"COMMITTED TO IMPROVING THE STATE OF THE WORLD
India@Risk 2007
India Economic Summit A Global Risk Network and Confederation of Indian Industry Briefing
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REF: 101107
Contents
Page 4 Foreword Page 6 Economic Impact of Demographics Page 8 Loss of Freshwater (Quantity and Quality) Page 10 Economic Shocks and Oil Peaks Page 12 Globalization vs Protectionism Page 14 Climate Change: The Environment and Challenges to India’s Growth Page 16 Infectious Diseases Page 18 Emerging Risks Page 20 Acknowledgements
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Foreword
This report has been prepared by the World Economic Forum’s Global Risk Network and the Confederation of Indian Industry (CII) for the India Economic Summit in New Delhi on 2-4 December 2007. Last year, the latest insights into trends, potential consequences and mitigation relevant to six key risks facing India were identified. This year, the trends and mitigation strategies of these risks are further explored: 1) Economic Impact of Demographics – India is facing a demographic dividend. What must be done to ensure it does not turn into a demographic liability? Can the “inequality trap” be overcome and inclusive growth achieved? 2) Loss of Freshwater (quantity and quality) – How best can India cope with increasing freshwater insecurity? 3) Economic Shocks and Oil Peaks – How vulnerable is India to external economic turbulence? What exogenous crises would risk derailing India’s growth prospects (e.g. an oil price shock)? 4) Geopolitical Risks: Globalization vs Protectionism – What happens if there is a backlash or retrenchment from globalization? With the explosion of expectations, can India keep up with its own aspirations? 5) Climate Change: The Environment and Challenges to India’s Growth – Can India balance the complex trade-offs between the environment and growth? What are the risks and opportunities for India? 6) Societal Risks: Infectious Diseases – What must be done to combat the spread of high-mortality disease and pandemics? What if India fails?
It is clear that India is at an inflection point – the prospect of sustaining 8-10% growth is achievable, but a number of basic challenges are acting as a handbrake on development and need to be addressed. It is well known that the existing infrastructure in India is stretched to its upper limits, and that increased investment is required. But there is also an urgent need for the government, private sector and civil society to collaborate on governance reforms to eliminate corruption and ensure equity in the provision of basic of services such as education, water and sanitation. Finally, much can be gained by removing constraints inherent in inefficient government bureaucracies, complex tax regulations and labour market rigidities. Reform is difficult in any country, but it will be of utmost importance for India. Decision-makers cannot assume that tomorrow’s growth story will read like today’s. The economic fundamentals are in place, but political dynamics and the scope of structural reforms are more likely to shape the next chapter. About the Global Risk Network This report builds on the existing work of the Global Risk Network of the World Economic Forum, primarily the annual Global Risks report produced in collaboration with Citi, Marsh & McLennan Companies (MMC), Swiss Re and the Wharton School Risk Center. The Global Risk Network is composed of an unparalleled network of industry, risk and country experts who work with business leaders and policymakers to: • Create a framework for assessing and prioritizing existing and emerging risks to global business over the short and long term • Alert key decision-makers to the impact these risks might have on their environments • Assist leaders in their reflection on how risks may be mitigated at the global, regional, industry and company levels • Transform these global risks into business opportunities To generate a global risk, an issue must have global scope, cross-industry impact, and there must be uncertainty as to how the risk will manifest itself (in regard to the likelihood of occurrence and severity of impact).
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The six risks are intimately interlinked and generate many other threats to the Indian economy. Along with national security, the three pillars of security – human, economic and physical – need to be raised to bring the economy to a position where the challenges can be met. The risks were identified because of their interconnectedness, which magnifies their impact.
Shamsher S. Mehta, Director-General, Confederation of Indian Industry (CII), India
In preparing this report, more than 40 experts from business, academia, non-government organizations and policy-making were asked to consider the drivers of the recent period of unprecedented growth in India and the opportunities that exist, as well as the threats to India’s continuing progress.
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Over the last three years, the Global Risk Network has engaged a wide range of experts in the economic, geopolitical, environmental and societal fields to explore the nature of the risk landscape facing governments, societies and businesses. In conjunction with its partners, the Global Risk Network has identified 23 core global risks to the international community over the next 10 years. These core global risks have been assessed in terms of likelihood and severity (see figure below). In addressing likelihood, actuarial principles were applied in the few cases where sufficient data existed; in most cases only qualitative assessments, based on expert opinion, were possible. Although some risks are inherently long term (such as climate change), and others (such as an oil price shock) could occur in the near term, all risks were evaluated within a 10-year time frame. A more detailed description of the core global risks can be found in the Global Risks 2007 report, published for the World Economic Forum Annual Meeting in Davos (and available at http://www.weforum.org/en/initiatives/globalrisk).
The 23 Core Global Risks: 10-year Horizon
Increasing consensus around risk
The Correlation Matrix
Key:
Stronger correlation
Oil price shock Proliferation of WMD Spread of liability regimes
Current account deficit/ Fall in US$ International terrorism Pandemics
Loss of freshwater services Breakdown of CII
Climate change
Retrenchment from globalization Coming fiscal crises Failed and failing states China economic hard landing Middle East instability NatCat: Tropical storms Emergence of nanotech risks Asset prices/ excessive indebtedness Transnational crime and corruption Interstate and civil wars Developing world disease (HIV/AIDS, TB, malaria) NatCat: Inland flooding NatCat: Earthquakes Chronic disease in developed countries
Source: World Economic Forum Global Risks 2007
One approach to thinking about interconnectedness is to assess correlation – the matrix below portrays the strength of the macro correlations perceived by experts to exist between the global risk issues assessed above. Within the framework of these 23 interconnected global risks tracked by the Global Risk Network, six risks were identified by CII and the Forum as critical to the future of India (in terms of their likelihood and/or the severity of their impact). Risks to India were identified, assessed and ranked with each of the following risk families represented: societal, geopolitical, economic and environmental. Risk correlation was accommodated in the assessment, with the selected risks framed to highlight the potential for Indian contagion. This is not to suggest that other issues facing India are any less serious or potent; this report does not propose to rank or prioritize the risks. Rather, the study is intended to analyse some of the critical issues facing India and distil expert insight in a concise and meaningful way. As for global risks, it is clear that the six threats to India’s future profiled herein are not separate, isolated issues on the risk landscape; their drivers, triggers and consequences are highly interconnected. For a country characterized by increasing interdependence, the imperative is for collective action to mitigate these shared risks. Ring-fencing is no longer an option.
250 billion - 1 trillion more than 1 trillion
Retrenchment from globalization
Asset price collapse
Pandemics
Interstate and civil wars
Oil price shock China economic hard landing
Severity (in US$)
Middle East instability Coming fiscal crises NatCat: NatCat: NatCat: Tropical storms Earthquakes Inland flooding
50-250 billion
Transnational crime and corruption Breakdown of CII Fall in $ Chronic disease in Climate change developed countries Liability regimes Developing world disease Loss of freshwater services Failed and failing states Proliferation of WMD International terrorism
10-50 billion
Nanotechnology
2-10 billion
below 1%
1-5%
5-10%
10-20%
above 20%
Likelihood
Note: Likelihood was based on actuarial principles where possible. For most risks, however, qualitative assessment was used. Source: World Economic Forum Global Risks 2007
It is a central tenet of work conducted by the Global Risk Network that global risks do not manifest themselves in isolation. This was apparent when the domino effects of Hurricane Katrina briefly shook the global system. More recently, the connections between two of the major issues for public policy and private enterprise – energy security and climate change – have reinforced the sense that global risks share a common lineage.
5 | India@Risk
India Economic Summit:
A Global Risk Network and Confederation of Indian Industry Briefing
COMMITTED TO IMPROVING THE STATE OF THE WORLD
Executive Summary: Economic Impact of Demographics – Challenges to Indian Growth
India is facing a demographic dividend. Might it turn into a demographic liability?
Risk
India’s population is a paradox: while India enjoys one of the largest and most balanced demographics in terms of age (54% of the population is below 25 years of age), it is one of the most persistently imbalanced in terms of income inequality and gender (e.g. male/female birth ratio of 1.12). This could lead to far-reaching imbalances in society. In the short term, India faces the immense task of feeding, educating, training and employing its youthful population. The pace of upward mobility, urbanization and industrialization poses significant adjustment costs and risks to policy-makers. In the long term, India faces the challenge of managing an ageing population with inadequate pensions and rectifying the skewed demographic picture, with an alarming number of men with little prospect of having a wife and children – which may become a potential social and public health time bomb if effective policy action is not taken.
Important Trends
Growing India: India is the world’s second most populous country and is expected to be the most populous by 2040. The country is undergoing the same forces of demographic transition that have been experienced elsewhere, only delayed by a few decades. By 2040, India’s population structure will mirror that presently found in major industrial countries. Young India: Over 700 million Indians are below 35 years of age, and over 550 million are below 25. However, despite its youthful population, India’s size means that it is home to the second largest number of older people in the world, in absolute terms (after China). This is often overlooked, but is critical in terms of health and pension policies. Unequal India: The rising income gap is creating an urban-rural divide and a north-south imbalance. A quarter of India’s population lives below the poverty line with most living off the land on small farms with little access to new technology . Urbanizing India: Almost 70% of Indians still reside in rural areas, although in recent decades migration to larger cities has led to a dramatic increase in the country’s urban population. By 2025, the percentage of urban population will be 40%. Megacity India: India is home to around 18% of the world’s population, but accounts for only 2.42% of the total world area; the emergence of megacities is inevitable. By 2025, there will be more than 13 urban agglomerations of more than 10 million people. Aspirational India: The emerging middle class will surge tenfold, exceeding 500 million by 2025. It will command 60% of the country’s spending power. This will be an historic shift. Imbalanced India: The skewed demographic picture is as persistent as it is alarming (as of 2001, there were 927 girls to 1,000 boys, against a world average of 1,045 women to 1,000 men). Dubbed the “missing women phenomenon” and due to the cultural “preference” for male children, this imbalance continues despite sex selective abortions being banned in India for more than a decade. Literate India: Although literacy rates have risen considerably, more progress is needed. A marked discrepancy still exists across gender and social backgrounds. Children receive on average of only 10 years of education, three years less than in many emerging countries. Working India: Although regular employment has risen, it still only represents 15% of total employment. Employment in firms with more than 10 employees accounts for only around 4% of total employment. The working age population is likely to be 800 million by 2016, and this is likely to pose enormous challenges in terms of providing adequate education and employment opportunities. Employment for 71 million additional persons has to be created in the next five years. Because 60% of the population depends on agriculture, these agricultural workers will need to gain new skills to work in the changing economy.
Impacts
India’s population has been labelled the “demographic dividend”, and the working age population is unlikely to peak before 2016; which is a massive opportunity that India cannot afford to miss. But to avoid a “demographic liability”, India must grow by 8-10% per year to provide jobs for the expanding working-age population. Urbanization is one of the key drivers of the next phase of growth. Urban workers are more productive for a variety of reasons – higher value-added occupations, resource efficiencies and network effects in production and consumption. But rapid urbanization can lead to mega-slums and challenges to quality of life and social harmony, and environmental impacts. In the short to medium term, social unrest could become a major issue if the growing inequalities in access to basic needs are not addressed. Socio-economic imbalances can feed a vicious circle of despair if disadvantage is transmitted across generations. In the long term, ageing increases fiscal pressures through higher government spending on healthcare, social security, etc. Only about 11% of the working-age population participates in mandatory, formal programmes designed to provide income security after retirement.
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Mitigation
Government and business should not ignore the opportunity that exists in educating, integrating and mobilizing India’s poor as a source of labour and new markets. The democratization of quality education is required, with well-trained teachers and better use of technology along with reforms to ensure incentives are in place for teachers and students. Providing vocational training and productive jobs for the huge labour force will not be easy, and most doubt that the services sector and IT jobs will be the answer. India’s growth strategy must include a much larger and more competitive manufacturing sector. Reform existing labour laws to increase employment in larger companies. Remove the stringent requirement to obtain government permission to lay off workers from manufacturing plants with more than 100 workers. Consolidation of labour laws should be considered. Salaries of all educational professionals need to be drastically improved for India to maintain its competitiveness. Greater accountability should rest with local officials to ensure teacher attendance in rural areas. The top of the education pyramid, the Indian Institute of Management and Indian Institute of Technology, have served India well – it is the bottom of the pyramid that now needs broadening – expanding the provision of primary formal and nonformal education to realize the goal of Universalization of Elementary Education (UEE). Since investment in tertiary education is very low (0.8% of GDP), the private sector has started to partner with tertiary educational institutions to provide increased funding to targeted programmes intended for specialized fields. Due to the poor basic infrastructure, private sector employers have begun to create mini-towns or suburbs with all the basic services to attract highly motivated employees. The self-sustaining benefits of education are clear: Prime Minister Manmohan Singh pointed out that if India can find productive jobs for its young labour force, it will result in a significant increase in India’s savings rate in the next 5-10 years, thus generating the resources for investment in new infrastructure that is needed to successfully modernize and grow. Public pension reforms and health insurance will play a key role in alleviating the long-term fiscal burden provoked by ageing; the cost would be low (relative to GDP). In addition, notions of old age and retirement may have to change (e.g. retirement age is fixed at 58-60 in most government jobs). There is an urgent need for a range of high impact social reform policies to overcome a long-standing cultural preference for male children and to reverse a potentially disastrous future imbalance in the male/female ratio of India’s population.
Examples
India’s Sarva Shiksha Abhiyan programme of universal primary school coverage employs innovative methods to impart education and increase enrolment. The Old Age Social and Income Security project (1999) recommended a simple and convenient pension system, while the National Policy for Older Persons encourages individuals to make provisions for their own retirement. The Skills Development Initiative of CII develops and spreads much needed, internationally benchmarked occupational skills among India’s current and potential workforce. The state of Kerala, notable for its progressive social programmes, has had success in mitigating gender imbalance. Its demographics are more typical of a middle-income country, with a female-male ratio of 1.05.
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It is imperative to deal with population growth and to depoliticize the issue. If the demography of the country is handled well, demographic liability can turn into a great opportunity. The threat the country faces today is not from the revolution of rising expectations but from the revolution of unfulfilled expectations.
R. M. Abhyankar, Former Ambassador of India to European Union and Belgium
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7 | India@Risk
India Economic Summit:
A Global Risk Network and Confederation of Indian Industry Briefing
Executive Summary: Loss of Freshwater (Quantity and Quality)
How best can India cope with increasin..."
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