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Economist Survey on India

February 21st, 2004 · No Comments

The Economist writes about India’s “shining hopes”:

India is a country of extremes, and prone to extreme views about itself. This survey will examine the origins of the present buoyant optimism, and conclude that much of it is overdone: or at least, based on hope rather than achievement. Nor was India in quite such a mess a year ago as the pessimists feared. For a decade, the economy had seen average real growth in GDP of about 6% a year. The hope now is that it is about to take off on a markedly steeper growth path of 8% a year or more, and keep it up.

That sort of acceleration is necessary to provide opportunities for India’s growing population and its even-faster-growing workforce. During the present decade, on one estimate India’s labour force will expand by 50% more than all of East Asia’s (including China’s) put together. Without further structural reform, such a growth spurt seems unlikely. But this survey will argue that this is indeed a moment of shining economic opportunity for India, and that if Mr Vajpayee’s Bharatiya Janata Party (BJP) succeeds in leading its coalition to another election victory, it should be better placed to take advantage of it, and pursue the necessary reform, than has been any government in recent years.

Shining brighter, however, than any GDP growth target is the prospect of some lasting reconciliation with the twin from which India was so bloodily separated at birth in 1947.

The editorial compares India and China:

So is it really possible that India will be the new China? Perhaps, but only with important caveats. First, India is still far too dependent on the vagaries of the weather. Agriculture counts for almost a quarter of its GDP, and last year’s good monsoon was responsible for as much as 3.5% of that thumping growth figure. Tradeable services, the cause of so much excitement, cannot provide the only motor for growth and employment. This kind of work is highly specialised, certainly far more so than low-end manufacturing. On the most optimistic projections, outsourcing will employ 4m Indians, directly and indirectly, by 2008. Yet 9m enter the labour market every year.

This means that India’s manufacturing sector still has a vital role to play. It is sometimes assumed that China has captured the entire market for cheap manufacturing. That is not the case. Even China’s costs will gradually start to rise in the relatively near future, and could do so quite sharply if inflationary and international pressures force it to revalue its currency. There will, anyway, always be room for firms to find a profitable mix of technology and wage costs in any given industry: after all, people still make plates and shoes, not just films and pharmaceuticals, in the United States.

For India to do this, however, it must become a much more attractive place for foreign direct investment. At the moment, China is sucking in about $50 billion of FDI a year, ten times more than India. Those $50 billion will bring China much more than mere cash: they carry with them management skills, technology, marketing and expertise of all kinds greatly in excess of what is available locally. But the investment will not come until India shows that it is serious about improving its dreadful infrastructure, which means better roads, proper airports (compare Mumbai and Shanghai) and reliable power. That cannot be done by a government that is running deficits of around 10% a year. And the deficit problem, in turn, will not be fixed until India sorts out its tax system. Its legal system, clogged and antiquated, needs improvement too.

If these things are tackled, the Indian cobra might join the Chinese dragon in the sun. Some 300m Indians are still mired in poverty. But think back to the China of a decade ago, and a prosperous India is not such an impossible dream.

Tags: Emerging Markets

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