68 Section 2 Excess production capacity, excess debts, resource price declines and the world economy 1.Excess production capacity and signs of protectionism (1) Slowdown of the Chinese economy and excess production capacity (A) Basic structure of the Chinese economy (shift to a new normal) As mentioned in the previous section, China has maintained high economic growth but the various conditions supporting the growth have been changing. To be more specific, the working-age population has peaked and labor costs have risen due to a labor shortage in urban areas. These factors, coupled with a rise in the exchange rate of the Chinese yuan, have caused a change in the manufacturing industry’s export competitiveness. Since the global economic crisis in 2008, China has temporarily managed to maintain growth while implementing a variety of economic measures, including a 4-trillion-yuan economic package, but the growth of the Chinese economy has continued to decelerate moderately on the whole. Below, an overview of the basic structure of the recent Chinese economy will be provided (Figure I-1-2-1-1). In the 2000s, China achieved high economic growth, driven by brisk investment activities, including investment in infrastructure and production facilities, and expansion of exports realized by attracting foreign companies (Figure I-1-2-1-2). As a result, the shares of gross capital formation and net exports (exports in particular) in gross domestic product increased and the share of private consumption declined, so China’s economic growth increasingly became one led by external demand and investment (Figure I -1-2-1-3). After the outbreak of the global economic crisis in 2008, external demand, mainly in the United States, shrank rapidly, so net exports fell deep into the minus column, exerting strong downward pressure on the Chinese economy. In response, the Chinese government curbed the slowdown of the economic growth rate by substantially expanding gross capital formation through the implementation of the 4-trillion-yuan economic package. However, in this process, state- owned enterprises and local governments rapidly increased their debts and production capacity considerably expanded. The additional money supply thus created flowed into the real estate and stock markets in pursuit of domestic investment destinations, which were limited due to the effects of interest rate restrictions and regulation of capital movement.
141
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68
Section 2 Excess production capacity, excess debts, resource price declines and the world
economy
1.Excess production capacity and signs of protectionism
(1) Slowdown of the Chinese economy and excess production capacity
(A) Basic structure of the Chinese economy (shift to a new normal)
As mentioned in the previous section, China has maintained high economic growth but the various
conditions supporting the growth have been changing. To be more specific, the working-age population
has peaked and labor costs have risen due to a labor shortage in urban areas. These factors, coupled with
a rise in the exchange rate of the Chinese yuan, have caused a change in the manufacturing industry’s
export competitiveness. Since the global economic crisis in 2008, China has temporarily managed to
maintain growth while implementing a variety of economic measures, including a 4-trillion-yuan
economic package, but the growth of the Chinese economy has continued to decelerate moderately on
the whole.
Below, an overview of the basic structure of the recent Chinese economy will be provided (Figure
I-1-2-1-1). In the 2000s, China achieved high economic growth, driven by brisk investment activities,
including investment in infrastructure and production facilities, and expansion of exports realized by
attracting foreign companies (Figure I-1-2-1-2). As a result, the shares of gross capital formation and
net exports (exports in particular) in gross domestic product increased and the share of private
consumption declined, so China’s economic growth increasingly became one led by external demand
and investment (Figure I -1-2-1-3). After the outbreak of the global economic crisis in 2008, external
demand, mainly in the United States, shrank rapidly, so net exports fell deep into the minus column,
exerting strong downward pressure on the Chinese economy. In response, the Chinese government
curbed the slowdown of the economic growth rate by substantially expanding gross capital formation
through the implementation of the 4-trillion-yuan economic package. However, in this process, state-
owned enterprises and local governments rapidly increased their debts and production capacity
considerably expanded. The additional money supply thus created flowed into the real estate and stock
markets in pursuit of domestic investment destinations, which were limited due to the effects of interest
rate restrictions and regulation of capital movement.
69
Figure I-1-2-1-1 Basic structure of Chinese economy
Figure I-1-2-1-2 Changes in China’s real GDP growth rate and contributions by demand
components
Source: National Bureau of Statistics of the People’s Republic of China and CEIC database.
Table I-1-2-1-6 Average capacity utilization rate in China
(%)
2012 2013 2014 2015
Average capacity utilization rate 72.7 72.0 72.2 67.8
Note: 1. Inquiry survey conducted on Chinese entrepreneurs.
2. As for 2015, the survey was conducted in August–October 2015. 2526 eligible replies.
Source: The Daily NNA China Edition. Original source: China Entrepreneurs Survey.
As the Chinese government has been instructing companies to dispose of old facilities with poor
production efficiency and has been curbing new investments, mainly in sectors with excess capacity, the
growth rate of fixed asset investments has continued to decline (Figure I-1-2-1-7). However, the disposal
of facilities did not necessarily proceed quickly because of its significant impact on local economies and
employment. As a result, the state of excess production capacity continued, and producer prices
(shipment prices) have recorded year-on-year drops for almost four years, although there have recently
been signs of a moderate price recovery (Figure I-1-2-1-8). The trend of price decline has been observed
mainly in the steel and coal industries but is also spreading to a broad range of products, including
chemical materials, ceramics, stone, and clay products, and automobiles (Figure I-1-2-1-9).
Figure I-1-2-1-7 The growth rate of fixed asset investments (accumulated amount from the
beginning of the year, ratio to the same period of the previous year)
Note: Fixed asset investments are published as the accumulated amount from January.
Source: National Bureau of Statistics of the People’s Republic of China and CEIC database.
-20
-10
0
10
20
30
40
50
60
0
5
10
15
20
25
30
35
40
2008 2009 2010 2011 2012 2013 2014 2015 2016
Overall Steel (right axis)
(%) (%)
(year/month)
79
Figure I-1-2-1-8 Growth rate of producer prices (ratio to the same month of the previous year)
Source: National Bureau of Statistics of the People’s Republic of China and CEIC database.
Figure I-1-2-1-9 Producer prices of major items in China (January to April 2016, compared
with that of the same period in the previous year)
Source: National Bureau of Statistics of the People’s Republic of China and CEIC database.
-30
-20
-10
0
10
20
30
40
2008 2009 2010 2011 2012 2013 2014 2015 2016
Overall Chemical materials Steel Automobiles(year/month)
Negative values continue in ratio to the previous year
-20
-15
-10
-5
0
Coal
Ste
el
Nonm
etal
min
eral
pro
duct
s
Over
all
Cer
amic
s
Com
pute
r, c
om
munic
atio
neq
uip
men
t
Gen
eral
mac
hin
ery
Auto
mobil
e
(%)
80
Under these circumstances, consumption is not strong enough to make up for curbed investments as
will be explained later, with the result that the economy is slowing down, mainly in the northeastern
region, where there are many sectors with excess production capacity (Figure I-1-2-1-10).
Figure I-1-2-1-10 Real GDP growth rate in respective regions
Note: The map is an approximate map.
Source: National Bureau of Statistics of the People’s Republic of China and CEIC database.
It has also been pointed out that the decline in producer prices in China is affecting export prices.
For example, regarding Chinese exports of steel products, the export volume has expanded rapidly since
2014, while the unit export price has continued to decline (Figure I-1-2-1-11).28
28 Here, as a reference, the average price of iron and steel as specified by HS code chapter 72 is indicated.
In reality, iron and steel includes a wide variety of items, so the movements of the average price do not
necessarily match the movements of prices of individual items. Articles of iron and steel as specified by HS
code chapter 73 also include a wide variety of items, such as rails, pipes, bridge sections, window frames,
tanks, cables, bolts and nuts, so the calculation of the average price here includes only items in HS code
chapter 72.
China overall 6.9%
Shanxi province 3.1%
Liaoning province 3.0 %
Beijing 6.9%
Tianjin 9.3%
Shanghai 6.9%
Guangdong province 8.0% Chongqing 11.0%
Sichuan province 7.9%
- 6%
6% - 7%
7% - 8%
8% - 9%
9% -
81
Figure I-1-2-1-11 Changes in China’s exports of steel (HS72)
Note: HS72 category is indicated as steel.
Source: Global Trade Atlas.
0
200
400
600
800
1,000
1,200
0
2
4
6
8
10
12
2011 2012 2013 2014 2015 2016
Export volume Average unit price (right axis)
(mil.t) ($/t)
(year/month)
82
Column 2 Sectors with robust fixed asset investments
Although fixed asset investments are slowing down, mainly in sectors with excess investments, the
growth rates of such investments in some sectors are accelerating or remaining steady. For example, in
the secondary industry, the growth in fixed asset investments in the mining sector has slowed down
considerably, and the growth in investments in the manufacturing and construction sectors have also
been on a downtrend. On the other hand, the growth in fixed asset investments in the electricity, gas and
water sectors has remained steady (Column Figure 2-1). In the manufacturing industry, the growth in
fixed asset investments in raw materials and resource-related fields such as steel, non-ferrous metals, oil
and coal has slowed down. However, the growth in investments in fields related to daily life, such as
cultural and recreational products, clothing and furniture, and electronics as well, is above the average
in the manufacturing industry. In the tertiary industry, the growth in fixed asset investments has declined
steeply in such sectors as financial services, real estate, and dining and boarding, whereas the growth
has remained steady for information and communication, health and social services, and flood control
and environmental preservation.
Column figure 2-1 Changes in the growth rate of fixed asset investments by industry
0
10
20
30
40
50
60
2008 2009 2010 2011 2012 2013 2014 2015
(Primary/Secondary/Tertiary)
Overall Primary industry Secondary industry Tertiary industry
(%)
83
-20
-10
0
10
20
30
40
50
60
702
00
8
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
08
20
09
20
10
20
11
20
12
20
13
20
14
2015
(Major sectors in secondary industry)
Secondary industry Mining Manufacturing
Electricity, gas and water Construction
(%)
(Sectors remaining steady) (Sectors on a downtrend)
-10
0
10
20
30
40
50
60
70
2008
2009
2010
2011
2012
2013
2014
2015
2008
2009
2010
2011
2012
2013
2014
2015
(Major sectors in tertiary industry)
Tertiary industry Information and communication
Health and social services Flood control and environmental preservation
Financial services Real estate
Dining and boarding
(%)
(Sectors accelerating
or remaining steady)(Sectors on a downtrend)
84
Note: Health and social services, cultural and recreational products and clothing were newly established
in 2012.
Source: National Bureau of Statistics of the People’s Republic of China and CEIC database.
To sum up the above observations, fixed asset investment remains steady for public infrastructure
(electricity, gas, water, and flood control and environmental preservation) and products related to daily
life (cultural and recreational products, clothing, and furniture) and is growing in the fields of health and
social services. Such investment also remains steady in IT-related fields (electronics in the
manufacturing sector and information and communication in the services sector).
Until recently, the nominal GDP growth rate has stayed higher than the real GDP growth rate in
China. However, from the end of 2011 through 2012, the gap between the two rates narrowed rapidly,
and in the first quarter of 2015, the real GDP growth rate surpassed the nominal GDP rate (Figure I-1-
2-1-12). By industry, the narrowing of the gap between the nominal and real GDP growth rates is a
phenomenon common to all industries, but in the secondary industry, the real growth rate surpassed the
nominal growth rate as early as in 2012, and this trend has been becoming increasingly prominent
(Figure I-1-2-1-13). The reversal of the two rates means that in the secondary industry, increased
deflationary pressure led to a negative price growth. Among the factors behind this is the fact that
producer prices have been declining on a year-on-year basis since the end of 2011, mainly in the steel
sector, due to excess production capacity in the manufacturing industry as was described earlier (Figure
-30
-20
-10
0
10
20
30
40
50
60
2008
2009
2010
2011
2012
2013
2014
2015
2008
2009
2010
2011
2012
2013
2014
2015
(Major sectors in manufacturing)
Cultural and recreational products Clothing
Wood products Furniture
Electronics Manufacturing
Non-ferrous metals Steel
Oil and coal
(%)
(Sectors remaining steady) (Sectors on a downtrend)
85
I-1-2-1-8, which was shown earlier). In 2015, the growth rate of the secondary industry declined to 0.9%
in nominal terms. In particular, the growth rate of the industrial sector,29 which includes mining and
manufacturing, fell to as low as 0.4% (TableⅠ-1-2-1-14). In place of the secondary industry, the tertiary
industry has become the drivers of economic growth, maintaining relatively high growth rates of 11.7%
in nominal terms and 8.8% in real terms in 2015.30
Figure I-1-2-1-12 Changes in China’s real GDP growth rate and nominal growth rate
Note: GDP deflator is counted backward as shown in the following formula as the Chinese government
has not reported it:
GDP deflator (price volatility) = nominal GDP volatility / real GDP volatility
Source: National Bureau of Statistics of the People’s Republic of China and CEIC database.
29 The industrial sector includes mining, manufacturing, electricity, gas and water. 30 However, the sector that has recorded particularly high growth in the tertiary industry is financial
services (nominal growth rate at 23.2% and real growth rate at 15.9% in 2015). It has been pointed out that
the high growth may have been caused by the effects of the increase in fee revenues due to the stock market
rise that continued until the middle of 2015.
-5
0
5
10
15
20
25
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1
2011 2012 2013 2014 2015 2016
Deflator Nominal growth rate Real growth rate
(%)
Nominal growth rates exceeded real
growth rates. (GDP deflator was negative)
(year/Q)
86
Figure I-1-2-1-13 Changes in China’s GDP growth rate by industry
Note: GDP deflator is counted backward as shown in the following formula as the Chinese government
has not reported it:
GDP deflator (price volatility) = nominal GDP volatility / real GDP volatility
Source: National Bureau of Statistics of the People’s Republic of China and CEIC database.
“many companies cited Vietnam as a candidate site for relocation for ROK companies operating in
China. Among the reasons for the increase in investments in Vietnam is the country’s attractiveness as
a production base due to its low labor cost compared with China and its attractiveness as a market with
a certain population size.”35,36
personnel with advanced skills, among other activities. Currently, KORTA has 122 overseas offices in 84
countries. 35 The population in 2014: approximately 92.5 million people (estimate by the United Nations Population
Fund) 36 Mukoyama, H., “KANKOKU NI TOTTE SONZAIKAN WO MASU BETONAMU” (February 2016).
113
Column 3 Progress in the ROK-U.S. Free Trade Agreement (FTA)
The United States is the second-largest trading partner for the ROK after China in terms of the trade
value (Column Figure 3-1). Although the value of trade between the ROK and the United States
continued to grow until 2014 after the ROK-U.S. FTA entered into force in 2012, it remained flat in
2015 (Column Figure 3-2).
Column Figure 3-1 Changes in ROK’s trade value (by major country)
Note: Countries with a larger trade value are indicated from the top.
Source: Korea Custom Service and Global Trade Atlas.
0
50
100
150
200
250
China USA Japan Vietnam Hong Kong Saudi Arabia
(bl. $)
2009 2010 2011 2012 2013 2014 2015
114
Column Figure 3-2 Changes in ROK and USA’s trade value
Source: Korea Custom Service and Global Trade Atlas.
According to The Assessment of 4-Year Korea-U.S. FTA and Implications, a report published in
March 2016 by the Korea International Trade Association’s Institute for International Trade, products
exported from the ROK had a share of 3.2%, the largest in 15 years, of the U.S. import market in 2015
despite a serious slump in exports last year. The report also offered the analysis that the tariffs on “FTA-
benefiting products” for which tariffs have been lowered or eliminated, such as electric and electronics
products, machinery, rubber and agricultural products, led the rise in the share in the United States.
Regarding passenger cars, which account for around a quarter37 of the value of exports to the United
States, expansion of exports is expected because after 2016, the fifth year38 from the entry-into-force of
the FTA, the 2.5% tariff will be eliminated39 (Colum Figures 3-3 and 3-4).
37 The share rose from 17.6% in 2012 to 25.1% in 2015 (HS8703, passenger cars). 38 Regarding the counting of the number of years of tariff concessions, the second year of tariff
concessions starts on January 1 of the year that follows the year of the entry-into-force, and January 1 is
treated as the starting point of counting for later years as well. 39 Regarding passenger cars, it was prescribed that the United States should maintain the import tariff rate
(2.5%) for four years after the entry-into-force and eliminate the tariff in the fifth year and that the ROK
should reduce the import tariff rate (8%) to 4% on the date of the entry-into-force and eliminate the tariff
in the fifth year after keeping the rate at 4% for four years (prescribed in Paragraph A of the official notes
exchanged on February 10, 2011).
0
20
40
60
80
100
120
140
2009 2010 2011(1 year beforeeffectuation)
2012(1st year of
effectuation)
2013(2nd year ofeffectuation)
2014(3rd year ofeffectuation)
2015(4th year ofeffectuation)
(bl. $)
Export value Import value Trade value
(year)
115
Column Figure 3-3 Changes in ROK’s export value to USA (by major item)
Note: HS2-digit classification.
Source: Korea Custom Service and Global Trade Atlas.
Column Figure 3-4 Changes in ROK’s import value from USA (by major item)
Note: HS 2-digit classification.
Source: Korea Custom Service and Global Trade Atlas.
The ROK has been actively promoting FTAs with major countries around the world since the
beginning of the 2000s. On December 20, 2015, FTAs signed with China, Vietnam and New Zealand
0
5
10
15
20
25
30
Auto
mobil
es a
nd p
arts
Ele
ctri
c eq
uip
men
t
Gen
eral
mac
hin
ery
Min
eral
fuel
Ste
el p
roduct
s
Ste
el
Pla
stic
Rubber
Opti
cal
appar
atus
Org
anic
chem
istr
y
Air
craf
t
Ves
sels
87 85 84 27 73 72 39 40 90 29 88 89
(bl. $)
2009
2010
2011
2012
2013
2014
2015
0
5
10
15
20
25
Gen
eral
mac
hin
ery
Ele
ctri
c eq
uip
men
t
Opti
cal
app
arat
us
Min
eral
fu
el
Gra
ins
Pla
stic
Org
anic
ch
emis
try
Chem
ical
pro
duct
s
Au
tom
obil
es a
nd
par
ts
Mea
t
Air
craf
t
Phar
mac
euti
cal
pro
du
cts
84 85 90 27 10 39 29 38 87 02 88 30
(bl. $)
2009
2010
2011
2012
2013
2014
2015
116
entered into force, with tariffs reduced or eliminated immediately thereafter, and on January 1, 2016, the
second-year tariff reductions were implemented.
According to an estimate of the economic effects following the entry-into-force of the above three
FTAs that was announced by the ROK government,40 the effects will raise the ROK’s real GDP growth
rate by 1.0% and will create around 55,000 jobs over the 10 years following the entry-into-force.
(B) Indonesia
(a) Growth after the global economic crisis and the recent slowdown
Indonesia achieved a recovery from the global economic crisis earlier than any other ASEAN
country and maintained a growth rate of between 6% and 7% for three consecutive years from 2010.
This robust economic performance, coupled with the stability of the government of President Susilo
Bambang Yudhoyono, drew the world's attention to Indonesia’s growth potential.41 In 2008, after the
outbreak of the global economic crisis, Indonesia joined the G20 Summit, which was the first such
summit meeting attended by emerging countries, becoming the only ASEAN country to do so, a fact
that indicates the high expectations for its growth potential. However, since 2010, Indonesia’s growth
rate has been slowing down year after year, and in 2015, the growth rate came to 4.8% (Figure I -1-2-1-
44).
40 The press release reference materials published by the ROK Ministry of Trade, Industry and Energy
(December 20, 2015), Trade Publicity (January 6, 2016) (JETRO) 41 In 2009, a securities market participant emphasized the promising potential of China, India and
Indonesia, which were rising as emerging economies, by coining the word “Chindonesia.” In addition, a
report titled “Indonesia, adding another I to the BRIC story?” was issued.
117
Figure I-1-2-1-44 Changes in real GDP growth rates in ASEAN countries
Source: IMF WEO, April 2016.
Looking at changes in the contributions of demand components to the growth rate in the five years
between 2011 and 2015, when the real GDP growth rate continued to decline, the following trends attract
attention: (i) although the contribution of private consumption was always large, it declined year after
year; (ii) the contribution of gross fixed capital formation, which was at a similar level to the contribution
of private consumption in 2011 and 2012, fell steeply in 2013 and thereafter;42 (iii) the contributions of
both imports and exports declined year after year, and in 2015, the contributions of both items were
negative (as imports declined more than exports did, the contribution of net exports was positive) (Figure
I-1-2-1-45 and Table I-1-2-1-46).
42 From 2010 to 2012, there was a boom in foreign direct investments in Indonesia. As for the decline in
the second half of 2015, the failure to smoothly implement the budget under a new government is
presumably a contributing factor.
-15
-10
-5
0
5
10
15
201
995
19
96
19
97
19
98
19
99
20
00
2001
20
02
20
03
20
04
20
05
2006
20
07
20
08
20
09
20
10
2011
20
12
20
13
20
14
20
15
Indonesia Singapore Thailand Philippines Brunei
Vietnam Malaysia Myanmar Cambodia Laos
(%)
(year)
Asian currency crisis Global economic crisis
118
Figure I-1-2-1-45 Changes in Indonesia’s real GDP growth rate and contributions by demand
components
(Ratio to the previous year, ratio to the same quarter of the previous year, %, percentage point)
Source: Statistics Indonesia, CEIC Database.
Table I-1-2-1-46 Changes in Indonesia’s real GDP and contributions by demand components
(numerical scheme of Figure I-1-2-1-45)
Source: Statistics Indonesia, CEIC Database.
Regarding the average of the shares of individual GDP demand components in the five years between
Real GDP
growth
rate
Private
consumption
Government
consumption
Gross
capital
formation
Inventory
changeExports Imports Net exports Error
2011 6.2 2.8 0.5 2.7 -0.2 3.6 3.4 0.2 0.0
2012 6.0 3.1 0.4 2.9 0.8 0.4 1.9 -1.5 0.4
2013 5.6 3.0 0.6 1.6 -0.6 1.0 0.5 0.6 0.3
2014 5.0 2.9 0.1 1.5 0.4 0.2 0.5 -0.3 0.4
2015 4.8 2.7 0.5 1.6 -0.5 -0.5 -1.4 0.9 -0.4
119
2011 and 2015, the share was 56% for private consumption, 32% for gross fixed capital formation, 9%
for government consumption and 0% for net exports (24% for both exports and imports), indicating that
the growth was led mainly by domestic demand and investment.
A look at changes in the contribution to the growth rate by industry shows the following trends: (i)
the contribution of the mining sector decreased year after year and became negative in 2015; (ii) the
contributions of the manufacturing and wholesale/retail/boarding/dining sectors declined; (iii) the
contribution of agriculture/forestry/fisheries, construction, and various services sectors, including
information and communication remained stable (Figure I-1-2-1-47 and Table I-1-2-1-48).
Figure I-1-2-1-47 Changes in Indonesia's real GDP and contributions by industry
(Ratio to the previous year, ratio to the same quarter of the previous year, %, % point)
Source: Statistics Indonesia, CEIC Database.
Figure I-1-2-1-48 Changes in Indonesia’s real GDP growth rate and contributions by industry
Regarding inward foreign direct investments, investments increased from 2009 onwards but
remained flat for three consecutive years from 2013 to 2015.43 Major investor countries/regions are
Singapore, Japan and other Asian countries, Europe and the Americas 44 (Figure I-1-2-1-49). By
investment sector, the value of investments in the secondary industry continued to rise from 2010 to
2013 but declined in 2014 and 2015. On the other hand, the value of investments in the tertiary industry
grew from 2013 onwards and reached almost the same level as the value of investments in the secondary
industry in 2015. Although the value of investments in the primary industry increased from 2008
onwards, the level was relatively low compared with the values of investments in the other industries,
and in 2015, it declined (Figure I-1-2-1-50).
Figure I-1-2-1-49 Changes in Indonesia’s inward direct investment (investing countries and
regions)
Note: Performance base.
Source: Indonesia Investment Coordinating Board, CEIC Database.
43 It was Japan that led the boom in foreign direct investments in Indonesia from 2010 to 2012, with
investments made not only in the resource sector but also in other sectors such as machinery (automobiles,
motorcycles and parts), daily consumer goods and services. 44 The major investor countries/regions, arranged in descending order in terms of the share in overall
investments (actual results in 2015), are Singapore (20.2%), Malaysia (10.5%), Japan (9.8%), Europe
(7.9%), the Americas (6.1%), the ROK (4.1%), Hong Kong (3.2%) and China (2.1%). Asia as a whole has a
share of around 51%.
0
5
10
15
20
25
30
2007 2008 2009 2010 2011 2012 2013 2014 2015
Japan SingaporeROK Other AsiaUSA Europe
(bl. $)
(year)
International
cooperationAfrica Australia and
OceaniaROK
USA Other Asia Europe Japan
Malaysia Singapore Total
121
Figure I-1-2-1-50 Changes in Indonesia’s inward direct investment (investment target)
Note: Performance base.
Source: Statistics Indonesia and CEIC Database.
As for the trade trends, Indonesia’s trade surplus expanded after the Asian currency crisis because
of declines in imports of input materials, such as parts and raw materials, and capital goods. In addition,
growth in exports due to a rise in prices of primary goods and an increase in demand for resources also
expanded the surplus. Due to the effects of the global economic crisis, the trade surplus temporarily
shrank, but the trade balance later improved due to the booming demand for natural resources. However,
while exports decreased in line with the global recession around 2012, imports increased against the
backdrop of robust domestic demand, resulting in the deterioration of the trade balance, and Indonesia
recorded a trade deficit, albeit a small one, for three consecutive years from 2012 to 2014. In 2015, the
trade balance improved and registered a slight surplus, but the reason for the improvement was a larger
decline in imports than in exports (Figure I-1-2-1-51).
-100
-50
0
50
100
150
0
5
10
15
20
25
30
2007 2008 2009 2010 2011 2012 2013 2014 2015
Primary industry Secondary industry
Tertiary industry Total
Total, ratio to the previous year (right axis)
(bl. $) (Ratio to the previous year, %)
(Year)
122
Figure I-1-2-1-51 Changes in Indonesia’s trade balance
Note: Imports are indicated as minuses.
Source: Statistics Indonesia, CEIC Database.
Regarding exports (compared with the previous year), a look at changes in the top five export
destinations (in terms of contribution) shows that except during the time of the global economic crisis,
exports, mainly to Japan, China, Singapore, the United States and India, grew from 2002 onwards, but
in 2012 and thereafter, exports generally declined. In particular, exports to China made a negative
contribution in 2014 (Figure I-1-2-1-52).
Figure I-1-2-1-52 Changes in Indonesia’s exports (ratio to the previous year) (contributions of
Petroleum gas Chemical wooden pulp Bituminous mixture
Coconut oil Oil (crude oil) Other wood products
Activated carbon Others All items
(bl. $)
(Year)
Global economic crisis
130
From the above, it is presumed that while the expansion of exports of primary goods to China after
the global economic crisis made significant contributions to Indonesia’s growth, the reaction to the
recent steep drop in demand resulted in the current slowdown of the growth.48
(c) Challenges to be overcome in order to maintain stable growth
Despite the growing expectations for the government of President Jokowi, which was inaugurated
following a change of government at the end of 2014, Indonesia’s economic growth has recently slowed
down. In Indonesia, the manufacturing industry has not grown sufficiently to lead the economic growth.
Although it is a net importer of oil, Indonesia has not yet fully shifted away from an economic structure
dependent on exports of resources, so it is often swayed by the trends of the world economy.
Among other presumed factors behind the slowdown of Indonesia’s growth are the withdrawal of
risk money around the world, which reduced investments and consumption, and the monetary policy
tightening by the Bank Indonesia, the central bank, since the middle of 2013 due to concerns over the
current account deficit.
The government of President Jokowi has set the target of the real GDP growth rate during his term
of office at a high level, 7% on average. In order to realize such high economic growth and keep the
growth sustainable, there are many challenges to be overcome. One is upgrading the export structure.
Because of its rich reserves of natural resources, Indonesia has a high dependency on coal, palm oil and
other natural resources, and its economic conditions are prone to be significantly affected by movements
of prices of such resources. Presumably, the economic growth achieved by the previous government of
President Yudhoyono was not one led by the manufacturing sector but was one dependent on exports of
resources to meet demand from emerging countries. (Figure I-1-2-1-64) In order to create enough jobs
for the working-age population that is expected to continue growing, fostering domestic companies and
establishing a system that enables production and exports of products with high value added is a
challenge (Figure I-1-2-1-65). To cope with this challenge, it will be important for Indonesia to
implement economic measures that the government of President Jokowi is advocating, promote
peripheral industries and small and medium-size enterprises by improving the business and investment
environments, make progress in the development of infrastructure that constitutes the foundation of
regional development and the promotion of investments and exports, and deepen networks with other
countries by actively involving itself in and leading the initiatives for regional economic integration and
economic cooperation.
48 According to Sato (2015), the main reason why the double-digit growth in the value of exports from
Indonesia that continued from 2004 to 2011 (except in 2009, when exports were affected by the global
economic crisis) abruptly declined in 2012 and has remained on a downtrend since then is the end of the
commodity boom that was triggered by increased demand from China.
131
Figure I-1-2-1-64 Changes in industrial structure of Indonesia
Note: Secondary industry includes mining, construction, electricity, water and gas.
Source: WID, World Bank.
Figure I-1-2-1-65 Forecast of Indonesia’s population composition (estimation by the United
Nations)
Note: Population estimate by the United Nations which estimates high, middle and low variants of
0
5
10
15
20
25
30
35
40
45
501994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Primary industryManufacturingSecondary industry (excluding manufacturing)Tertiary industry
(%)
(Year)
Asian currency crisis Global economic crisis
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
2020
2025
2030
2035
2040
2045
2050
2055
2060
2065
2070
2075
2080
2085
2090
2095
2100
Total/aging population (over 60)
Total/working-age population (15-59 years)
Total/young population (0-14 years)
Estimation
(100 mil. people)
Prospect of
increase of
(Year)
132
population every 5 years. Figure shows middle variants.
Source: World Population Prospects: The 2015 Revision, the United Nations.
(3) Excess production capacity and an increase in trade restrictive measures taken around the
world
By causing an expansion of exports from producing countries and by lowering export prices, excess
production capacity around the world, coupled with the slowdown of the world economy, is prompting
countries to take trade remedial measures, such as anti-dumping (AD) measures and safeguard (SG)
measures. In this section, an overview of the current status of excess production capacity and countries’
response will be provided with respect to the steel industry, where this trend is prominent.
(A) Status of excess capacity in the steel industry
Global steel demand declined steeply in 2009 in response to the global economic crisis but has been
recovering since 2010 predominantly due to the economic package implemented in China, among other
factors. However, as crude steel production capacity has increased at a pace higher than that of demand,
the supply-demand gap expanded in the global steel market, resulting in a state of excess supply.
According to a forecast by the OECD, 49 in 2015, annual apparent consumption 50 volume is
approximately 1.65 billion tons while the global crude steel production capacity is estimated at
approximately 2.3 billion tons. It means that there is annual excess capacity of approximately 0.65
billion tons. The gap between production capacity and consumption volume has been expanding every
year, with the result that the capacity utilization rate (a value obtained by dividing crude steel production
volume with steel production capacity) plunged sharply from 84% in 2005 to 70% in 2015 (Figure I-1-
2-1-66).
49 OECD Directorate for Science, Technology and Innovation, Steel Committee (2015), Excess Capacity in
the Global Steel Industry: The Current Situation and Ways Forward, DSTI/SU/SC (2014) 15/FINAL,
March 2015 50 Generally speaking, apparent consumption refers to the sum of the volume of production in and the
volume of imports into a relevant country/region minus the volume of exports from the country/region.
133
Figure I-1-2-1-66 Gap between production capacity and actual production volume in the global
steel market
Source: Statistical data of OECD Steel Committee and Bureau of Resources and Energy Economics of
Australia.
In China, while production capacity increased 3.4% in 2014 compared with the previous year,
apparent consumption volume of steel materials dropped 3.8% compared with the previous year. Due to
this domestic situation, the volume of exports from China increased around 50%, whereas export prices
of hot-rolled steel, a representative type of steel material, fell by around 20% in February 2016 compared
with the same month of the previous year (Figure I-1-2-1-67).
Figure I-1-2-1-67 Changes in export price from China (average of all steel)
Global total
to USA
to ASEAN
134
The ROK and other many Asian countries, along with China, have plans to construct new steel plants
or expand existing plants. Factors behind the higher pace of increase in production capacity than the
pace of growth in demand include governmental interventions and other market-distorting practices, in
addition to a slowdown in the demand itself.51 Theoretically, if the state of excess production lasts over
an extended period of time, producers cut back on their production capacity. However, in reality, the
production capacity remains the same and the state of excess capacity continues over an extended period
of time. The reasons for that include the malfunction of market mechanism in producing countries along
with the high cost of withdrawal, such as the costs of disposal of facilities and employment adjustments,
the excessive market expectations for the future, and governments’ intention to maintain employment
and increase steel self-sufficiency.52 Indeed, despite the state of excess capacity, since the projects for
the construction of new steel plants are progressing, it is estimated that global crude steel production
capacity will continue to increase significantly (Table I -1-2-1-68).
Table I-1-2-1-68 Successive construction of large steel plants in Asia
Source: News reports.
(B) Increase in the initiation of trade remedial measures
Surplus steel materials relative to demand are traded at low prices in domestic and export markets,
resulting in a decline in the profitability of the steel industry as a whole. In addition, due to inflows of
51 OECD Directorate for Science, Technology and Innovation, Steel Committee (2015) 52 As steel is a raw material that constitutes the foundation of many industries, it is widely used in such
products as automobiles and household electrical products, transportation infrastructure, including railways
and expressways, resource infrastructure such as oil field facilities and pipelines, and buildings. Therefore,
each country seeks to ensure stable domestic supply of steel. In Japan, too, the government-operated Yahata
Steel Works started operation more than a century ago, specifically, in 1901.
Baosteel Group (Zhanjiang, Guangdong province, China) 8.93 mil.t (operation scheduled September 2015)
Buhan Iron and Steel (Fangchenggang, China) 9.2 mil.t (operation scheduled 2016)
POSCO (Odisha, India)
12 mil.t (plan)
Tata Steel Limited (Hà Tĩnh, Vietnam)
4.5 mil.t (plan)
Shougang Group (Terengganu, Malaysia)
0.7 mil.t (1st phase, operation 2015)
Shandong Iron and Steel Group (Rizhao, Shangdon province, China) 8.1 mil. t (operation scheduled 2016)
Hyundai Steel (Dangjin, ROK)
4.0 mil. t (1st phase, operation 2010) 4.0 mil. t (2nd phase, operation 2010)
4.0 mil. t (3rd phase, operation 2013)
China Steel (Kaohsiung, Taiwan)
2.5 mil.t (operation 2010)
Formosa Plastics (Hà Tĩnh, Vietnam) 22.5 mil. t (total of 2 phases by 2020) (plan)
(operation of 1st phase with 7.1 mil. t is scheduled 2016)
the ROK53 and China, with the rise in the ratio particularly steep in Brazil and China (Figures I-1-2-2-
12, I-1-2-2-13, I-1-2-2-14 and I-1-2-2-15).
Figure I-1-2-2-12 Ratio of the outstanding obligation to GDP in nonfinancial private corporate
sector (%)
Source: BIS total credit statistics.
53 Regarding the ROK’s heavy dependence on foreign capital, it has been pointed out that if foreign capital
is withdrawn, the supply of funds in the country may shrink, obstructing the smooth conduct of economic
activities. Looking at the ROK’s balance of net external assets, the country became a net asset holder in the
third quarter of 2014 for the first time since the preparation of the statistics started in 1994, with its assets
exceeding debts, and has remained a net asset holder since then. Meanwhile, a look at the composition of
the balances of the ROK’s external assets and debts (as of the end of 2014) shows that securities
investments and “other investments” (e.g. loans), which are relatively easy to withdraw, account for a larger
portion of the debts than direct investments, which are difficult to withdraw. The ratio of foreign currency
reserves to the balance of short-term debts that come due within the current year has stayed above the
benchmark level of 1.0.
100.7
85.7
40
50
60
70
80
90
100
110
120
2008 2009 2010 2011 2012 2013 2014 2015
Emerging countries Developed countries
(%)
(Year/Q)
145
Figure I-1-2-2-13 Changes in the ratio of the outstanding obligation to GDP in major emerging
countries (2008Q3-2015Q3, percentage point)
Note: Changes from 2008Q3 to 2015Q3.
Source: BIS total credit statistics.
Figure I-1-2-2-14 Debt repayment burden of nonfinancial and household sectors in major
emerging countries
Source: BIS debt service ratios statistics.
-20
0
20
40
60
80
100
120C
hin
a
Turk
ey
Russ
ia
Bra
zil
Mal
aysi
a
Sau
di
Ara
bia
Mex
ico
Ind
ones
ia
Thail
and
RO
K
India
So
uth
Afr
ica
Arg
enti
na
Government sector Household Nonfinancial private sector
(pp)
21.620.1 20.0
13.5 13.5 13.1
10.7
8.4 8.2
4.6 4.0
0
5
10
15
20
25
Bra
zil
RO
K
Chin
a
Mal
aysi
a
Tu
rkey
Russ
ia
Thai
land
India
South
Afr
ica
Indones
ia
Mex
ico
Deb
t se
rvic
e ra
tio
146
Figure I-1-2-2-15 Debt repayment burden of nonfinancial and household sectors in Brazil,
ROK and China
Source: BIS total credit statistics.
The leverage, which represents the debt-to-capital ratio, is also increasing. The increase is
remarkable in China and Latin America by country/region and in construction and oil/natural gas by
sector. However, it is notable that even in China and Latin America, the leverage has not increased
markedly in other sectors and that it has not increased in the construction and oil/natural gas sectors in
other regions (Figures I-1-2-2-16 and I-1-2-2-17).
Figure I-1-2-2-16 Rise in leverage of listed companies in emerging countries (2007-2013)
Source: IMF World Economic Outlook October 2015
21.6
20.1
20.0
10
12
14
16
18
20
22
24
2008 2009 2010 2011 2012 2013 2014 2015
Deb
t se
rvic
e ra
tio
Brazil ROK China(Year/Q)
(%)
4.7%
18.6%
9.4%
22.5%
0%
5%
10%
15%
20%
25%
Asia (China within
Asia)
Europe, Middle
East and Africa
Central and South
America
147
Figure I-1-2-2-17 Rise in leverage of listed companies in major emerging countries (2007-2014)
Source: IMF World Economic Outlook October 2015
In the first place, the leverage of non-financial private companies may be affected by factors at the
company, country and global levels. However, according to an analysis by the IMF, the importance of
factors at the company and country levels54 has declined in relative terms, while global factors, such as
the interest rate level in the United States and – although this has smaller effects – the crude oil price,
have become more important.55 As a result, it is presumed necessary for emerging countries to prepare
for the impact of the tightening of the global financial environment. In Brazil, for example, private-
sector debts expanded substantially in the phase of interest rate decline since the global economic crisis,
and this may be related to the global trend of lower interest rates (Figure I-1-2-2-18).
54 For example, the expansion of China’s debts is presumed to be closely related to the economic package
implemented after the global economic crisis, the economic development that is dependent on capital
investments, and excess production capacity. As for the excess production capacity in China, see Part I,
Chapter 1, Section 2 (1), and regarding the actual state of the expansion of debts, see the White Paper on International Economy and Trade 2014. 55 Diana Ayala, Milan Nedeljkovic & Christian Saborowski (July 2015) “What Slice of the Pie? The
Corporate Bond Market Boom in Emerging Economies (IMF Working Paper WP/15/148)”
109.4 97.7
78.8
58.5
-20
0
20
40
60
80
100
120C
hin
a/O
il a
nd n
atura
l gas
Cen
tral
and S
outh
Am
eric
a/O
ilan
d n
atura
l gas
Cen
tral
and S
outh
Am
eric
a/C
onst
ruct
ion
Chin
a/C
onst
ruct
ion
Asi
a/C
onst
ruct
ion
Cen
tral
and S
outh
Am
eric
a/M
anufa
cturi
ng
Chin
a/M
inin
g
Euro
pe
and o
ther
s/C
onst
ruct
ion
Euro
pe
and o
ther
s/M
anufa
cturi
ng
Ch
ina/
Man
ufa
cturi
ng
Asi
a/O
il a
nd n
atura
l gas
Asi
a/M
inin
g
Asi
a/M
anufa
cturi
ng
Euro
pe
and o
ther
s/M
inin
g
Euro
pe
and o
ther
s/O
il a
nd n
atura
lg
as Cen
tral
and S
outh
Am
eric
a/M
inin
g
(%)
148
Figure I-1-2-2-18 Corporate bond issues and project finance tranches by Brazilian companies
(100 mil. $)
Note: Total amount of total corporate bond issues with maturities of 10 years or longer that are registered
to Thomson Reuters as of 3.29.2006 and for which issuersthe issuing bodies are located in Brazil and
tranches that are registered to Thomson Reuter
Source: Thomson Reuters
Moreover, exposure to foreign currency debts is expanding, mainly in Latin America, and attention
also needs to be paid to this point.56 In Brazil, dollar-denominated private-sector debts have large shares
in corporate bonds in the mining sector (97.2%) and project finance (77.5%), which are sectors where
cash flow in dollar terms can generally be expected, but it should be kept in mind that dollar-
denominated debts also have a certain share in corporate bonds in the financial sector (Figure I-1-2-2-
19).
56 Global Financial Stability Report October 2015 (IMF)
Figure I-1-2-2-19 Ratio of private-sector debts in Brazil that are dollar denominated
Note: Total amount of total corporate bond issues with maturities of 10 years or longer that are registered
to Thomson Reuters as of 3.29.2006 and issuing bodies are located in Brazil and tranches that are
registered to Thomson Reuters as of 3.24.2016 and
Source: Thomson Reuters
Household debts have grown mainly in Southeast Asian countries, such as Thailand, Malaysia and
Singapore, reaching a level similar to the level in developed countries57 (Figures I-2-2-20 and I-1-2-2-
21). Among the factors behind the growth in household debts are presumably an increased consumption
appetite associated with a rise in the income level and progress in the development of institutions and
legal systems 58 concerning credit information due to assistance from Japan. 59 For example, the
coverage rate of credit information concerning the adult population has risen rapidly, to 70.8% in
Thailand, to 70.4% in Malaysia and to 60.8% in Singapore, contributing to the expansion of
consumption (Figure I-1-2-2-22). On the other hand, there are moves to introduce regulation on personal
loans in some countries in order to prevent the rapid increase in household debts from becoming an
instability factor in terms of finance.
57 Generally speaking, legal systems necessary for the accumulation of household debts, such as housing
loans, are well developed in developed countries, so the amount of household debts there is large compared
with the amount in emerging countries. In the third quarter of 2015, the ratio of household debts to GDP
was 74.8% in developed countries, compared with 32.3% in emerging and developed countries (according
to BIS total credit statistics). 58 Ease of raising funds is an element of the “Doing Business” business environment indicator of the World
Bank, and the coverage ratio of credit information and the development of legal systems are used as
benchmarks. 59 For example, as part of the APEC’s structural reform initiative (EoDB: Ease of Doing Business), Japan
provided support for the development of institutional systems in the APEC member countries/regions in the
area of fund-raising.
97.2
77.5
50.2
36.0 26.5
0
20
40
60
80
100
Corp
ora
te b
onds
(min
ing
sect
or)
Pro
ject
fin
ance
Corp
ora
te b
onds
(oth
er
sect
ors
)
Corp
ora
te b
onds
(all
sect
ors
)
Corp
ora
te b
onds
(fin
anci
al s
ecto
r)
(%)
150
Figure I-1-2-2-20 Changes in household debts in major emerging countries (2008Q3-2015Q3,
percentage point)
Note: Changes from 2008Q3 to 2015Q3.
Source: BIS total credit statistics.
Figure I-1-2-2-21 Changes in the ratio of households' debt balance to GDP in ASEAN countries
Source: BIS total credit statistics.
26.7
21.820.3 20.3
15.0
10.89.9
8.26.0
4.7 4.5
2.2 1.8
0
5
10
15
20
25
30
Thai
land
Mal
aysi
a
Sin
gap
ore
Chin
a
Hong K
ong
Bra
zil
Pola
nd
Turk
ey
Russ
ia
Indones
ia
Sau
di
Ara
bia
Arg
enti
na
Mex
ico
74.8
70.4
60.8
70.8
0
10
20
30
40
50
60
70
80
90
100
2008 2009 2010 2011 2012 2013 2014 2015
Developed countries average IndonesiaMalaysia SingaporeThailand
151
Figure I-1-2-2-22 Coverage rate of credit information concerning the adult population
Source: World Bank Doing Business Database 2016.
It should be kept in mind that many emerging countries other than China and resource-producing
countries60 are recording current account deficits. Countries recording current account deficits need to
cover the deficits by raising funds from abroad, a situation which will lead to an increase in net external
debts. While the United States61 and southern European countries reduced their current account deficits
following the global economic crisis and the euro crisis, the proportion of emerging countries among
the countries recording current account deficits is increasing. Although the total sum of current account
surpluses around the world, namely the size of the global imbalance, has been declining since the global
economic crisis, such surpluses have continued to be concentrated in countries like China and Germany,
with many emerging countries slipping into current account deficit (Figures I-1-2-2-23 and I-1-2-2-24
and Table I-1-2-2-25).
60 According to the World Economic Outlook Database October 2015 (IMF), many resource-producing
countries are forecast to fall into current account deficit in 2015. 61 As demand for the U.S. dollar as a currency of settlement in international transactions continues to exist
under the dollar reserve currency system, the United States can afford to let the current account deficit
grow and to accumulate net external debts (Ogawa, E. (ed.), GUROBARU INBARANSU TO KOKUSAI TSUKA TAISEI), but the situation is different for emerging countries.
A look at the composition of nominal GDP by demand items (actual results in FY201464) shows that
the share in GDP was 58% for private consumption, 31% for gross fixed capital formation and 11% for
government consumption. In other words, private consumption, which accounts for around 60% of
nominal GDP is the main engine of growth.
On an annual basis, the real GDP growth rate (new standard), 65 accelerated, coming to 5.6% in
FY2012, 6.6% in FY2013 and 7.2% in FY2014. On a quarterly basis, the real GDP growth rate stayed
high between 7% and 8% for three consecutive quarters from the first quarter to the third quarter of
2015. Robust private consumption is leading the high growth, and public investment is also a
contributing factor of the growth (Figure I-1-2-3-16).
Figure I-1-2-3-16 Changes in India’s real GDP growth rate and contributions by demand
Note: Fiscal year is based on financial year (April to March).
Source: Census of India and CEIC Database.
Regarding the composition of nominal GVA (gross value added)66 by industry, the share in nominal
64 In India, the fiscal year starts in April and ends in March in the following year. 65 In January 2015, the Central Statistics Office of India announced changes in the preparation method of
statistics, including revisions of the base year for the System of National Accounts (SNA). As a result, the
base year for GDP has been changed from 2004-05 to 2011-12 and the calculation method was changed
from a factor cost basis to a market price basis. As there are inconsistencies between growth rates in new
and old statistics, it should be kept in mind that growth rates in new statistics are relatively high compared
with growth rates in old statistics. 66 GVA is gross value added estimated from the production side. GDP represents GVA plus Net Indirect
Taxes (NIT: indirect taxes minus subsidies). As GVA is regarded as an indicator that moves in closer
alignment with the movements of monthly economic indicators than GDP, which is affected by changes in
NIT, it is often used to look at real growth rates from the supply side.
5.6 6.6 7.25.0
7.6 7.7 7.3
-15
-10
-5
0
5
10
15
20
25
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
201220132014 2012 2013 2014 2015
Private consumption Government consumptionGross fixed capital formation Inventory changeValuable goods ExportsImports Net exportsError Real GDP growth rate
(Ratio to the same quarter of the previous year, %, % point)
(Fiscal year) (Fiscal year/Q)
173
GVA was 17% for the primary industry, 30% for the secondary industry and 53% for the tertiary industry.
In other words, the tertiary industry, which accounts for around 50% of nominal GVA, is the main engine
of growth.
On an annual basis, real GVA (actual results in FY2014) grew 5.4% in FY2012 compared with the
previous year, 6.3% in FY2013 and 7.1% in FY2014. By industry, the services industry67 in particular
recorded high growth rates of 4.0% in FY2012 and 3.9% in FY2013 and 5.3% in FY2014, contributing
significantly to the growth of GVA (Figures I-1-2-3-17 and I-1-2-3-18).
Figure I-1-2-3-17 Changes in India’s real GVA growth rate and contributions by industry
Note: Fiscal year is based on financial year (April to March).
Source: Census of India and CEIC Database.
67 The services industry includes finance/insurance/real estate/professional services, commerce/
hotels/transportation/communication/broadcasting, and administration/defense and other services.
5.4
6.3
7.1
5.4
7.27.5
7.1
-1
1
3
5
7
9
11
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
201220132014 2012 2013 2014 2015
Administration, defense and other servicesFinance, insurance, real estate and special servicesCommerce, hotel, transport, communication and broadcastingConstructionElectricity, gas and waterManufacturingMiningAgriculture, forestry and fisheriesReal GVA
(Ratio to the previous year, Ratio to the same quarter of the previous year, %, % point)
(Fiscal year/Q)(Fiscal year)
174
Figure I-1-2-3-18 India’s growth rates by industry
Note: Fiscal year is based on financial year (April to March).
Source: Census of India and CEIC Database.
The real GDP growth rate came to 7.3% for the whole of 2015 (calendar year), surpassing China’s
growth rate of 6.9%. As mentioned above, it should be kept in mind that India changed the method of
preparing statistics, but the growth rate of more than 7% in GVA as well is also evidence of India’s
growth momentum.
On the other hand, the nominal GDP growth rate has been slowing down, so it should be kept in
mind that the real GDP growth is partly due to general price drops (Figure I-1-2-3-19). The GDP deflator
continued to decline from the third quarter of 2013 onwards and turned negative in the second quarter
of 2015. Therefore, it is presumed that despite its high rate of real GDP growth, India is not feeling such
strength of growth as is suggested by these figures (Figure I-1-2-3-20).
1.7
1.41.8
1.8
2.0 2.2
5.4
6.3
7.1
-1
0
1
2
3
4
5
6
7
8
2012 2013 2014Administration, defense and other servicesFinance, insurance, real estate and special servicesCommerce, hotel, transport, communication and broadcastingConstructionElectricity, gas and waterManufacturingMiningAgriculture, forestry and fisheriesReal GVA
(Ratio versus the same quarter of the previous year, %, % point)
(Fiscal year)
Serv
ice sector
4.0
3.9 5.3
175
Figure I-1-2-3-19 India’s nominal GDP growth rates
Note: Fiscal year is based on financial year (April to March).
Source: Census of India and CEIC Database.
Figure I-1-2-3-20 India’s GDP (nominal growth rates, real growth rates and deflators)
Note: Deflator is calculated by dividing nominal GDP growth rate by real GDP growth rate.
Source: Census of India and CEIC Database.
-15
-10
-5
0
5
10
15
20
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
2012 2013 2014 2015
Final private consumption Final government consumption
Gross fixed capital formation Inventory change
Valuable goods Net exports
Errors and omissions Nominal GDP
(Fiscal year/Q)
(Ratio versus the same quarter of the previous year, %, % point)
-5
0
5
10
15
20
25
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
2012 2013 2014 2015
Nominal GDP Real GDP Deflator
(%)
(Fiscal year/Q)
176
(b) Current account balance: although there is a chronic deficit, the deficit has recently been
shrinking
India’s current account balance has been chronically in deficit due to its large trade deficit. It is
notable that while the balance of trade in goods and the primary income balance, which includes
investment income and other items, are in deficit, the balance concerning software and other services
and the secondary income balance, which includes remittances from non-resident Indians (NRIs) to their
home country, have consistently been in surplus. Against the backdrop of the expansion of the deficit in
the balance of trade in goods, India’s current account deficit grew, hitting a record high of 31.9 billion
dollars (6.8% as a proportion of GDP) in the third quarter of FY2012. Afterwards, the current account
deficit trended downward despite some quarterly swings, amounting to 1.2 billion dollars (0.2% as a
proportion of GDP) in the fourth quarter of 2013 and 0.6 billion dollars (0.1% as a proportion of GDP)
in the fourth quarter of 2014 (Figure I -1-2-3-21).
Figure I-1-2-3-21 Changes in India’s current balance
Note: Fiscal year is based on financial year (April to March).
Source: Reserve Bank of India and CEIC Database.
(c) Budget account: recording a chronic deficit; seeking fiscal consolidation while aiming for high
growth
According to the Indian government’s draft budget for FY2016, which was announced on February
29, 2016, the government maintains the policy of promoting high growth and seeking to achieve fiscal
consolidation at the same time. Under the draft budget, the budget deficit in FY2016 will shrink from
3.9% as a proportion of nominal GDP under the budget for FY2015 (estimate) to 3.5%.
Secondary income balance (e.g. Transfer between individuals)Balance on servicesPrimary income balanceTrade balanceCurrent balanceRatio of current balance to nominal GDP (right axis)
(bl. $)
(Year, Q)
(%)
177
This was the second budget compilation since the inauguration of the Modi government. Under the
budget for FY2015, the first budget for the Modi government, the government announced a long-term
policy vision called “Team India,” which looked forward to 2022, the 75th anniversary of India’s
independence, and budget funds were allocated for initiatives that are in line with this vision, such as
infrastructure development intended to reduce the number of poor families and regions to zero. This
policy direction has been maintained in the current fiscal year. Total government expenditures in
FY2016 expanded by as much as around 11% from FY2015 (estimate).68 In particular, the budget
amount is planned to be increased by 22% for infrastructure development and by 84% for agriculture-
related items. The expenditure growth is planned to be covered by higher taxes, including increases in
the clean environment tax, infrastructure tax and excise tax on a variety of goods, such as tobacco and
jewelry, but it should be kept in mind that the Goods and Services Tax (GST) planned under the draft
budget for FY2015 has not yet been approved by the parliament (Figure I-1-2-3-22 and Table I-1-2-3-
23).
Figure I-1-2-3-22 Changes in India’s fiscal balance
Note: GDP for 2016 (estimation) is a value reported by Ministry of Finance, Government of India
(http://indiabudget.nic.in/glance.asp).
Source: Ministry of Finance, Government of India, Census of India and CEIC Database.
68 The estimate for FY2015 is growth of around 5% compared with the previous year.
5.9
4.94.5
4.1 3.93.5
0
1
2
3
4
5
6
7
0
20
40
60
80
100
120
140
160
2011 2012 2013 2014 2015 2016
Ratio of financial deficit to GDP (right axis)Value of financial deficitGDP
(Tn. INR) (%)
(Fiscal year)
Estimation by government
178
Table I-1-2-3-23 TEAM INDIA (Policy and Vision for 2022)
Item Description
1. One roof for each family (house for
all)
Provision of 20 million houses in urban areas, 40
million in rural areas
2. Provision of basic utilities
Provision of electricity 24 hours a day and 7 days
a week, access to clean drinking water, WC and
roads
3. Employment opportunities (ensuring
livelihood)
Employment opportunity for at least one member
of the family
4. Essential reduction of poverty Focus of all our policies
5. Provision of electricity to every
household (by 2020)
Eliminating 20,000 villages without electricity
(including off-grid solar electricity)
6. Connecting nationwide 178 thousand
villages with all-weather roads
100 thousand km to be newly constructed in
addition to 100 thousand km which is currently
under construction
7. Quality of life, productivity,
necessary health to maintain a family
Provision of health care services to the cities and
villages
8. Education for the youth, measures
for skills development
Lower secondary school located at every 5 km,
upgrading of existing schools
9. Improvement of agricultural
productivity, realization of
appropriate prices of agricultural
products
Expansion of irrigation districts and
improvement of effectivity of existing irrigation
systems, building agro base industries and
increase in income in rural areas
10. Means of communication for all
villages
Resolving the gap in communication between
urban and rural areas
11. Employment creation for youth
Two thirds of the population consists of youth
under 35 years old. Becoming a manufacturing
hub for the world for their job opportunities.
Purpose of programs such as Skill India, Make in
India
12. Encouraging entrepreneurship and
startup support
Conversion from job seeker to employment
creator
13. Development of Northeast India Promoting development of the least developed
region
Source: Government of India website (http://indiabudget.nic.in/budget2015-2016/ub2015-16/bs/bs.pdf)
(d) Exchange rate and stock prices: effects of external factors
A look at exchange rate movements shows that since the second half of 2011, the Indian currency
179
has been depreciating. One likely reason for this is the effects of the European debt crisis.69 It has been
pointed out that the currency depreciation resulted from the fact that India, like Greece, was suffering
from the “twin deficits” – the current account and budget deficits at the time of the European debt crisis.
Afterwards, concerns grew over a possible outflow of investment funds amid increased expectations for
the scaling back of the quantitative easing (QE) in the United States (the so-called Bernanke shock),
leading to further depreciation of the Indian currency, the rupee, between around May and August.
While India, like other emerging countries, depends on investments from abroad for its economic
growth, its currency tends to come under downward pressure because of its chronic current account
deficit. As a result of policy interest rate hikes and the shrinkage of the current account deficit, the
currency ceased to depreciate temporarily and continued to strengthen until May 2014. However, since
then, the currency has remained weak due to the effects on the Indian market of external shocks such as
the China’s economic slowdown and a steep drop in Chinese stock prices (Figure I-1-2-3-24).
Figure I-1-2-3-24 Changes in India’s exchange rate
Note: Currencies named the Fragile Five by stock market players are picked up for reference.
Source: Thomson Reuters EIKON.
As for stock price movements, the SENSEX,70 the representative price indicator of the Indian stock
69 In October 2009, the revelation of Greece’s window-dressing of its budget deficit fueled fears over a
possible default of the country. An economic crisis spread beyond Greece because of the awareness of
sovereign risks concerning other euro-zone and European countries, and this came to be known as the
European debt crisis. 70 A stock price indicator based on the free-float market capitalization weighted average of 30 issues listed
on the Bombay Stock Exchange.
0
20
40
60
80
100
120
140
2010 2011 2012 2013 2014 2015 2016
India Brazil Indonesia South Africa Turkey
Currency
appreciation
(weak dollar)
Currency
depreciation
(strong dollar)
(Index as of Jan. 2010=100)
(Year/month)
Bernanke
shockDevaluation of
Chinese yuan
European debt crisis
180
market, trended upward from 2012 onwards, and after Prime Minister Modi took office in May 2014,
the stock price rise accelerated further. Although the Indian stock price index, like the Indian currency’s
exchange rate, has recently been trending downward due to external factors such as China’s economic
slowdown, it still stays at a high level (Figure I-1-2-3-25).
Figure I-1-2-3-25 Trends of stock prices in India
Source: Bombay Stock Exchange (SENSEX) and CEIC Database.
(e) Prices: prices prone to be significantly affected by weather factors
In India, one major factor that strengthens inflationary pressure is a decline in production of foods,
which account for 50% of the consumer price index, particularly a drop in production of vegetables and
crops due to weather factors. Although India is striving to introduce and improve irrigation facilities,
the effort has not made sufficient progress. The Reserve Bank of India, the central bank, positioned
curbing inflation as the top priority and announced the goal of pushing down the inflation rate below
8% by 2015 and below 6% by 2016 and keeping it at 4% with a tolerance of ±2% thereafter. There are
expectations for a governmental initiative to curb inflation in the medium to long term by enhancing the
supply capacity through the development of infrastructure, including cold chains, in addition to
restraining the inflation for non-food products that can be controlled on the demand side through
monetary policy.
In the first half of 2014, the rise in the consumer price index slowed down compared with the
accelerating inflation in the second half of 2013, but the price growth rate remained high at around 8%
compared with the same month of the previous year as a result of the continued high prices of foods and
higher import prices due to the rupee’s weakness. In the second half of 2014, the rise in the consumer
price index continuously decelerated due to a slowdown in the price growth for fuels and electricity
caused by a fall in crude oil prices, falling to 3.3% in November of the same year. Subsequently, because
90
100
110
120
130
140
150
160
170
180
190
2010 2011 2012 2013 2014 2015 2016
(Jan.2010=100)
(Year/month)
Inauguration of Modi
administration
Shanghai
stock
market
crash
181
of price hikes for gasoline and diesel fuels and the government’s measure to curb food prices, there have
been some ups and downs in prices but the fluctuations have been smaller than before, and the growth
rate of consumer prices has remained low. In the future, attention should be paid to whether price
stability will be maintained as it becomes difficult to push down inflation through lower resource prices
(Figure I-1-2-3-26).
Figure I-1-2-3-26 Trend in consumer price index in India
Source: Census of India, Reserve Bank of India and CEIC Database.
(B) Structural reform initiative and challenges
Although India is recording high economic growth, it faces many challenges as mentioned above,
including the tendency of its exchange rate and stock prices to be swayed by external factors and large
fluctuations in the inflation rate due to weather factors (particularly the rainfall amount in the monsoon
season). The Indian government is striving to carry out structural reforms in order to build a resilient
economy that is not significantly affected by external factors and promote economic growth.
Prime Minister Modi has made clear his government’s goal of achieving economic growth by
inviting more foreign manufacturers to India under the Make in India campaign, which is intended to
promote the manufacturing industry. As mentioned earlier, in recent years, the growth of the services
industry made significant contributions to India’s economic growth in recent years. On the other hand,
the manufacturing industry’s international competitiveness has been weak. In order to achieve further
economic growth and create more jobs, India aims to become a global manufacturing base by devoting
efforts to strengthening the manufacturing industry as well.
The government designated the following 25 areas as eligible for the initiative to promote the
Immediately after its inauguration, the Modi government relaxed the restriction on foreign
investments related to insurance, defense and railway infrastructure and also announced a succession of
deregulation measures on a sector-by-sector basis.
In November 2015, the government actively adopted such measures as lowering or abolishing the
upper limit on the foreign investment ratio and simplifying procedures (e.g., a shift from a government
approval system to an automatic approval system) with respect to major sectors, including agriculture,
defense, broadcasting, construction, retailing and banking (Table I-1-2-3-27).
Table I-1-2-3-27 Eliminating restrictions on foreign investment in India
Description of major elimination of restrictions
Limited liability
partnership (LLP)
Conventional government approval shifts to automatic approval in those
industries where 100% investment in LPPs is allowed.
Investment by non-
resident Indians
(NRIs)
Investments by the companies owned and governed by NRIs are handled as
domestic investments unless they repatriate the profits (expansion of the
scope from specific industries to all industries)
Plantation
In addition to black tea, a good that has been admitted since previous times,
investment in coffee, rubber, cardamom, palm and olive oils plantations:
that were to be prohibited, are allowed without upper limits (automatic
approval)
Defense
- 49% upper limit on investment remains unchanged but conventional
government approval shifts to automatic approval.
- Conventional 24% upper limit on investment in venture capital
investment shifts to 49% (automatic approval).
- Over 49% investment has been admitted if modern and advanced
technology may be brought to the state, and the examination body
changes from the Cabinet Committee on Security (CCS) to the
Foreign Investment Promotion Board (FIPB).
Broadcasting
- Conventional 74% upper limit on investment in cable TV and satellite
broadcasting shifts to 100% (49% and under for automatic approval,
government approval for over 49%)
- Conventional 26% upper limit on investment in FM radio and
uplinking news shifts to 49% (government approval)
Civil aviation
- Conventional 74% upper limit on investment in irregular air transport
services shifts to 100% (automatic approval).
- In addition to regular air transport services and domestic regular
passenger services that have been admitted since previous times,
upper limits on investment in local air transport services are set to
49% (automatic approval)
184
Construction
Upper limit on investment has been 100% and remains unchanged. Some of
the conditions are eliminated as follows:
- Conditions on minimum floor area and minimum capital are removed
- Investment can be discontinued or repatriated after the 3 year of lock
up period.
Wholesale/cash and
carry - Wholesalers are allowed to retail (single brand).
Manufacturing
- Conventional 100% upper limit on investment remains unchanged.
Additionally, manufacturers are allowed to sell their products
manufactured in India via wholesale, retail or e-commerce.
Single brand
retail/duty-free shop
(Single brand retail)
Upper limit on investment has been 100% and remains unchanged. Some of
the conditions are eliminated as follows:
- E-commerce is admitted (government approval is required)
- Conventionally over 30% of the fund-raising amount is bound to
finance within India (if possible, by small-sized companies and those
in rural areas). Conditions can be eliminated if modern and advanced
technology may be brought to the state and fund-raising within India
is not possible.
(Duty-free shop)
- Added as 100% upper limit on investment (automatic approval).
Private bank
Upper limit on investment is 74% for overall foreign funding (automatic
approval for 49% and under, government approval for over 49%) and
remains unchanged. Some conditions are eliminated as follows:
Total holdings of foreign institutional investors (FIIs), foreign portfolio
investors (FPIs) and qualified foreign investors (QFIs) can be raised from
24% to 74% according to the resolution of the board of directors and the
extraordinary resolution of general meeting of stockholders.
Others
Upper limit on investment in land operation handling service business by
private airports, satellite facility installation and operation business and
credit information companies is raised from 74% to 100% (automatic
approval excluding satellite facility installation and operation business).
Source: Various materials from the Government of India, etc.
(d) Financial sector reform
Non-performing loans are expanding, mainly at publicly-operated banks. In order to promote the
disposal of non-performing loans, the government has expressed its intention to inject public funds into
public-operated banks. In addition, the government has announced other options, such as having the
Bank Board Bureau implement the roadmap for the reorganization of publicly-operated banks, including
185
mergers, and lowering the ratio of governmental investment in banks below 50%.
(e) Labor law reform72
The scope of small enterprises that are exempted from the application of labor regulation concerning
job reduction in the state of Rajasthan has been expanded (this measure was implemented after passage
through the state parliament and approval by the central government in July 2014).
(f) Abolition of subsidies
In order to reduce the budget deficit, the subsidy for diesel fuel was abolished in October 2014 and
the excise tax on sales of gasoline and diesel fuel was raised.
In India, structural reforms have been continuously implemented since before the inauguration of
the Modi government. The structural reform that gave a particularly strong boost to India was the new
economic policy of 1991. Through the new economic policy, the license system concerning private
companies was abolished except for some cases, and subsequently, the areas to which exceptional
treatment was applied decreased and monopoly by the public sector disappeared in many areas.
Regarding foreign investment, the upper limit of 40% on the foreign ownership ratio was abolished and
foreign direct investments were automatically permitted in cases where the foreign ownership ratio was
below 51%. Later, foreign investment in India was further liberalized, and from the time before the
inauguration of the Modi government, investments resulting in 100% foreign ownership have been
automatically approved. Regarding trade, import volume restrictions have been abolished, tariff rates
have been lowered and the number of items subject to export restriction has been drastically reduced.
The structural reforms in the 1990s laid the foundation of the Indian economy, leading to the current
high economic growth rate.
Currently, business and household sentiment is improving amid high expectations for the Modi
government’s structural reform,73 and the Reserve Bank of India’s interest rate policy and the expansion
of foreign investments through deregulation are expected to provide momentum to India’s growth. The
potential of India, whose working-age population is forecast to continue to increase for the next 40 years
or so, is huge, so the country will probably continue to attract close attention from around the world as
a huge production base and consumer market (Figure I-1-2-3-28).
72 Administration in the labor field is a matter under the joint jurisdiction of the federal and state
governments. While federal laws govern the matter in principle, special legislation may be enacted under
state laws. As the state of Rajasthan is actively inviting companies, it has implemented the reform of labor-
related laws that is intended to make corporate management easier in advance of other states. 73 In addition to the “Make in India” campaign, the Modi government has announced a series of other
campaigns, including “Skill India,” which promotes the skill improvement of workers, “Digital India,”
which promotes electronic administrative procedures, and “Smart India,” which promotes the
modernization of 100 cities.
186
Figure I-1-2-3-28 Future prediction of India’s population composition (estimation by the
United Nations)
Note: Population estimate by the United Nations, which estimates high, middle and low variants of
population every 5 years. Figure shows middle variants.
Source: World Population Prospects: The 2015 Revision, the United Nations.
As for the future growth rate of the Indian economy, the IMF forecasts growth of 7.5% in each of
2016 and 2017. The World Bank and the Asian Development Bank (ADB) also forecast high growth
rates: the World Bank’s growth forecast is 7.8% for 2016 and 7.9% in 2017, while the ADB’s growth
forecast is 7.4% for 2016 and 7.8% for 2017 (Table I-1-2-3-29).
Table I-1-2-3-29 Outlook for India’s real GDP growth rate
2015 2016 2017
International Monetary Fund (IMF) 7.3 7.5 7.5
World Bank 7.3 7.8 7.9
Asian Development Bank (ADB) 7.6 7.4 7.8
Note: IMF data is compiled based on World Economic Outlook (WEO) April, 2016. World Bank data
is compiled based on Global Economic Prospects January 2016. Asian Development Bank (ADB) data
is compiled based on Asian Development Outlook 2016.
However, India’s share in the global GDP is still only 2.6%, so the country cannot be expected to
replace China (with a share of 13.4% in the global GDP) as the growth driver of the world economy in
Figure I-1-2-3-30 Ratio of India’s GDP to the World
Source: United Nations.
In order to implement Prime Minister Modi’s initiative to invite manufacturers (Make in India), it
is essential to resolve challenges faced by companies expanding into India, such as those related to the
acquisition of land, infrastructure, licensing, and the tax system, so attention is focusing on the
government’s initiatives in these areas. As it has recently been pointed out both at home and abroad that
the progress in the Modi government’s structural reform is slow, the speed of India’s reform is seen as a
problem. However, it can also be said that it is a sound process necessary for achieving sustainable
growth over the long term.
If the government’s structural reform initiative intended to achieve fiscal consolidation and
economic growth brings clear actual results, rather than ending up as an empty slogan, India is expected
to act as a growth driver of the world economy in the long term.
13.4
5.9
2.6
0
2
4
6
8
10
12
14
16
18
201970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
China (reference) Japan (reference) India
(%)
(Year)
188
Column 4 India’s exports of goods and services
This column takes a look at changes in the value of exports of goods and services from India and
the share of the value of exports in GDP in the 10-year period between 2005 and 2014. The value of
exports of goods increased by a factor of 3.2 from 102.4 billion dollars in 2005 to 330.0 billion dollars
in 2014, while the value of exports of services expanded by a factor of 3.0 from 52.2 billion dollars in
2005 to 156.2 billion dollars in 2014. In 2014, the share of the value of exports in GDP was around15.9%
and the share of the value of exports of services was around 7.6% (Column Figure 4-1).
Column Figure 4-1 Changes in India’s exports of goods and services (ratio to GDP)
Source: WDI, World Bank.
Next, looking at the breakdown of net exports of services, it is notable that while the surplus in the
communication, computer, information service and financial service sectors is steadily increasing, the
deficit in the transportation sector is growing (Column Figure 4-2). Communication, computer and
information services are India’s growth industries that take advantage of the country’s human resources
and are making considerable contributions to the acquisition of foreign currency funds. As for the
breakdown of the balance of trade in the communication, computer and information sectors, which are
leading the export of services, the computer services sector accounts for most of the total.
0
100
200
300
400
500
600
0
2
4
6
8
10
12
14
16
18
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Export value of services (right axis)Export value of goods (right axis)Exports of goods (ratio to GDP)Exports of services (ratio to GDP)
(%) (Bl. US$)
(Year)
189
Column Figure 4-2 Changes in India’s net exports of services (breakdown)
Source: WTO Database.
Looking at changes in sales in India’s IT industry as a reference, IT services have registered the
largest sales, followed by business process outsourcing (BPO), software/engineering, and hardware in
that order (Column Figure 4-3). The share of exports in sales was 78% for IT services, 85% for BPO
and 78% for software/engineering on average between 2005 and 2014. On the other hand, regarding
hardware, the share of domestic sales was 96%.
-80
-60
-40
-20
0
20
40
60
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Public servicesIndividual, cultural and leisure servicesOther business servicesCommunication, computer and information servicesRoyaltiesFinancial servicesInsurance and pension servicesConstructionTravelingTransportMaintenance and repair servicesManufacturing servicesService balance
(Year)
(bl. $)
190
Column Figure 4-3 Changes in sales of IT industry in India
Source: NASSCOM (National Association of software and Service Companies)
By export destination (estimate for FY2015), exports to the United States and Europe accounted for
62% and 28%, for a total of around 90%, of the total (Column Figure 4-4).
74 BPM is a short for business process management. It generally refers to identifying and analyzing
processes in order to consider how to make continuous improvements in terms of efficient and effective
execution of jobs.
0
20
40
60
80
100
120
140
2006 2007 2008 2009 2010 2011 2012 2013 2014
Hardware Software and engineering BPO IT services
(bl. $)
(Fiscal year)
USA
62%
UK
17%
European
continent
11%APAC
8%
Others
2%
191
According to a survey concerning IT personnel75 conducted by the Ministry of Economy, Trade and
Industry, working in the IT industry is a job that inspires dreams and pride for Indian IT engineers and
such engineers feel a very high level of satisfaction compared with their counterparts in other countries.
In addition, the survey indicates that Indian IT engineers are eager to work abroad and start new
businesses, indicating that communication, computers and information services are likely to continue to
be growth sectors in the future.
Column 5 Changes in India’s trade (with China)
A look at changes in India’s trade with China makes clear the following notable points.
India has consistently been recording an import excess, or trade deficit, in its trade with China, with
the deficit continuing to grow from 2010 to 2015 (Column Figure 5-1).
Column Figure 5-1 Changes in India’s trade to China
Note: Values reported by China. Imports are indicated as minuses.
Source: Global Trade Atlas.
As for changes in product items exported from India to China, the value of exports of iron ores, slugs
and ash (most are iron ores in the HS2601 category) declined rapidly year after year, falling to as low
as 670 million dollars in 2015, and the value of exports of cotton and cotton fabrics also decreased year
after year from 2013 onwards. In 2015, in addition to the value of exports of the above items, the value
of exports of precious stones, precious metals, copper and copper products also dropped (Column
Figures 5-2 and 5-3).
75 “Questionnaire Survey on Foreign Personnel” conducted under an FY 2015 commissioned project called
“Survey concerning IT Personnel” (undertaken by the Mizuho Information and Research Institute).
-60
-50
-40
-30
-20
-10
0
10
20
30
2010 2011 2012 2013 2014 2015
Exports Imports Balance
(Bl. US$)
(Year)
192
Column Figure 5-2 Changes in India’s export items to China (contributions)
Source: Global Trade Atlas.
Column Figure 5-3 Composition of India’s export items to China (comparison of 2010 and
2015)
Source: Global Trade Atlas.
-30
-20
-10
0
10
20
30
2011 2012 2013 2014 2015
Cotton and cotton fabrics Jewelry and precious metalCopper and copper products Organic chemistrySalt, sulfur, lime and cement Ore, slug and ashGeneral machinery Mineral fuelPlastic and plastic products Electric machineryOthers All items
(%)
(Year)
Cotton and cotton fabrics
10%Jewelry and precious
metal
4%
Copper and copper
products
4%
Organic chemistry
3%
Salt, sulfur, lime
and cement
2%
Ore, slug and ash
57%
General
machinery
2%
Mineral fuel
2%
Plastic and plastic
products
2%
Electric machinery
2%
Others
12%
2010
Export value
20.9bl. $
193
Source: Global Trade Atlas.
Meanwhile, a look at changes in items imported to India from China shows that although the overall
value of imports declined in 2012 mainly because of a decline in imports of general and electrical
machinery, it grew in 2013 and 2014. In particular, imports of steel increased as much as 132% in 2014
compared with the previous year and imports of electrical machinery grew 22% in 2015 (Column
Figures 5-4 and 5-5).
Cotton and cotton
fabrics
17%
Jewelry and precious
metal
15%
Copper and copper
products
12%
Organic chemistry
8%Salt, sulfur, lime and cement
6%
Ore, slug and ash
5%
General machinery
4%
Mineral fuel
3%
Plastic and plastic
products
3%
Electric machinery
3%Others
24%
2015
Export value
13.4bl. $
194
Column Figure 5-4 Changes in India’s import items from China (contributions)
Source: Global Trade Atlas.
Column Figure 5-5 Composition of India’s import items from China (comparison of 2010 and
2015)
Source: Global Trade Atlas.
-10
-5
0
5
10
15
20
25
30
2011 2012 2013 2014 2015
Others
Vehicles (excluding forrailway)
Steel products
Optical apparatus
Furniture
Plastic and plastic products
Steel
Fertilizer
Organic compound
General machinery
Electric equipment
All items
(%)
(Year)
Electric
machinery
24%
General
machinery
24%
Organic
compound
10%Fertilizer
5%
Steel
5%
Plastic and plastic
products
2%
Furniture
1%
Optical apparatus
2%
Steel products
3%
Vehicles (excluding for
railway)
2%Others
22%
2010
Import value
40.9bl. $
195
Source: Global Trade Atlas.
The value of exports of iron ore from India fell steeply because both export price and volume
declined due to China’s economic slowdown. On the other hand, low-price steel products were exported
to India and other countries from China due to an excess supply there. The value of imports of steel from
China to India did not change between 2010 and 2015 as much as the value of exports did because the
effects of the steep price drop were offset by the resulting rise in the volume of steel imports.
(3) Structural reform initiative in the ROK
In February 2014, the ROK formulated the Three-Year Plan for Economic Innovation. In the plan,
the government pointed out the ROK’s structural problems such as inefficiency in the public sector, an
environment of limited competition, shrinkage of the working-age population, a decline in
entrepreneurship, delay in productivity improvement, inequality between large enterprises and small
and medium-size ones, the lag of the services industry, and growth excessively dependent on exports,
and set three pillars of the plan: (i) an economy with a solid foundation (correcting abnormalities:
public sector reform, and budget and tax system reform), (ii) strong growth achieved through innovation
(creative economy: deregulation and industrial fusion achieved through projects, and support for
business startups, and (iii) an economy well-balanced between exports and domestic demand (expansion
of the foundation of domestic demand: promotion of investment, expansion of consumption, promotion
of employment, support for small and medium-size enterprises, etc.). This plan seeks to realize the “era
of the people’s happiness” through the innovation and reinvigoration of the ROK economy as its
numerical target, aiming to raise the potential growth rate to 4%, the employment rate to 70% and per-
capita national income to 40,000 dollars three years later, or in 2017 (Table I-1-2-3-31).
Electric machinery
23%
General machinery
18%
Organic
compound
10%
Fertilizer
6%
Steel
4%Plastic and plastic products
4%
Furniture
3%
Optical apparatus
3%
Steel products
2%
Vehicles (excluding for
railway)
2%
Others
25%
2015
Import value
58.3bl. $
196
Figure I-1-2-3-31 Overview of ROK's Three-Year Plan for Economic Innovation
Source: Materials of Ministry of Strategy and Finance.
Specifically, regarding an economy with a solid foundation, the plan promotes the management
reform through consolidation and deregulation with respect to public corporations with growing debts.
As for creative economy, the plan provides fiscal support to industries that are expected to grow and
promotes the development of venture companies through collaboration between local governments,
large companies, research institutions and other organizations, with centers to support creative economy
established in 17 major cities across the country as bases of the initiative. Regarding an economy well-
balanced between exports and domestic demand, the government has designated health and medical care,
education, tourism, finance and software as priority service sectors for growth promotion and aims to
shift away from an export-oriented economic structure dependent on large companies.
As a result of China and other emerging countries catching up in terms of technological and
production capabilities, the ROK’s international competitiveness is declining in its major areas of
strength, so there are hopes for fostering industries that can act as new growth engines.
The government has cited five items, cosmetics, clothing, daily life and baby goods, agricultural and
197
fishery products, and pharmaceuticals, as consumer goods sectors that are performing well amid the
recent sluggishness of exports and intends to make intensive efforts to foster them as sectors with
promising export potential while maintaining the competitiveness of existing major export products.
Among promising growth sectors in the ROK are next-generation displays, biopharmaceuticals and
cosmetics. Regarding next-generation displays, ROK companies are ahead of others in the global market
with respect to mass production of organic electronic luminescence (EL) panels, which are superior to
liquid crystal displays in terms of thinness, lightness, electricity conservation, and clear picture quality,
and they are manufacturing and selling such panels for use in smartphones and television sets. Regarding
biopharmaceuticals, not only conglomerates (chaebols) but also non-conglomerate companies are
vigorously engaging in production outsourced by major foreign pharmaceutical companies and
development of biosimilars, which are the biopharmaceutical version of generic drugs. With respect to
cosmetics, such products as premium cosmetics containing Chinese medicine treatments have become
popular among young women on the tailwind of the boom of ROK TV dramas and movies, and
companies making such cosmetics are planning to expand into the Middle East and Latin American
markets in addition to China and Southeast Asia, which are the main markets.
In 2014, the ROK services industry (tertiary industry) accounted for around 70% of the total number
of employees in the ROK, while the share of value added created by this industry in GDP was about
60%, smaller than the share in Japan, the United State and Europe. According to statistics prepared by
the OECD, the level of productivity in the ROK’s services industry in 2014 was around 45% of the level
in the manufacturing industry, much lower than the average of 90% among the OECD member
countries.76 This reflects the fact that while progress has not been made in fostering service sectors with
high value added, there is a concentration of employees in services sectors with low productivity,
including self-employed workers (Figure I-1-2-3-32 and Table I-1-2-3-33).77
76 Overview of the OECD Economic Surveys Korea, May 2016 77 The share of the tertiary industry in nominal GDP in Figure 65 and the share of the services industry in
nominal GDP in Figure 66 do not match with each other because the sources of data used in the calculation
of the shares are different.
198
Figure I-1-2-3-32 Percentages of employed persons in ROK by industry and ratio of added
value to nominal GDP (2014)
Source: The data from International Labor Organization and Bank of Korea.
Table I-1-2-3-33 Ratio of added value in service sector to nominal GDP in major countries
(2014)
(%)
France USA UK Netherlands Japan Germany ROK
78.9 78.4 78.4 77.0 72.0 69.0 59.4
Source: Statistics of the United Nations.
The OECD presumes that this situation has been created by the concentration of resources, including
capital and human resources, in the manufacturing industry that was caused by the ROK’s
manufacturing-oriented economic development and points out that the services industry’s low level of
competitiveness is affecting the income inequality and growth rate in the ROK. Based on this assessment,
the OECD observes that the services sector’s competitiveness should be strengthened through the
abolition of barriers to entry into the sector, promotion of regulatory reforms and liberalization of trade
and foreign investment, among other measures.78
In a statement concerning the Three-Year Plan for Economic Innovation (February 2014), President
Park emphasized the government’s intention to lay the foundation of dramatic development of the
services industry by actively increasing its fiscal, R&D and financial support: which has been mainly
provided to the manufacturing industry, to a level similar to the support for the manufacturing industry
in order to ensure that investments in the services industry can expand and high-quality jobs can be
78 Overview of the OECD Economic Surveys Korea, June 2014
2.4%
6.1%
36.5%
24.4%
61.1%
69.5%
0% 20% 40% 60% 80% 100%
Ratio to
nominal GDP
Number of
employed
persons
Primary industry Secondary industry Tertiary industry
199
created.79
It is said that the ROK will shift to an aged society80 in 2018, and pressure for fiscal expenditures
is strengthening in order to secure the financial sources necessary for policy measures related to pension
and welfare. Therefore, it is an urgent task to strengthen the initiative to achieve sustainable growth by
carrying out structural reforms based on the Three-Year Plan for Economic Innovation.
By achieving innovations and creating new industries, the ROK needs to create domestic jobs and
demand through a change of course from the existing growth model led by the manufacturing industry,
exports and large companies to a new approach that takes into consideration promotion of domestic
demand and the services industry while expanding further into the fiercely competitive global market.
(4) Structural reform initiatives in resource-producing countries
(A) Russia: promotion of import substitution and improvement of the business environment
After 2000, when President Vladimir Putin took office, the Russian economy consistently grew
except during the global economic crisis in 2008 thanks to crude oil price rises. Against the backdrop of
the continued economic growth, in 2004, President Putin established the Stabilization Fund,81 into
which a certain percentage of oil and gas revenues was put into as reserves. The reserves were used to
complement expenditures, cover the pension fund deficit, repay external debts and make investments in
and provide loans for domestic infrastructure projects, thereby supporting stable economic growth.
Currently, Russia is heavily dependent on the oil and gas industry, which accounts for around 50% of
the budget revenue and more than 50% of exports (Figure I-1-2-3-34).
79 Cited from Momomoto K. (2015), KANKOKU KEIZAI NO KISO CHISHIKI (October 2015), JETRO. 80 The number of years necessary for the share of the population of people aged 65 to double from 7%
(aging society) to 14% (aged society) is known as “doubling time” and is used as an indicator of the pace of
the aging of society in countries. Japan shifted from an aging society to an aged society over the period of
24 years from 1970 to 1994, the fastest pace that has ever been observed around the world. However, the
ROK is forecast to make this shift at a faster pace, over the period of 18 years from 2000 to 2018. 81 In 2008, this was divided into the Reserve Fund and the National Wealth Fund. The Reserve Fund is
used to complement expenditures and make premature repayment of external debts, while the National
Wealth Fund is used to cover pension fund deficits and to supplement voluntary pension reserves. In
November 2013, it became possible to use the National Wealth Fund to make investments in and provide
loans for domestic infrastructure development projects.
200
Figure I-1-2-3-34 Changes in share of values of exports and resource exports in nominal GDP
Source: WDI, World Bank.
The budget for FY2016, which was enacted on December 15, 2015, was compiled based on the
assumed crude oil price of 50 dollars per barrel and the assumed exchange rate of 63.3 rubles to the
dollar. The budget deficit amounted to 2.4 trillion rubles, equivalent to 3% of the GDP. While the budget
deficit is covered mainly by reserve funds, the deficit may expand further if the crude oil price trends
even lower.
Although the monetary policy’s main emphasis is placed on curbing the inflation due to the ruble’s
weakness, the ruble weakened further, leading to a rise in the policy interest rate to 17% at the end of
2014. Although the policy interest rate has been gradually lowered since then, it remains high at 11%.
In light of the current economic conditions, it is necessary to reduce the policy interest rate, but the rate
has been kept high out of concern over a possible inflation rise.
Under these circumstances, President Putin advocated the goal of shedding the dependence on
resources82 in his annual speech at the Federal Assembly on December 3, 2015. On March 1, 2016, as
a specific initiative to achieve the goal, the Russian government announced the Action Plan of the
Government of the Russian Federation to Provide Stable Social and Economic Development of the
Russian Federation in 2016 (Anti-Crisis Plan).83 This plan calls for federal budget expenditures totaling
around 470 billion rubles, of which the largest portion, or 310 billion rubles, is allocated to fiscal loans
to regions (Table I-1-2-3-35). The plan places emphasis on the improvement of the environment for
achieving economic diversification and medium-term economic stability and provides support mainly
82 “Competitive manufacturing is still concentrated mostly in the commodities and mining sector. We’ll
only be able to achieve our ambitious goals in security and social development, to create modern jobs and
improve the living standards of millions of our people, if we change the structure of our economy.” 83 The Russian government (http://government.ru/news/22017/). As of April 8.
to such fields as the automobile industry, housing construction, light industries and agriculture.84
84 Trade Publicity (March 30, 2016) (JETRO)
202
Table I-1-2-3-35 Major expenditure items in Russia’s anti-crisis plan for 2016
Item Institution in charge
Expenditure by
funding source
(100 mil. ruble)
Federatio
n budget Others
Financing for federal organs Ministry of Finance, administrative
divisions of federal subjects 3,100 -
Subsidies for federal organs for
social security payments to the
unemployed
Ministry of Finance, Ministry of
Labor and Social Protection 55 -
Maintaining the provision of
rehabilitation techniques for the
physically disabled (supports taking
into account the rise in price)
Ministry of Finance, Ministry of
Labor and Social Protection,
Ministry of Economic Development
298 -
Supports for automobile industry
Ministry of Industry and Trade,
Ministry of Economic
Development, Ministry of Finance
885.9 491
Supports for agricultural machinery
Ministry of Agriculture, Ministry of
Industry and Trade, Ministry of
Finance
- 100
Procurement of traction vehicles in
Russian Railways investment project
(2016)
Ministry of Transport, Ministry of
Economic Development, Ministry
of Finance, Ministry of Industry and
Trade, Russian Railways
-
398
(National
Welfare
Fund)
Modernization of public
infrastructure by expanding the
government supports
Ministry of Construction, Housing
and Utilities, Ministry of Finance 34 -
Additional capital input in Industrial
Development Fund (FRP)
Ministry of Industry and Trade,
Ministry of Finance - 200
Improvement of conditions for
supports for non-resource exports Ministry of Finance 81 -
Establishment of new SMEs and
employment creation
Ministry of Economic
Development, Ministry of Finance 111 -
Expansion of grants for innovative
companies
Ministry of Finance, Ministry of
Economic Development 44.3 -
Source: The Russian Government
(http://government.ru/media/files/X6NrVuOjjj1ALG5ZoCbVm5G3lQ0lCkh.pdf) and Trade publicity,
JETRO.
203
Measures to support industries include the promotion of import substitution and the expansion of
exports in non-resource sectors, which are intended to diversify the economic structure, and the
improvement of the business environment and deregulation, with the aim of fostering non-resource
sectors in order to shed the dependence on resources.
(B) Brazil: fiscal consolidation and response to private debts
As Brazil faces a decline in total demand, it is in a state of demand shortage, in which real GDP is
smaller than potential GDP. Brazil’s fiscal position is particularly unfavorable among Latin American
countries, so it is not easy to implement fiscal pump-priming. In this situation, the Inter-American
Development Bank (IDB) has proposed that Brazil should promote fiscal consolidation through
efficiency improvement of government expenditures and targeting of expenditure items and that while
doing that, the country should maintain social benefits by improving efficiency in such areas as health,
education, training and poverty reduction. The IDB has also observed that appropriate action must be
taken regarding the expansion of private-sector debts because while it is necessary to deal with this
problem, which may destabilize the financial sector, the room for monetary policy measures is limited
given the need to respond to the capital outflow85 (Figure I-1-2-3-36).
Figure I-1-2-3-36 Output gap (horizontal axis) and structural fiscal balance (vertical axis) in
Central and South American countries
85 Banco Interamericano de Desarrollo (2015), El laberinto: Como America Latina y el Caribe puede
navegar la economia global, Informe macroeconomico de America Latina y el Caribe de 2015, March
2015, Banco Interamericano de Desarrollo
204
Source: Extracts from Banco Interamericano de Desarrollo (2015), El laberinto: Cómo América Latina
y el Caribe puede navegar la economía global, Informe macroeconómico de América Latina y el Caribe
de 2015, March 2015, Banco Interamericano de Desarrollo.
In relation to the above, Brazil is implementing the pension reform. For example, the government
has expressed its intention to raise the starting age of pension benefits payout for women, which is
currently 60 years old, to 65 years old, the same as the starting age for men. 86The possibility of
implementing revenue reform, such as introducing the financial transaction tax (Contribuição Provisória
sobre Movimentação Financeira (CPMF)) 87 and imposing tax on dividends, was also suggested.88
In addition, Michel Temer, a vice president who took office as interim president in May 2016, has
indicated his intention to promote fiscal reform and other initiatives, and it has been pointed out that
expectations for such reform are growing in the market.
(C) Argentina: reform focusing on market functions
In Argentina, the new government of President Mauricio Macri89 was inaugurated in December
2015, marking the start of a reform focusing on market functions in order to achieve economic recovery.
The IMF estimates Argentina’s real GDP growth rate at 1.2% in 2015 and forecasts a growth rate of
minus 1.0% in 2016 (Figure I-1-2-3-37).90 Although the Argentine government forecasts a growth rate
of 3.0% in 2016,91 the country’s economy is facing the risk of stagflation, in which inflation rises during
recession, so it is necessary to keep a close watch on future developments (Figure I-1-2-3-38).
86 A comment made by Minister of Finance Nelson Barbosa on December 18, 2015. 87 This is a tax imposed on all financial transactions, including withdrawals of bank deposits and use of
credit cards. 88 A comment made by Minister of Finance Barbosa. 89 On December 10, 2015, Mauricio Macri took office as new president (a four-year term), representing a change from the leftist government that lasted 12 years to a right-of-center government. The new
government has expressed its intention to rebuild the economy by improving the investment
environment through the relaxation of the control of foreign currency and trade transactions. 90 However, a turnaround to a positive growth rate of 2.8% is forecast for 2017. 91 According to the draft national budget for 2016.
205
Figure I-1-2-3-37 Changes in Argentina's real GDP growth rate
Source: IMF World Economic Outlook, April 2016.
Figure I-1-2-3-38 Changes in the increase rate of consumer prices (CPI) in Argentina
Source: IMF World Economic Outlook, April 2016.
Based on his election campaign promises, President Macri announced plans to devalue the Argentine
currency, the peso, in order to unify the currency’s multiple exchange rates against the dollar and move
the rate closer to the actual situation; to abolish export tariffs on major export grain; to redress the fiscal
deficit; and to implement measures to restore the level of foreign currency reserves. He has also
2.9
0.5
1.2
-1.0
2.8
-15
-10
-5
0
5
10
15
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
(%)
(Year)
Estimated values for 2014 and later
41.0
10.9
23.9 25.0
20.0
15.0
10.0
5.0
-5
0
5
10
15
20
25
30
35
40
45
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
(End-of-period
value: %)
(Year)
No data for 2015
Estimated values for 2016 and later
206
expressed his intention to phase out foreign currency control. Immediately after its inauguration, the
government already implemented a shift to a floating exchange rate system92 and announced a series of
measures, including relaxation of foreign currency controls, reduction or waiver of export tariffs on
major agricultural products, reduction or waiver of the domestic tax on automobiles and other products,
abolition of export tariffs on industrial products, and abolition of the Declaración Jurada Anticipada de
Importación (DJAI)93 (Figures I-1-2-3-39 and I-1-2-3-40).
Figure I-1-2-3-39 Changes in Argentina’s international balance of payments
Source: National Institute of Statistics and Censuses and CEIC Database.
92 As the revision of the exchange system was the top priority issue for the government of President Macri,
Minister of Finance Alfonso Prat-Gay announced the abolition of Argentina’s four-year-old exchange
control on December 16, 2015, and a shift to a floating exchange system was implemented at the opening
of trading on December 17. 93 At the same time as the abolition of this system, a new import control system called the Import
Monitoring System was announced. Under the new system, nearly 1,400 out of all import items (including
automobiles, auto parts, information equipment and textiles) were designated as sensitive items and were
subject to permission for non-automatic import, which made it necessary to file application for import. The
WTO was unable to determine that Argentina had implemented a corrective measure concerning its import
restrictions by introducing the new system, so consultations between the complainants (Japan, the United
States and Europe) are ongoing.
-20
0
20
40
60
80
100
2000 2002 2004 2006 2008 2010 2012 2014
(bl. $)
(Year)
Exports of goods Imports of goodsExports of services Imports of servicesCurrent balance Trade (goods and services) balance
207
Figure I-1-2-3-40 Changes in exchange rate of Argentine peso
Source: Thomson Reuters EIKON.
As there are concerns that in the future, inflation will grow due to the Argentine currency’s
depreciation caused by the relaxation of exchange control, a recession may be expected in the short term.
However, it is inevitable that reforms necessary for economic rebuilding involve pain, and if the results
of Argentina’s reforms start to appear, expectations for an increase in investments in such areas as
electricity and other infrastructure, agriculture, construction and energy will grow. On the diplomatic
and trade fronts, it is expected that progress will be made in the negotiations concerning a free trade
agreement (FTA) between the EU and the Common Market of the South (Mercosur) (Mercado Común
del Sur) and that exports to The Pacific Alliance, Alianza del Pacífico (Mexico, Colombia, Peru and
Chile)94 will expand.
(D) Saudi Arabia: privatization of state-owned enterprises
The main determinant factor of Saudi Arabia’s economic conditions is the oil sector, which accounts
for around 50% of GDP. With almost all exports attributable to the oil sector, Saudi Arabia depends on
oil for 80% of government revenues. As a result, Saudi Arabia’s economic stability is closely related to
the oil price. Because of the recent decline in the oil price, Saudi Arabia’s fiscal positon has deteriorated,
with its budget deficit equivalent to around 15% of its economic size in 2015 (Figure I-Ⅰ-1-2-3-41).
94 Trade Publicity (January 6, 2016) (JETRO)
0
2
4
6
8
10
12
14
16
18
2015/9
/1
20
15/1
0/1
20
15/1
1/1
20
15/1
2/1
2016/1
/1
2016/2
/1
2016/3
/1
2016/4
/1
Strong peso
(weak dollar)
Shift to the floating exchange rate system
Dec. 17 2015
(Exchange rate per $)
Weak peso
(strong dollar)
208
Figure I-1-2-3-41 Ratio of fiscal balance to GDP in oil-producing countries in Middle East
Source: IMF WEO, April 2016.
In order to shed the dependence on oil, on April 25, 2016, the Saudi government announced Saudi
Arabia’s Vision 2030, which summarizes the goals that should be achieved over the next 15 years until
2030 and the policy agenda for their achievement. Deputy Crown Prince Mohammad bin Salman Al
Saud remarked that the government will turn Saudi Arabia into an economy not dependent on oil by
2020. This vision is comprised of three pillars, which are (i) positioning Saudi Arabia as the heart of the
Arab and Islamic worlds, (ii) turning the country into an investment powerhouse, and (iii) making the
country a strategic location, and the major items in the economic field cited in the vision are as follows:
(1) Implement the initial public offering of shares in Saudi Aramco (less than 5%)
(2) Transfer the proceeds from the sale of shares in Saudi Aramco to the sovereign wealth fund (SWF)
to create the world’s largest SWF.
(3) Privatize government organizations and promote participation of private capital, mainly in the fields
of healthcare and education.
(4) Create a local military industry (with a view to reducing military expenditures and creating jobs, for
example).
(5) Develop renewable energy (initial capacity target set at 9.5GW).
Saudi Aramco is the largest state-run oil company in the world, and even a mere 5% of all shares in
the company is worth 125 billion dollars. The company’s market capitalization is expected to surpass
that of major resource majors such as Total and BP.