partnerships and significant private investment are essential.

Figure 1. Poverty in India Varies Greatly by State

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“The agriculture sector will be India’s powerhouse.” Jyotiraditya Scindia Indian Member of Parliament

“If you want to develop the agricultural sector, one of the preconditions is a proper supply chain.” Hans-Joachim Körber, Chairman and Chief Executive Officer, Metro, Germany

Another critical factor is agriculture, which still employs 70% of the population. The sector has slowed down since the mid-1990s and is currently growing at just 2%. For the economy to achieve 10% growth, agriculture will have to grow by at least 4%. “The agriculture sector will be India’s powerhouse,” predicted Indian Member of Parliament Jyotiraditya Scindia. But for this to come true will require significant restructuring. The sector must diversify beyond traditional cereal production into more highvalue businesses such as horticulture, floriculture and fisheries. But this will involve the production, distribution and marketing of perishable products. Rural supply chains today are highly inefficient. About 40% of Indian produce is wasted due to insufficient transport, storage and handling facilities. “If you want to develop the agricultural sector, one of the preconditions is a proper supply chain,” said HansJoachim Körber, Chairman and Chief Executive Officer, Metro, Germany. “It is still very difficult to move food and vegetables from one state to another. There should be a focus on the supply chain to secure future growth.” A further constraint on growth is human resources. Pay increases in IT are running at a staggering 20%, indicating how tight the labour market is in India’s flagship services sector. Companies complain of inadequate talent among graduates and difficulties retaining personnel after spending money and resources on their training. If manufacturing and agriculture are to expand, if the retail sector is to modernize to cater to the expanding ranks of middleclass consumers and to the untapped rural market, if the infrastructure the nation badly needs is to be built,

India Economic Summit

if the health and education facilities and programmes the country requires are to push ahead, and if the economy’s knowledge base is to widen, what India needs are workers with the skills to carry out this ambitious growth agenda. “The demand for people is just going through the roof,” said India Economic Summit Co-Chair Nandan M. Nilekani, President, Chief Executive Officer and Managing Director, Infosys Technologies, India. “Many industries are simply competing for the same pool of labour.” The onus is on the education sector, particularly India’s universities. “You can’t have rapid growth or inclusive growth unless the education system is providing enough expansion of the relative skills,” explained Ahluwalia. “As we move towards 9% or 10% growth, the constraint in terms of available skills will become marked in certain areas.” Added Sunil Kant Munjal, Chairman, Hero Corporate Service, India: “For India, innovation will be the key to moving forward. Our labour costs are already not that low when you compare them to some other nations. The supply of people is large, but what matters is our ability to train people. It’s not just formal education; it’s all manner of skills and vocational education.” Again, the participation of the private sector will be vital. At the closing plenary, Indian Minister of Commerce and Industry Kamal Nath announced that the cabinet is moving to introduce legislation to allow foreign educational institutions to set up in India. The twin aims: to boost the quality of education by opening the market to foreign competition, and to attract accomplished Indian educators at universities abroad to come home.

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This landmark measure is the sort of bold decision that the government has to make to eliminate or at least reduce the obstacles to sustaining 10% growth and to ensure that the benefits of high growth are fairly shared. “There are many countries that use education as an excuse for an underperforming economy,” said Graham Mackay, Chief Executive, SABMiller, United Kingdom, who was also a Summit Co-Chair. “Most of the time the question is whether there is an enabling environment for growth. Is there a business-friendly enabling environment?” The key is good governance, Mackay argued. (See Figure 2) Unfortunately, India’s record so far is patchy, he reckoned. India can do better. The battle to get the economy in shape to sustain 10% growth is inextricably linked to the drive to improve state and national competitiveness. While making workhorse sectors perform better and more efficiently, India needs to find new sources of growth. This means making it easier for companies to access capital and encouraging capable enterprises to go global to hone their competitiveness. It means further reform of the financial services sector, including the deepening of the bond markets. (See Figure 3) It means modernizing the retail sector to trigger a consumer revolution with the participation of international players such as Wal-Mart and

Figure 2. States Perceived as Most Corrupt Tend to Have Lower Per Capita State GDP

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Metro in partnership with local firms. It means letting the private sector step forward and promoting a wide range of public-private partnerships. “The private entrepreneurial spirit that has come out of economic reforms is a genie that has been let out of the bottle and is impossible to put back in,” said Rajiv Kumar, Chief Executive and Director of the Indian Council for Research on International Economic Relations (ICRIER). India, to be sure, is in “a new growth trajectory,” Kumar concluded. “While 10% growth is very possible, anyone who assumes that it is a given is being complacent.” In managing the growth of this large, sprawling economy of over a billion people, there is certainly no room for complacency.

Figure 3. India’s Corporate Bond Market Lagging

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Infrastructure Development

“We are cutting red tape and rolling out the red carpet.” Vilasrao Deshmukh Chief Minister of Maharashtra, India

Poor infrastructure may be the single most important issue India faces. Despite impressive economic growth, India’s dilapidated roads, congested ports, inadequate power and labyrinth of state regulations are braking development. It can take up to eight days to truck goods from Kolkata to Mumbai. Steven Okun, Vice-President, Public Affairs, UPS, Singapore, said it took him more time to travel from Delhi to Mumbai than to go from Singapore to Hong Kong. Such experiences do little to encourage investment. Improving India’s infrastructure would propel economic growth, create jobs, boost domestic consumption, lower costs and stimulate exports. If its infrastructure were better, the country’s impoverished rural sector could even be transformed into a leading exporter. On the other hand, if infrastructure improvements continue to lag, foreign investment could stall and development would concentrate in service industries such as IT outsourcing. This would exacerbate income disparities, feed social pressures and raise the potential for unrest.

“There is progress, but a lot more needs to be done.” Peter Bakker, Chief Executive Officer, TNT, Netherlands; CoChair, India Economic Summit 2006

For the nation’s teeming cities, the government has created a US$ 110 million programme to revamp urban infrastructure in exchange for legal reforms. The state of Maharashtra, for example, will repeal a law restricting land ownership, said Vilasrao Deshmukh, Chief Minister of Maharashtra, India, to gain roughly US$ 80 million in infrastructure funding for Mumbai. “There is progress, but a lot more needs to be done,” said Peter Bakker, Chief Executive Officer, TNT, Netherlands and Summit Co-Chair. Indeed, the list of areas where India needs to invest is only growing, as antiquated infrastructure creaks under the burden imposed by accelerating growth. Burgeoning trade and travel have clogged India’s ports and rail system. Customs facilities, likewise, need to operate around the clock. Power demand is

Figure 1. Wealthier States Tend to Have Broader Power Grids

The government has ambitious plans to improve the situation. Montek S. Ahluwalia, Deputy Chairman, Planning Commission, India, outlined the government’s aim, as detailed in its 11th Five-Year Plan, to raise infrastructure spending from 4.7% to 8% of GDP. The government has committed to developing 35 new airports by 2009 and has embarked on a project to add 6,000 kilometres of highways connecting Delhi, Chennai, Kolkata and Mumbai. And, recognizing the link between a broad power grid and state wealth, the government announced in October it will sell stakes in its four largest power companies to help finance expansion of the nation’s power supply. (See Figure 1) India Economic Summit

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“We’re amazed by the achievements made by India over the past 10 years.” Hoang Trung Hai Minister of Industry of Vietnam

surging, yet half of the country’s villages still lack electricity and industry cannot rely on the existing power grid. India depends on expensive imported oil and polluting domestic coal, yet natural gas-fired plants operate below capacity for want of fuel. More investment is needed in finding domestic sources of natural gas and building networks to distribute it to consumers. The nation’s water supply is shrinking and India needs billions of dollars in irrigation pumps, dams, rainwater harvesting facilities, water treatment and desalination plants. (See Figure 2) Villages need schools and all but the top universities are in disrepair. India’s cities require a massive overhaul of their transport and waste systems, yet are growing so fast that some participants recommended India should begin scouting out sites to start building cities from scratch.

Figure 2. Access to Renewable Water Dropping

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“Over the next 30 to 40 years we’ll be building a new Delhi every year,” said Ashok Khosla, Chairman, Development Alternatives, India. “There are plenty of places we can go to put our cities that won’t compete with agriculture.” The government estimates it will need US$ 350 billion to meet the goals of the five-year plan, at least US$ 100 billion of which will need to come from private investors. But many investors remain uncertain about whether the rewards of investing in infrastructure projects that could span decades will compensate them for the risks of partnering with governments who face election pressures every few years. This mismatch in performance horizons is made trickier by the fact that governments – both state and national – want to retain control over key public assets. As a result, infrastructure aims will require public-private partnerships that bridge the gap in expectations. India is establishing special economic zones as one solution; another suggestion is the creation of special purpose vehicles that would provide investors with a single public partner able to cut through the red tape for them. Turning over more of the task of financing and executing big infrastructure projects would leave more money for governments to spend on India’s social infrastructure, improving education and healthcare, said Ajay Dua, Secretary, Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, India. (See Figure 3)

Figure 3. Commitment to Social Safety Net Varies by State

India Economic Summit

Investors say more also needs to be done to remove impediments to investment, including reducing regulations, lowering taxes, eliminating subsidies and harmonizing the various forms of all three which they encounter from state to state. “We need to create an Indian common economic market,” said Summit CoChair Nandan M. Nilekani, President, Chief Executive Officer and Managing Director, Infosys Technologies, India.

India also needs to develop more robust financial markets, particularly a market for corporate bonds, to expand its fund-raising capabilities and better spread project risk. Deregulating the insurance industry would help, as would putting more of India’s state-controlled banks under private management. “We’re all so euphoric about our stock market today, but we have a non-existent debt market,” said Gautam Thapar, Chairman, Ballarpur Industries, India. “If we only have half a financial market, we’re not going to get the investment we need.”

India’s Supply Chain Challenge Whether it is hand-woven saris from Madhya Pradesh or cow’s milk from Punjab, getting any product from one point to another in India can be a trial. Consider a typical truck run from Kolkata to Mumbai, a distance of approximately 2,150 km. The trip can take about eight days, including stops at state borders to pay tariffs and fees and complete formalities or to wait for crossings to open, as well as other delays. No wonder 40% of India’s produce spoils before delivery (see column opposite). India urgently needs reliable and efficient supply chains – not just so that fashionable Delhi ladies can pick out a traditional Chanderi sari from their local boutique, or the school child in Chennai can get his daily carton of Nestlé milk. A good supply chain, of course, benefits the consumer. Goods are fresher, more choice is available, and prices should be lower. A modern retailing industry can develop, creating jobs in both urban and rural areas, though perhaps at the expense of some of the millions of small convenience shops that have so far been the main retailing experience most Indians have had. “Retail has the potential to be an absolute revolution just like what we achieved in telecom,” said Mukesh Ambani, Chairman and Managing Director, Reliance Industries Limited, India; Co-Chair of the India Economic Summit. But the real dividend will be at the front end of the supply chain. Better, more efficient infrastructure, transport, storage, handling and distribution will cut down the middlemen and bring buyers, retailers and consumers closer to the farmers or the weavers. In the food sector, this will empower the farmer and transform the rural economy. “There is a huge mindset change,” explained Ambani, whose company in November 2006 launched its first retailing venture, opening 11 stores in Hyderabad under the brand ‘Reliance Fresh’. “Corporations wouldn’t go directly to the farmer. All that is gone and I see a huge amount of enthusiasm. We have the potential to increase the income of the farmer multifold.” Increasing farmers’ incomes will contribute significantly to boosting equitable growth in a country that, for all its recent success in IT services, remains predominantly an agricultural economy.

KOLKATA TO MUMBAI – 2,150 km (The Economist, 3 June 2006) WEDNESDAY 14.00 The lorry is loaded in Kolkata. It cannot depart because of daytime road restrictions on heavy vehicles. THURSDAY 04.00 The lorry reaches National Highway 6 after a traffic jam within the city. THURSDAY 20.00 The lorry reaches the border between West Bengal and Jharkard. The border is closed for the night. FRIDAY 05.00 The lorry joins the border queue and it takes two hours to clear the documents and two more to clear the border. FRIDAY 18.00 After a 200km journey across Orissa, the lorry stops for the night as the road is closed due to the threat of attacks by bandits or Maoist insurgents. SATURDAY 05.00 After a 12 hour drive to reach the Chhattisgarh border, there is a four hour queue to cross the border, which is open at night. SUNDAY 06.00 The lorry arrives in Maharshtra and must go through 12 toll booths and inspection points (on top of the previous 14). TUESDAY 10.00 The lorry arrives in Mumbai and the driver telephones the Octroi agent to get forms processed which takes all night. WEDNESDAY 10.00 The lorry reaches the customer. TOTAL 8 days; an average 11 km/hr; 32 hours waiting at toll booths and check points.

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Risk Management

“Every risk is an opportunity for innovation and change. Risk gives impetus for technological change so I would regard risks not merely as risks but as opportunities to move ahead at a swifter pace.”

“Our intensity of energy usage has to come down.” R. Seshasayee Managing Director Ashok Leyland India President of the Confederation of Indian Industry

Palaniappan Chidambaram, Minister of Finance of India

The risks to India’s progress span the development spectrum, from the immediate perils of poor nations to the long-term challenges of affluent economies. While problems of water, the rural poor and disease have plagued India since before independence, they are being joined by modern-day challenges, including volatile oil prices, the threat of international protectionism and global climate change. The potential impact of these problems rises as the economy grows. So India’s early stage of development gives it the chance to confront them early and devise novel solutions. “Every risk is an opportunity for innovation and change,” said Palaniappan Chidambaram, Minister of Finance of India. One of the greatest risks is the one posed by India’s young and growing population. If India fails to adequately feed, school and employ this swelling group, its “demographic dividend” could become a demographic disadvantage. Later, India will face the same problem now vexing Europe and Japan – how to support an ageing population. As many as two-thirds of India’s population live in a shrinking agricultural sector, uneducated and unskilled, driving more into the cities by the year. Thus, even as companies complain of a skills shortage, growing disparities in income could stoke social unrest. Ultimately, India’s democracy may prove the lever that forces policy-makers to address these needs and avert a social crisis. “If you don’t have democracy, there is a grave danger of social unrest,” said Palaniappan

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Chidambaram, Minister of Finance of India. “But our democracy is a great pressure valve.” India needs to improve its educational systems from the primary level through to the universities. Industry needs to play its part as well, providing vocational training and helping universities design more practical studies. Companies can also play an important role in rural development by helping to set up schools, creating agroventures or helping local government beef up their technological capabilities. Added to India’s burden is the scourge of HIV and tuberculosis. The government estimates that as many as 5.7 million Indians are HIV-positive and almost 2 million have TB, with many cases unreported as the two mutually reinforcing diseases spread beyond high-risk groups. The government has shifted from preaching abstinence to distributing condoms and now offers free HIV treatment and a TB programme that is reckoned as one of the world’s most successful. The government aims to increase spending on healthcare, but this an area where companies can play a direct role: there are no restrictions to private sector investment in healthcare. Ultimately, though, one of the most powerful weapons will be overcoming taboos to increase awareness. The collapse of the Doha Round has underscored the growing risk to India, among others, of a rise in protectionism, which could hurt India’s trade in goods and services. “The great champions of globalization have started shirking it, but we in India trumpet globalization

India Economic Summit

because we are getting globally competitive,” said Kamal Nath, Minister for Commerce and Industry. But India faces its own backlash if the poor continue to be left behind by globalization. India should deepen its relationships with the EU and US, but also with its immediate neighbours to raise its clout in trade negotiations. “To be at the global table you must be able to carry the region,” said Rajat M. Nag, Director-General, Southeast Asia Department and Special Adviser to the President, Asian Development Bank, Manila. (See Figure 1) India is particularly vulnerable to an oil price shock. Though it lies close to rich gas fields and relies on domestic coal for most of its energy, India is a net oil importer and subsidizes fuel prices. India is already short of natural gas. “There are gas projects we’ve had to put on hold due to volatility in prices and uncertainty in availability of gas,” said T. Sankaralingam, Chairman and Managing Director, NTPC, India. Chidambaram estimated that high oil prices cost India roughly 1 percentage point of annual economic growth. India needs to secure its energy supply, invest in a strategic oil reserve and start taking stakes in foreign supplies as China has done. It must continue to develop alternative sources of energy at home, such as solar, wind and biofuel. Equally important, India needs to waste less energy. “Our intensity of energy usage has to come down,” said R. Seshasayee, Managing Director, Ashok Leyland, India, and President of the Confederation of Indian Industry. Figure 1. Trade with US and ASEAN Nations Rising

India Economic Summit

“There are gas projects we’ve had to put on hold due to volatility in prices and uncertainty in availability of gas.” T. Sankaralingam, Chairman and Managing Director, NTPC, India

Perhaps the biggest risk facing India, however, is the impact of global climate change, particularly on its worsening water situation. India already suffers from the effects of deforestation and air pollution thanks to its reliance on coal. Droughts and floods are on the rise and glaciers are retreating. The impact of these problems globally appears to be contributing to more severe weather, potentially affecting the monsoons that are critical to the nation’s agriculture and water supply. Shortages of water pose perhaps the greatest risk of social unrest. Almost a third of India’s people lack access to quality drinking water and the numbers are growing as water supplies shrink. “That is a shocking indictment,” said Ravi Narayanan, Adviser, Arghyam Foundation, India. (See Figure 2) Figure 2. Overall Water Supplies Falling Behind

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In addition to massive investments in water-related infrastructure such as desalination plants and drip irrigation, policies should discourage the growth of waterintensive crops in dry areas. Cities must conserve and recycle water to reduce their burden on rural supplies. Mechanisms also need to be developed to price water to reflect its scarcity.

The Environment Risk to Growth Environmental concerns ranked high on the agenda of India’s decision-makers at the India Economic Summit. Vulnerability to climate change and a decline in freshwater quantity and quality in particular were at the core of concerns discussed. Water issues, warned Indian Finance Minister Palaniappan Chidambaram, are the biggest risk to India’s development. Chief Minister Vasundhara Raje of Rajasthan highlighted the challenges of balancing efficient pricing with equitable access, and Ralph Peterson, Chairman and Chief Executive Officer, CH2M Hill Companies, USA, proposed models for downstream financing of upstream efficiency. India’s place in the global fight to mitigate climate change remains unclear, with significant resistance to emission cuts being balanced by real opportunities to benefit from Clean Development Mechanism projects. Whatever role India plays, the threat posed by a warming climate is real for the region and poses particular risks to Indian agriculture and communities exposed to flooding, a development reflected in increased interest in agricultural risk management tools. (See Figure 1)

Spread of HIV and TB Threaten India’s Economy The spread of HIV/AIDS in India, fuelled by co-infection with tuberculosis, is threatening India’s economy. The Minister of Finance of India, Palaniappan Chidambaram identified the HIV/AIDS and Tuberculosis risks listed in the World Economic Forum’s India@Risk 2006 report as having the most “frightening propensity to get out of hand.” India carries the highest burden of the twin epidemics of HIV and TB which are predicted to be a significant drag on India’s future economic growth as they continue to affect millions of working age adults, reducing workforces, diminishing productivity and cutting household incomes. The World Economic Forum’s India Business Alliance to Stop TB (IBA) is a model private sector response to the disease which kills more than 1,000 people a day in India. Judging by the early successes of the IBA, which is the world’s largest private sector effort to control TB, tackling the illness is an achievable goal. The IBA was set up in 2004 by the World Economic Forum’s Global Health Initiative (GHI) to increase the involvement of the private sector in TB control. 32 Indian companies joined forces under the auspices of GHI in partnership with the Revised National TB Control Programme, the Confederation of Indian Industry, the World Health Organization and the Stop TB Partnership in an Alliance that now reaches more than 4 million people.

Figure 1. Insurance Covering a Larger Portion of Agricultural Land during the Monsoon Season

India Business Alliance to Stop TB: achievements since 2004

Mitigating these environmental risks will be an essential part of ensuring the sustainable growth of India’s economy and building a more equitable and dynamic subcontinent.

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• More than 4 million people reached with TB control programmes • More than 7,000 people now on TB treatment • 32 companies now committed to TB control activities • Leading companies: Reliance, TATA, Aditya Birla involved • Unique public private partnership model with business as healthcare provider

India Economic Summit

The Creative Imperative in India Since its Annual Meeting 2006 in Davos, the World Economic Forum has been pursuing the “creative imperative” through the interactive sessions and workshops in regional meetings across the globe, including this year’s India Economic Summit. The aim is to tap the combined knowledge of Forum partners, members and meeting participants – business, government and civil society leaders from around the world – to identify innovative approaches to addressing international issues and problems, from the lack of water to ageing demographics, from imbalances in the global economy to the threat of terrorism. Many of these captured ideas will fuel the discussions and brainstorming at the Annual Meeting 2007 and help shape its agenda. These are some examples of the creative ideas and out-of-box insights that participants at the India Economic Summit discussed in New Delhi: State and National Competitiveness It is critical for India to shape its competitive niches in the global economy. It must further cultivate the comparative advantage it has already exploited in the business process outsourcing market. This means producing high-quality goods and services at a low cost. India can collaborate with developed countries to “extend” the niche competitiveness of those economies. Indian Minister of Science and Technology and Earth Sciences Kipal Sibal, for example, has proposed to Norway that it set up marine engineering training facilities in India and then outsource business to trained Indian personnel. This would allow Norway to maintain its leading position in the marine engineering sector, while providing new skills to Indian workers. As Minister Sibal put it: “You build your future; we build our human capital.” Such collaborative arrangements would provide India with the know-how it requires such as energy conservation techniques and technology. “India has to focus on how to monetize innovation. The cost of failure is low in India and that is something we should use to our advantage.”

“Science and technology is the key for innovation and economic growth. But also important is social innovation, changing mindset to take risks.” Kiyoshi Kurokawa, Science Adviser to the Prime Minister, and Professor, National Graduate Institute for Policy Studies (GRIPS), Japan

Efforts must be made to address the problem of unemployment among graduates and postgraduates in rural areas who are unable to get a job. Not attuned to urban living, they are similarly unsuited to village life or rural employment. The private sector should make use of these talents in their efforts to develop rural markets. India and its neighbours should do more to promote South Asia as an economically integrated region. “We really underplay our neighbourhood at our own cost,” said Rajiv Kumar, Chief Executive and Director, Indian Council for Research on International Economic Relations (ICRIER), India. “The region from Chittagong (in Bangladesh) to Kabul (in Afghanistan) is and will remain an integrated economic space – trade, migration, population, the labour force. We [India] take responsibility for building that economic space. If others are afraid of our size, we must make them feel secure.” To create an Indian common market, a single point-ofdeparture process should replace the repeated formalities and levies on cross-border commerce and traffic. Ways should be explored to divide the revenues fairly among states with valid claims.

Kiran Mazumdar-Shaw Chairperson and Managing Director, Biocon India, India

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Managing Growth While some accomplished Indian academics, engineers and scientists who have gone abroad have returned, many still do not come home, unwilling to accept local pay scales and conditions. The proposed legislation to allow foreign educational institutions to enter the Indian market could provide a mechanism for attracting Indian R&D talent back. But this initiative will have to be bolstered by new grant programmes, investment from the private sector in education and the creation of publicprivate partnerships to support higher learning and research.

Risk Management “India is being robbed of at least 1% growth because of high oil prices,” said Palaniappan Chidambaram, the Minister of Finance of India. He called for oil-producing countries to meet high oil-consuming nations, proposing that the two groups set a pricing band for petroleum. Chidambaram also called on developed countries to provide funding and technology to developing economies to help them reduce energy consumption and increase energy efficiency. India needs to examine new ways of water conservation such as rain harvesting in urban areas.

To empower women and expand opportunities for them in the workplace, Indian companies should consider adapting flexible work schemes that have been used in countries such as Japan that have also had to address gender inequality. Infrastructure Development To construct the infrastructure India needs will require investment of US$ 350 billion over the next five years. As the government will not be able to provide all the necessary funding, the private sector will have to cover the shortfall. In a session on financial markets, participants discussed the need for alternative sources of capital. Deregulation of the insurance sector and pension reforms could unlock funds that may then be invested in infrastructure development. In addition, the creation of dedicated public vehicles for investing in infrastructure projects would centralize the tendering and approval process, thereby eliminating the confusion investors typically face.

The Key Challenges Ahead: R. Seshasayee, Mohamed A. Alabbar, Kamal Nath, Michael Rake, Nandan M. Nilekani and Graham Mackay

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India Economic Summit

Acknowledgements The India Economic Summit is held in cooperation with the Confederation of Indian Industry (CII). The World Economic Forum wishes to acknowledge the support of the following companies as Partners:

Strategic Partners

Summit Supporters

Accenture AIG AMD Apax Partners Audi Avaya Bain & Company Bombardier BT Cisco Systems Citigroup The Coca-Cola Company Deloitte Deutsche Bank Ernst & Young Intel Corporation KPMG Manpower Marsh & McLennan Companies Merck & Co. Merrill Lynch Metro Nestlé PricewaterhouseCoopers Siemens

CH2M HILL Department of Industrial Policy and Promotion, Ministry of Commerce and Industry of India Emaar Financial Technologies India Brand Equity Foundation SABMiller TNT NV

Service Provider Taj Palace Hotel

The World Economic Forum would also like to thank Kamal Nath, Minister of Commerce and Industry, and Vilasrao Deshmukh, Chief Minister of Maharashtra for their generous hosting of activities during the India Economic Summit.

Regional Partners GeoPost International UPS

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Contributors Peter Torreele is Managing Director of the World Economic Forum. Lee Howell is Director, Head of Asia, at the Forum. The India Economic Summit was under his direct responsibility, with Colette Mather, Senior Adviser, South Asia; Shruti Bhatia, Senior Manager, India; Satyadeep Rajan, Senior Member Relations Manager, Asia; and Samantha Gianora, Event Manager, Summit Coordinator.

Samantha Tonkin, Senior Media Manager at the World Economic Forum worked with Wayne Arnold and Alejandro Reyes to produce this report. The World Economic Forum would like to express its appreciation to the summary writers for their work at the Summit. Session summaries are available at www.weforum.org. Associate Principal, Editing: Nancy Tranchet Design and Layout: Kamal Kimaoui, Associate Principal, Production and Design Photographs: Prabhas Roy Special thanks to PricewaterhouseCoopers for their help in preparing data and statistics underpinning this report.

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India Economic Summit

The World Economic Forum is an independent international organization committed to improving the state of the world by engaging leaders in partnerships to shape global, regional and industry agendas. Incorporated as a foundation in 1971, and based in Geneva, Switzerland, the World Economic Forum is impartial and not-for-profit; it is tied to no political, partisan or national interests. (www.weforum.org)