The Hindu Business Line : BIS highlights India's challenges

THE Bank for International Settlements (BIS) has said that even as the Indian economy grew by over eight per cent last year, the second fastest rate in Asia after China, there are challenges to maintaining high growth rate.

In its annual report released today, the Basle-based BIS contends that maintaining the current higher rate of growth would require either increasing the extant investment rate (24 per cent of GDP) or significantly raising productivity, given that its potential rate of growth is estimated at about six per cent.

The Bank said that further opening up the economy to foreign investment would help in fostering both saving rate and productivity. It said India's investment also needs to be improved and the privatisation of State-owned enterprises accelerated.

In addition, at over nine per cent of GDP, India's fiscal deficit remains very large and this has contributed to a high real interest rate and the crowding-out of more productive private investment.

Commenting on the high growth performance of the economy in 2003-04, it said the optimism reflects a number of factors. Increased foreign competition has led many firms to restructure, raising profitability. Net profits of large companies grew at an annual rate of 30 per cent in the last two quarters of 2003. It said the authorities have taken steps to accelerate privatisation, cut import tariffs and further open up the economy to foreign investors.

The current account balance has been in surplus since 2001 and net FDI and portfolio investment inflows have more than doubled since 2002, although such inflows remain well below those of China.

Besides, increased income and access to bank credit in the past two years have strengthened household purchasing power, driving consumption of durables and housing investment.

A crucial factor boosting India's future prospects has been its growing software and other service related industries.

Benefiting from its cost advantages and a large and highly skilled workforce, as well as cost cutting in industrial countries, India has attracted increasing amounts of global software an offshore outsourcing business. As a result, the IT and software-related sectors have grown rapidly during the past five years, raising their share of GDP to four per cent and contributing significantly to exports. Revenues from the outsourcing business were projected to have increased by over 50 per cent to reach $4 billion in 2003.

Even as the potential for future growth is large since global outsourcing is forecast to rise substantially in the next decade, the BIS report said outsourcing to India has raised concerns that it adversely affects job prospects, particularly in the US, which is the most important market for India's outsourcing business.

However, while job growth in a number of business process outsourcing (BPO) sectors in India has more than doubled during the past two years, it remains small compared to the number of job losses in the US. Citing some estimates that suggest that even if job transfers from the US were to grow at a high rate of over the next few years, their equivalent share in total US employment would probably remain below one per cent by 2010, BIS report said that outsourcing could yield considerable gains in the industrial countries by reducing costs.

BIS is of the view that in the future, as labour shortages emerge in industrial economies, outsourcing could help mitigate the problem.

Highlighting the recovery in world economy and trade, the report notes that in the context of expanding intra-Asian trade, "it is a landmark change in attitude that the emergence of China now seems to be viewed in Japan and India more as an opportunity and less as a threat".