By Adnan Syed
This three part series examines the rise of India as an economic giant, the threats that India faces in this remarkable rise, and implications for Pakistan.
The Rise of India
Indian economic growth is expected to be 8.50% this year. This is a remarkable rate of growth for any economy. But this rate is dwarfed by the double digit growth rates that China has been producing for the last 10 years. India’s growth rate is expected to accelerate in the coming years, and Morgan Stanley expects that within next three to five years, this growth rate will outpace the Chinese rate of growth. Many economists are now forecasting that India would have the best economic performance among all nations of the world for the next 25 years.
The biggest reason for this higher expected growth rate is the demography. Economic growth of any nation relies on increase in workers (or the working age population) and increase in productivity. In 2040, India would have 58% of population as workers. The same number for China is only around 40%. India’s working age population will increase by 136 million over the next 10 years. China’s will grow by mere 23 million. To give some idea, during the similar time frame, the European working population will decline by 15 million over the next 10 years.[i]
Thus when an economic engine revs up, the economic progress feeds on itself. As firms employ more labour, the labour crosses social strata and starts spending the new-found wealth. The positive chain reaction from the increased economic activity is happening all over India. One of the most impressive statistics in the fight against poverty happened in India over the past two decades. Some 300 million Indians left absolute poverty levels and climbed into the ranks of lower or a proper middle class. This middle class by some estimates is going to be 500 million strong within the next decade. These newly un-poor families spend their economic benefits on various consumer products. Indian factories then churn out more products for these consumers, thereby employing more people. The increase in consumption is having a multiplier effect across the whole economy as firms set themselves up to supply appliances and gadgets to the new middle class. A 100,000 rupee car, $35 laptop, cheap suspension bridges for rural villages and remote mountainous towns, cheaper TVs and washing machines; India produces everything, for Indians and for the world.
In the year 2010, India received a direct foreign investment of 25.90 billion USD taking the total FDI to almost 132 billion dollars to date. The world capital is flowing into the booming Chinese and Indian markets. And the investors are realizing that the world is on the cusp of something quite remarkable.
1) That there are two countries, with vast untapped potential, with populations almost 3 to 4 times the population of the present giant, the United States. That slowing and ageing western economies will not be the primary economic growth engines of the world. The baton of economic growth is decisively moving east.
2) That the wealth of these two nations will surpass and may dwarf a remarkable economy like that of the United States in coming decades.
OLD VS. NEW INDIA
The notoriously inept Indian bureaucracy was on display at the recently concluded Commonwealth Games. This $4.60 billion undertaking was the Indian message to the world that India had arrived on the world stage as the next power to reckon with. India barely made it properly to the first day of the Commonwealth Games. Widespread corruption allegations, combined with atrocious project management of the games added to the perception that the Old India red tap bureaucracy and rampant nepotism was still unready for the efficient modern world.
In this chorus of condemnation of poor Indian effort, another gigantic project finished around late 2010. The sleek and modern New Delhi Airport Terminal 3 was managed by a private company called GMR Infrastructure Ltd. The $3 billion undertaking was finished on time in less than three years by a private enterprise. The terminal, spanning almost 500,000 square meters is one of the largest airport terminals in the world.
The contrast between the efficient new Terminal 3 and the sloppy work done in the Commonwealth Games infrastructure heightens the divide between the stodgy India of the old and the new dynamic India that is working its way through the private sector enterprise.
It is the private sector that is the bedrock of economic growth in India and is reducing the endemic poverty. The Indian companies in technology and manufacturing are hiring at breakneck speeds. Still there are projections that India will be short of thousands of engineers per year in the coming few years. The financial sector is focusing more on the micro lending techniques for the poor; an area that the socialist governments of the past seldom paid any attention to.
The result is that India of today represents a vast swathe of poverty stricken country with islands of prosperity. However, encouragingly, these islands are expanding outwards. Where the dynamism of the new India struggles is when it collides with the Old India. And the old India is visible in the dilapidated infrastructure that criss-crosses the whole nation.
McKinsey and Co. estimated that the poor Indian infrastructure costs the nation almost 1.1% of its yearly GDP growth. This will translate to lost growth to the tune of $200 billion by the year 2017. McKinsey also estimated that India needs to spend some $1 trillion dollars to get its highways, bridges, ports and utilities to break free from the old and inefficient India and bring them at par with a nation aiming to achieve high rates of growths in the coming decades.
This battle between the old and the new India will play out over the next two decades. The old India prefers to keep the status quo, casting deep suspicions on free market capitalism and how it will radically change the socialist India forever. What works against the Old India is the youthfulness of the nation. The youth find the new India promising, delivering them the quality of lifestyle that their parents and generations could only dream of. The near double digit growth rates, and massive society transformation from overwhelmingly poor to overwhelmingly middle class are intoxicating phenomenon for the young population. It could care less for the inefficient bureaucratic India of the old.
THE RISKS TO THE NEW INDIA:
The current Indian economic miracle is no doubt one of the biggest stories of the early 21st century. However, free market capitalism demands the rule of law. Without the protection of property and rights of investors, investors cannot embrace India enthusiastically. On that front, India still has miles to go. Corruption remains endemic; Transparency International ranked India in the top half of the most corrupt nations on earth. In July 2008, Washington Times reported that a fourth of 540 Indian members faced criminal charges, “including human trafficking, immigration rackets, embezzlement, rape and even murder”.[ii]
India, for all its recent strength, still remains an overwhelmingly poor nation. As recently as 2005, the World Bank was estimating that 2 out of 3 people were living inside absolute poverty (on less than $2 a day). The state of infrastructure remains dilapidated. India remains the country where most people (per capita basis) die in road accidents. There is no national healthcare system. Marxist insurgencies fester in North-East India. Food inflation results in massive discomfort for the enormous body of poor people that dot the nation’s landscape.
But many commentators have noted what held India back, may very well guide it through towards a prosperous future without major hiccups. Indian economic progress was held back by the Indian democracy itself. The democratic parties indulged in ideological sloganeering but little else. Free market capitalism was frowned upon. Bureaucracy took over the administrative process, and choked life out of small business in India. Even today, construction of roads and other infrastructure needs various approvals from different departments. Setting up industries in West Bengal proved problematic for various industrialists as their plans were opposed by the local peasants and politicians. This is very much unlike China where “when technocrats decide to dam a river, build a road or move a village, the dam goes up, the road goes down and the village disappears. The displaced villagers may be compensated, but they are not allowed to stand in the way of progress”.[iii]
But China is already experiencing pockets of social unrest. Workers’ strikes have been reported in China during the past two years, an almost unheard phenomenon before. At some point, the Chinese will have to contend with a fundamental question; free market capitalism can only run without individual freedom and democratic rights for so long, but not forever. India will likely not face the Chinese problem. With a democratic system in practice for six decades, India recognizes how to deal with dissent. India does not have the Chinese culture of secrecy and censorship. However India still is not sure if its socialist past will seamlessly mingle with its new capitalistic future. For now, its major political parties agree that the new India is in their best interests. There is political consensus for prosperity.
What is needed to ensure the sustainability of prosperity is lacking in the nation. But this is the question for the coming decades. Right now, the India economic juggernaut keeps on rolling forward.
On Monday: Is the new dynamic India sustainable? Implications for Pakistan from the New India.
[i] The Economist, Oct 1, 2010
[iii] The Economist, Oct 1, 2010