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TECH TALK: As India Develops: What Others Say

February 24th, 2004 · No Comments

The Economist writes in its recent survey of India:

The most fundamental long-term reason for optimism is demographic. More than half of all Indians are under 25 years of age. It is the sort of bulge in the numbers of people in productive age groups that produced explosive growth in China and South-East Asia.

The reason India is expected to outperform Brazil, Russia and China as well as the rich world in the Goldman Sachs forecasts is that it is the only country where the population will continue to grow for the next 50 years and where the proportion of working-age people will increase well into the 2020s.

Mr [Mukesh] Ambani [of Reliance Industries] thinks India is undergoing a silent revolution: our young people want to fend for themselves, and the government is getting out of their way. What troubles many is that this revolution is changing the lives of only a small urban section of the population. Even Mr Ambani is worried by the widening social disparities. India, as Nehru wrote 60 years ago, is a bundle of contradictions held together by strong but invisible threads. Modernisation and globalisation, far from imposing, as some have feared, a bland sameness on India, are sharpening some of those contradictions.

The challenge is both to make India as a whole richer faster, and to find better ways of distributing the benefits of more rapid growth. As India’s population expands, that challenge will become ever more urgent, and ever harder.

The next few years should offer the Indian government its best chance yet to tackle it. Rarely has India enjoyed such favourable international prospects: of peace with Pakistan; of enhanced integration in the global economy; and of being accepted as an important world power. At home, this is helping generate a new self-confidence which, rightly managed, could produce a virtuous circle of private-sector investment, rapid economic growth and liberalising reform. That in turn might allow a reshaping of the government’s budget, and of its role in the economy: as less of an employer, subsidiser and borrower, and more of a provider of the infrastructure, health care and education its people deserve. That is indeed a shining hope.

From a recent Morgan Stanley report:

The liberalization program pursued in the 1990s in the form of reduced capital and trade controls is enabling India to participate in the global labour arbitrage trend. The increasing integration of the Indian economy with the rest of the world is evident in the significant rise in openness (imports plus exports as a percentage of GDP) to 32% in 2003 from 17% in 1991. Although India was always present in a limited way in manufacturing goods outsourcing, this trend is now increasingly spreading to a wide range of sectors, including IT software, IT-enabled business processing services, pharmaceuticals, engineering, design and research & development. We believe this trend is poised to accelerate significantly, unless there is an increase in protectionist measures by the developed world.

Though the opportunities in IT and Pharma should create employment, this will account for a small share of people entering the workforce. We believe the take-off of manufacturing and major reforms in the agricultural sector is critical to improving India’s employment levels. China can be a good example to follow. Over the last 10 years, it has provided a larger section of its work force with higher-quality job opportunities through outsourcing in manufacturing as well agricultural sector reforms. In China, the share of employment in the low income-generating agricultural sector has reduced significantly to 45% in 2001 from 68% in 1981. In comparison, in India the share of agricultural workers has reduced to 58% from 67%. We believe that simultaneous progress in manufacturing will be necessary for balanced economic development ensuring participation of lower-income earners in economic progress and social stability.

In our view, the key measures which the government has to adopt to improve the manufacturing environment are:
(a) Removing infrastructure bottlenecks
(b) Create an environment to attract FDI
(c) Labour reforms
(d) Creating skilled labour by improving education opportunities

In a world with increasingly mobile factors of production, India’s rising surplus labour will continue to create opportunities for MNCs and raise of the issue of protection. However, to make full use of this opportunity, India will have to initiate key reform measures, which will enable the manufacturing sector to gear up and provide jobs to the millions likely to join the workforce each year.

Tomorrow: What Others Say (continued)


TECH TALK As India Develops+T

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