The Giant in the East – II

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.

(AZW)

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.

46 Comments

Filed under Democracy, Economy, India, Islamabad, Pak Tea House, Pakistan, south asia, USA

46 responses to “The Giant in the East – II

  1. Samachar

    The most promising sign so far is that of Bihar. It perhaps may graduate from being one of the BIMARU states. If Bihar can turn around economics-wise, then perhaps any state can turn around.

    Moreover, as MJ Akbar put it:

    “The old politics of caste and corruption has been buried in Patna as well by the Nitish avalanche. Its ghost might hover for a while, but if it is dead in Bihar it can’t really survive anywhere else. “

  2. libertarian

    @Adnan: thanks f0r this well-researched series. Waiting on the final installment – especially thoughts on how Pakistan should respond to derive max benefit.

    @Samachar: caste is not dead in Bihar. Far from it. Right now Nitish’s basic decent governance – law, order and infrastructure development – has trumped caste. As peoples’ expectations – and governance standards – rise, the electorate will fracture around caste again. In other words, once better governance is guaranteed no matter who is in the gaddi, caste will raise it’s head again. 63 years have proven that caste cannot be suppressed. The only trend that fractures caste – and it’s feudal underpinnings – is urbanization.

    The point of Bihar being a beacon is spot on though. Even Mayawati’s apparently taking a leaf out of Nitish’s book. If she delivers – and UP starts making real progress – we can cautiously break out the bubbly. We’ll know for sure about 2015.

  3. Girish

    Adnan: really well-written article.

    The biggest challenge before India, in my opinion, has been the very big disparities in growth across regions, groups etc. Talking about regions, there is a wide disparity between the South and West of the country on the one hand, and East and North on the other. This by itself might not be an issue (after all, China also has seen big differences in growth between the south-east and other parts of the country). The problem is that the regions that have not grown (or have even seen economic decline for a few years as in the case of Bihar) are also the most populous parts of the country. In China’s case, the regions that have grown fastest are also the most populous. The social stresses caused by migration from poor but populous regions to more prosperous, less populated regions would be big enough in a homogenous country, they go up by several orders of magnitude in a country with the level of heterogeneity in India – unmatched anywhere else in the world. Furthermore, the demographic dividend that is often presumed to work in India’s favor can turn into a nightmare easily, if you consider the fact that much of the growth in population is coming from the poorest parts of the country. Kerala and TN are already have fertility rates at or below replacement levels (the level at which population stops growing) and most of the other states in the South and the West are approaching that level. Thus, to do justice to an understanding of India, a macro level analysis is grossly insufficient. One has to get into the nitty gritties.

    Thus, the future prospects for India critically depend on how well India does in bringing the currently laggard states also onto the growth and prosperity bandwagon. If that does not happen, the social pressures could reach explosive proportions, even forcing some regions to consider secession to protect their own relative prosperity. If, on the other hand, states such as UP and Bihar start growing, the positive effects on India as a whole will be enormous. They don’t even need to grow at the rates of Gujarat or Karnataka or Tamil Nadu. The mere fact that they start becoming more productive parts of the economy would be sufficient to give a big boost to overall growth rates, reduce poverty and solve many of the issues that have plagued India for decades. It will increase the prosperity levels of other, better developed regions, as they produce to meet the demand from these states. The virtuous loop of growth and rising demand will benefit everybody.

    Thus, the recent election results in Bihar have extremely great implications on India as a whole. Not just in shifting the nature of politics across the country, but in keeping India together in the future as well. So far, Nitish Kumar’s government has only provided the very basics, that past governments in Bihar had criminally neglected, such as providing law and order, roads, basic education etc. However, Bihar is still not on the path to economic growth yet. It has virtually no industrial sector. No power to feed any industrial units that want to set up shop in the state. A grossly inadequate human capital base. These are massive challenges that Bihar cannot solve on its own, even with the best quality of governance. Thus, taking Bihar (and UP and Jharkhand and Chattisgarh and MP and so on) onto a path of growth has to be a national project. It was not possible when the state government was as rotten as it was in the past. At least it is possible now. But I don’t see the urgency yet amongst the political classes – the issue will also continue to face the challenges of competitive politics. But it is incumbent upon us, the educated elite, to convince everybody that it is in everybody’s interests to pull these states out of their current state into a positive trajectory of growth and development.

  4. Nadeem

    @Adnan Syed

    What are you talking about? Read some story of ‘India-the Superpower’ intellectual? Learn something about economy plz!

    8.5% growth in what sectors? Do you know growth itself can be counter productive if it happens in consumer and services sectors? Similarly FDI is not a blessing all the time, it can upset the entire macro economics.

    When developing countries open their markets for multinational corporations, banks and consumer products, there is always a rise in FDI and growth rate, when these corporate start taking away profits, the balance of payment and inflation get out of control.

    Not that I am anti-India but I do not see growth in India in consumer and services sector as people freindly. That is a party time for US corporates and poor will be suffering in the end!

  5. Bade Miyan

    Samachar,
    “If Bihar can turn around economics-wise, then perhaps any state can turn around.”

    That is quite an unnecessary argument.

  6. no-communal

    It’s now time for us to fight with each other. Experience (that I don’t have) with that average techie gossip magazine, Rediff.com, will come in handy.

    In economic growth rate, Bihar is currently 4th, Maharashtra 11th. Look up the recent TOI article about Maharashtra. If you take out Mumbai, Maharashtra and Bihar are not very different.

    So I don’t know why Girish is saying what he’s saying, ” However, Bihar is still not on the path to economic growth yet….” As I said, Bihar is 4th, M is 11th.

  7. libertarian

    @Girish: But it is incumbent upon us, the educated elite

    Hmmm … why are you “elite”? And why do you believe you’re better qualified to make decisions than the (presumably unwashed) masses? Minoo Masani – a capitalist when it was not popular – presciently noted in the ’60s that India would be saved by the “little man”. And so it has been. Arrogating the quality of “knowing better” reeks of the feudal mentality.

    Also fundamentally disagree that Bihar – or BIMARU in general – needs to be a “national project”. Biharis are smart enough to figure what’s best for them – as they have clearly demonstrated since 2005. At some point UP will be shamed into acting – as an island of crap in the middle of relative oases – with massive (internal) emigration of itself best and brightest. The idea that Bihar is kicking their behinds already has folks from Mayawati down looking to fix what’s wrong.

  8. AZW

    Nadeem:

    There are a few interesting statements in your brief comment. For example growth can be counter-productive if it happens in consumer and services sector.

    So can you explain why US economic growth has been so strong over the past century, when the economy comprises of more than 70% consistently (over the past century) on consumer spending. Or what is wrong with the major economies in the world where services sector makes up more than 80% of the economy.

    Another point: When developing countries open their markets for multinational corporations, banks and consumer products, there is always a rise in FDI and growth rate, when these corporate start taking away profits, the balance of payment and inflation get out of control.

    FDIs are absolutely must for an emerging economy as capital is needed to start various projects and industries. While FDIs may be undesirable in some cases when the capital has no purpose but to target higher yields, countries can erect capital control measures or FDI taxes to check their inflows. But in most cases, developing economies require foreign capital. Just ask some officials in Pakistan’s Ministry of Finance for example.

    The last part of your comment smacks of nothing but a rant against multi-national corporations for the heck of it. And while you are most welcome to think of the rise of India as anything but people-friendly, I am more interested in hearing from 300 million strong Indians whose standard of living has improved manifold during past 20 years as India has embraked on these economic reforms.

  9. Girish

    libertarian,

    It seems like you are perhaps projecting your own prejudices and biases into what I wrote. I did not arrogate to anybody the right to decide what is good for Biharis. Rather, it was a proposal for the entire country to play a supportive role where necessary, to ensure that the economic uplift of Bihar (and UP) does not depend only on its own resources. Not to help Bihar but in their own interest. Also, the only role I offered to the educated elite (and the term is widely used with a very well known definition) is to help educate the rest of the country as to why it is in everybody’s interest to do so. Why is that a problem? I am not asking anybody to decide on behalf of anybody else. Why is it wrong to ask those who have had the benefit of an education (often at public expense) to play a more active role in disseminating information?

  10. Girish

    NC:

    Bihar’s growth rate has indeed been higher than most other states in recent years. After several years of very slow and sometimes even negative growth in real terms, this is no big deal. If a state has grown at a consistent rate of 12% an annum for 10 years, another 12% growth in the 11 year in that state is very different from 12% growth in a state that has not grown for 10 consecutive years. India in the period before the economic reforms grew over the long run at 3-4%, yet had years with over 10% growth rate. Was that any good?

    The key question is where that growth in Bihar has come from. It has not come from agriculture, which is the main productive sector of Bihar’s economy but cannot sustain a growth higher than 3-4% over the long run. It has not come from manufacturing – there is virtually none of it in the state except in the small scale sector. It has come entirely from two sources – infrastructure investments by the state (in roads, bridges etc.) and from private investments in the services sector, which has benefited from the improved law and order climate (e.g. the entertainment sector, which had virtually ceased to exist has seen a revival). The first is not sustainable in the long run, unless the state generates enough revenues from productive parts of the economy. The second can only go so far in generating growth unless incomes from other parts of the economy rise. Thus, the high growth in Bihar will end up being a one-time correction unless there are structural changes in the economy of the state.

    Nitish Kumar recognizes the challenges he faces on this front. He himself said something to the effect that his first term was spent in plucking the low hanging fruit. The second term will be where he would have to focus on the more difficult tasks of attracting investments in productive, wealth-generating sectors of the economy. The heavy mandate he has got is a double-edged sword – it provides him the ability to do what is right and the ability to push through legislative and policy changes, but also comes with high expectations. As he himself acknowledges, this is not something he can do on his own. He does need the support of the rest of the nation to give a jumpstart to the economy and take it to a path where it will eventually be able to support itself and others.

  11. Karun

    Adnan,
    Thanks for the balanced piece.

    Liberalisation and the path of economic progress seems irreversible as of now, but for true gains to percolate corruption and inefficeiency and popular politics has to be shunned.

    The beauty of 9% growth is not in numbers but in the fact that what did not happen in last 50 years is happening now in 5 Yrs. Its a very positive spiral and is growing at neck-break speed.

    When i was an Intern with Kolkata Metro in around 2000-2001, we had never dreamt that 10 years hence a truly world class subway systems will crisscross delhi and suburbs and what it has unleashed is a chain reaction where bangalore next year, mumbai next year, Chennai (i saw metro work ongoing in sep2010), Hyderabad and even kolkata racing towards its new metro sytem by 2014. This was unimaginable 10 yrs back. and this is not glitzy and glamour. Infratsructure can unlock so much value and can add much more to the overall GDP and poverty alleviation.

    Where i would like to see more work apart from infra (which is coming up slowly but surely) is manufacturing capability. India has been wise to insisit on companies manufacturing here and despite hiccups you can see the whos who of Automobiles using India as a manufacturing base, Mobile phones setting up their factories, but i would like to see more, especially in computer hardware and electronic systems. I had never thought that an Indian wind turbine maker will be a leading world player, or Tata would own the best of Steel making and automobile technologies from their acquisitions but more and more cash rich indian companies are getting this done.

    bottom line : we are very good at Software and BPOs but Manufacturing is not far behind.

    Hvaing said all that, I for most part am not so much worried about the pace of economic reforms rather i guess our focus should be on cutting red tape and increasing transparency. Growth will come on its own if these conditions are fulfilled.

    So India must demand now is comprehensive ‘Judicial Reforms’ to take the economic juggernaut ahead.

  12. Girish

    Karun,

    I agree mostly with what you have written. But why do you think economic reforms are a separate thing from cutting red tape and increasing transparency? These ‘are’ the main priorities of economic reform in the Indian context and have been so since the time the economic reforms started.

  13. Girish

    Karun,

    One could have still imagined that Chennai, Hyderabad, Bangalore, Mumbai and Kolkata would be building metro lines. But who would have thought that Jaipur (construction about to begin) or Gurgaon (construction already underway) would be building metro networks of their own? Even a few years ago, it would have been unimaginable.

  14. no-communal

    Girish
    “If a state has grown at a consistent rate of 12% an annum for 10 years, another 12% growth in the 11 year in that state is very different from 12% growth in a state that has not grown for 10 consecutive years.”

    This is the standard argument. Well, that applies to India as well. The world can (and do) say that about India as a whole. And yet we insist on taking ourselves seriously.

  15. libertarian

    @Girish: Rather, it was a proposal for the entire country to play a supportive role where necessary, to ensure that the economic uplift of Bihar …

    Doesn’t sound like a proposal to me. Nothing actionable. More like bland wishful thinking.

    Also, the only role I offered to the educated elite (and the term is widely used with a very well known definition) is to help educate the rest of the country as to why it is in everybody’s interest to do so.

    Huh? OK – whatever you say.

    And the term is used widely in a self-serving manner – and mostly in the subcontinent. It’s the tired Confucian ideal of a “thinking” class doing the thinking for the rest of us. Well no thank you. Everyone has the right to think – and we have a well-oiled democratic system to amalgamate the results.

    Ab is kutte ke bhonkna bund ho jayega … – time to sign off🙂

  16. Nice to see a non-Western non-Indian story about the Indian economy. One of the good things going for India is that our growth is not export-driven, but increasingly driven primarily by domestic economic activity. So even if the rest of the world slows down, India should continue to grow at accelerating rates.

    As a Mumbaikar, what worries me are:

    1. the impact on the environment as India grows so rapidly. Already, Mumbai and most other cities are becoming unlivable given the level of pollution. Most of the urban residents suffer from some respiratory ailment or the other because of the suspended dust in the air from all the construction and the traffic. India needs to urgently build out public transportation systems. The rapid-transit-system under construction in Mumbai is at least a year behind schedule! Meanwhile, our environmental problems are getting worse. And forget city dwellers, the increasing industrialization of the country and the explosion in vehicles on the roads (especially given the new freeway system being built that’s going to criss-cross the country) is bring a huge strain on the environment.

    2. The huge disparity in growth rates in agriculture and other industries. If the money in people’s hands is growing at 8-9% a year but agriculture is only growing at 0.5%, that is a recipe for DISASTER! Can you imagine the rate of inflation here in India? In Mumbai, onions have gone up from ₹ (Rs) 7 a kilo to ₹41 in two years. Milk from ₹15 to ₹40, dahi from ₹20 to ₹60! It’s all because more people have more money in their hands. But it’s not sustainable and does not improve the standard of living if agriculture is unable to produce at the same rate. This year fortunately, we’ve had a good monsoon, but agriculture needs desperately to be modernized so that output becomes independent of the monsoons. The Rupee appreciating should also make imports cheaper so that could be another way of supplementing agricultural output. This is a problem that can seriously unseat the government at the next elections, and something the MMS govt would be smart to focus on. We need to get the private sector into agriculture.

    3. Indian companies need to start moving away from just services and move towards innovation. That’s the secret to staying ahead of the pack.

    Look forward to the final part in this series.

  17. Adnan, the effects of the growth are definitely amazing.

    Here in Mumbai, jobs are aplenty. And when people have jobs, they have money in their hands to spend thus resulting in other people having jobs to sell them goods and services. Jobs as they say are the engines of growth. Some signs I can point out: everyone these days has cellphones – maids, dhobis, you-name-it – and many have their own two-wheelers to commute (leading to a huge crush in traffic of course!). Most people have a refrigerator and TV even if they may live in the slums (living space is the most expensive thing here in Mumbai) and many are getting washing machines. And people are on a buying spree everywhere. Most impressive is that the growth is for the most part democratic and not restricted to an elite few.

    Meanwhile, we have farmers committing suicide in the other part of our state (Maharashtra) due to the failure of their crops. So definitely a lot more work to be done. All Indians acknowledge that we have miles to go.. but at least we’re on our way.

  18. Girish

    NC:

    I don’t know if you read my post before hurriedly responding. India has had years before the 1980s, when it grew for a particular year (or even two) at very high rates, sometimes in double digits. But they came after sustained periods of decline and hence nobody took India’s growth in those years seriously. Structurally, the economy had flaws and the growth reflected nothing more than a correction. India’s growth story started getting taken seriously only when it was sustained over a long period of time. When we went from a 3% annual growth over the long term to a 5% growth rate sustained over a decade (the 1980s), a 6% rate sustained over the next (the 90s) and then an even higher trajectory in the decade after 2000. China had periods of high growth followed by stagnation and even decline during the Mao era. Its growth was taken seriously only when it was sustained over a long period of time.

    That is where my argument comes in. Bihar needs to sustain growth over long periods for us to believe that an economic revival in the state is underway. One year of being the 4th highest growing state is grossly inadequate to make that case. Further, when you dig into the details of where that growth has come from, you will see that very little of it comes from any structural changes compared the periods before, except the two sectors I have pointed to, neither of them capable of sustaining high growth over long periods of time without the growth of other sectors of the economy.

  19. no-communal

    Girish
    No actually I did read your comment entirely. But you painted the stagnation in Maharashtra compared to Bihar as if the former is experiencing some sort of economic saturation. From what I hear from my Maharastrian friends (who are not too revved up about new metro lines, must I add), in some regions outside Mumbai there are average 6 hours load shedding in the summer. So it’s not like there is nowhere up to go. It’s not like the US having a 2% growth as compared to China’s 10%.

  20. Nadeem

    @AZW

    Bad habit to jump directly in Indian comparison with USA. USA is an imperial power while India is a poor developing state with worlds biggest number living below poverty line. If 300 Million lives has been improved then 500 Million has gone below poverty line as well, that is exactly what I am talking. Imbalance and services based growth results in same.

    When comparing with USA, you must remember that 4 Trillion US Dollars are traded every day for 365 days. It’s banks and Hedge Funds control commodities and equities. That is also services sector but it bring in money from world over. Similarly, the specialised services and consultancies also bring foreign exchange. In that case if services sector has a larger share in GDP, it would be healthy.

    When talking about economy, always remember in which sector FDI came and how much it helped in exports/generation of foreign exchange and what is net impact on balance of payments. In india’s case, it is negative.

    Dont compare that with service sector like opening branches of foreign Bank in India, which itself is a drain on resources. I hope it will help you understand.

  21. This is true. Mumbai has power 24×7 but the rest of Maharashtra including large cities like Pune see 6 or more hours of brownouts and blackouts every single day, as well as restricted times during which they get water in the pipes. So Maharashtra is definitely sliding into the BIMARU bracket. The state also has the highest number of farmer suicides.

  22. I forgot to mention the other main problem plaguing the country: the bonanza of scams we’re seeing: 2G spectrum scam, CWG scam, insurance scam, real-estate scam (Adarsh), etc etc. Transparency is needed if the people have to see the benefits of their tax money flow back to them.

  23. BTW since we’re tallking about economy: as a consumer in the world being crushed by the inflation in India, I’m very curious to know what the prices of commodities are like in other parts of the world.

    If possible, can people in Pakistan, US, UK and other places who’re visiting this site post the prices of basic commodities so we can all compare our relative burdens: price of milk, onions, tomatoes, eggs, electricity? (1 Indian rupee = around 2 Pakistani rupees and 1/45th of a US dollar (2¢)).

  24. no-communal

    Now Nadeem is talking like a world’s expert on India. Oh well, time to sign off.

  25. Bade Miyan

    NC,
    My comment was a tired reaction to Samachar. That’s all. I don’t think anyone is deluded into thinking that Bihar has come of age. However, there is a significant improvement. Girish is also right on most counts. The growth in Bihar is driven by Government spending, but it is a growth, nevertheless. Whether the growth would stall or not, only time can tell. I feel hopeful because of the direction the whole country has taken, which is going to pull Bihar and UP along with it. True, in 70s of 80s there were a few pockets of growth but the GOI was still trapped in dispiriting policies. I highly doubt that people in my state(or elsewhere) would want to go back to 24*7 lawlessness. I can say this with surety. The biggest change is in the social sphere. I get stunned every time I go back to my village every year or so. Just 5 years ago, when I used to go back, the typical talks, apart from marriages, etc., would be either about failed crops or legal cases. Early this year, on one of the trips, I was pleasantly surprised to hear from the son of one of the guys who works on our fields ask me about vocational colleges for his wife! And, my dad said, “Oh, this is nothing. Wait till you hear the other fools. No one wants to work on the farm now. ” Nitish may have manipulated caste and all that but his best idea has been to implement the bicycle scheme for girls. And, of course, the TV too. It has opened their eyes and that is one of the foremost reasons why they want power! So, 10 years ago, by the time transformers got set up, the entire power lines used to disappear. Not this time: There were armed bands leading day and night vigil to prevent such a thing from happening.

    The infrastructure aspect is frequently highlighted but it(the railways) was really not that bad in Bihar. Roads don’t take that much time to build. I think if Nitish keeps a tight leash on law and order, investments would follow. A lot of people forget that Bihar used to be fairly industry friendly till the 70s. Power is another factor which can revive the sugar mills in North Bihar within months. I read somewhere that the entire state needs 900 MW of power of which it produces only 150 MW. Apparently, just Gurgaon consumes that much power. As for services vs manufacturing industries, well, that is a problem faced by all of India. Indeed, it is starting to rile a lot of people here in the US too.
    So, I think, overall, we should be hopeful. I mean, compared to 20 years ago, we have surely made some progress.

    Nadeem,
    Bhai, trust me, the progress is real. I mean, for god’s sake, just compare the pictures from 20 years ago and now. That, however, doesn’t hide the very real need to do a lot more and a lot faster.

  26. Subcontinental

    Pakistan needs to know only one thing about India, and that is that 500 million people in India do not have toilet facilities. Everything else are just facts that come in the way of good arguments.

    Pakistan and India are equal and that the West better start treating Pakistan that way!

  27. lal

    ” If 300 Million lives has been improved then 500 Million has gone below poverty line as well, that is exactly what I am talking”
    I don’t know the statistics behind Nadeems claim,but according to planning commision the poverty levels in India has come down from 51.3 % 1977-78 to 36 % 1993-94 and 27.5 % in 2004-05.
    But there are suggestions that we are reaching a dynamic stability in our poverty eradication measures.For all the 100s of crores of rupees spent in various Yojanas targeted on BPL families our results has not been spectacular.Other than institutional corruption (only 15 Rs of the 100 Rs given ever reaches down there according to none other than Rajiv Gandhi),one of the reasons suggested is that a significant number of people actually go down the poverty line,even as we save some.Lack of proper health care,espicially to the earning memebers of the family or children is considered as one very big reason.(yup..no one cares about women and old people)The way poverty line is calculated,depending only on the calories that a family needs,there is no reservation for money needed for health care,education, house or electricity.
    This problem means we must not only target the people below BPL,but as well people who could become poor.There are health insurance schemes with government paying the premium in Andhra,TN and Kerala.that may be the way to go aith all the talk of “TWO INDIAS” by Rahul gandhi and ofcos nadeem

  28. Samachar

    AZW,
    So can you explain why US economic growth has been so strong over the past century, when the economy comprises of more than 70% consistently (over the past century) on consumer spending.

    National Public Radio explained this the other day. The problem is what is counted as “consumer spending”. If an American buys a house and pays a mortgage, the monthly mortage payment is included in the “consumer spending”. When you look at what you and I would consider to be consumer spending, then it is more like 35% of the economy.

  29. Samachar

    There are plenty of development traps for India opening up ahead. The main point about Bihar is that one of those traps has been shown to be avoidable.

  30. AZW

    Nadeem:

    Bad habit to jump directly in Indian comparison with USA. USA is an imperial power while India is a poor developing state with worlds biggest number living below poverty line. If 300 Million lives has been improved then 500 Million has gone below poverty line as well, that is exactly what I am talking. Imbalance and services based growth results in same.

    Well, a few things first: 300MM lives have been improved on a net basis. Therefore if 800MM Indians lived in absolute poverty, now 500MM people do. But even these figures are old. The absolute poverty levels are more in the range of 30% of the population. Since many people are pointing out those that are considered poor and live in urban slums and villages now enjoy a lot of modern perks like television, cell phones and even computers.

    By the way, it is free market capitalism at work in India, as it was in the United States. The US was a growing economy some 125 years ago, and their economic growth was roughly like what India is experiencing. In those times, FDIs originated from Europe and landed in America.

    Since rhetoric is free, you are most welcome to believe what you want. But let’s see your source of information where 500MM further people have gone below the poverty line.

    When talking about economy, always remember which sector FDI came and how much it helped in exports/generation of foreign exchange and what is net impact on balance of payments. In india’s case, it is negative.

    Indian economy is still growing at an early stage from a very low level. There is a huge amount of pent-up demand that is being met as the capital gets deployed. India would care less now where the capital is going, as its priority is to get the economy rolling forward. Once the economy matures, then the sustainability of that expansion comes into question. This is what I alluded to in the last five lines of my article. This is a story for the coming decades.

    You mentioned that in India’s case, balance of payments is negative. A small quibble here: BOP always has to sum to zero. You may be talking about current account and capital account. India is running a large current account deficit as its consumers consume imported goods. This development is a result of burgeoning middle class (not a shrinking one as you proclaimed). Countries do run current account deficits from time to time. And some economists are actually quite comfortable with these deficits as “a wide current account deficit is not necessarily a bad thing for a fast-growing developing country provided that it is attempting to boost local productivity and exports”..

    You: When comparing with USA, you must remember that 4 Trillion US Dollars are traded every day for 365 days. It’s banks and Hedge Funds control commodities and equities. That is also services sector but it bring in money from world over. Similarly, the specialised services and consultancies also bring foreign exchange. In that case if services sector has a larger share in GDP, it would be healthy.

    Here is an assignment for you. Calculate the annual trading volume of oil, equities (on major exchanges) and FX (say US dollars) in dollars. Pick top 10 US hedge funds and assume they work as a cartel and control (don’t know what you mean here, but I am assuming they are manipulating the prices) commodities, equities, and USD.

    Now assume that all these 10 hedge funds do is to trade these three assets (they don’t but let us not waste ourselves with these minor details. They also do not collude because that would involve 24/7 interaction between these hedge funds, and considering the size of personnel working for the hedge funds, impossible to hide, but again why get these small details get in the way of rhetoric).

    Now let’s see how much the top 10 hedge funds combined trading volumes compare to the annual trading volume of these three assets combined. Make as many generous assumptions as you would like. I may venture here that we would be lucky to hit even a 5% ratio of the trading volume for the top 10 hedge funds (combined) vs. trading volume of all three assets combined.

  31. no-communal

    Economic liberalization pushing people below the poverty line is a myth created by some (Delhi based) left wing intellectuals and the (Delhi based) party heads of the various factions of the communist party. Sure, there is inflation and that needs to taken care of. I don’t know how since I am not an economist. But going back to the earlier socialist model cannot be the answer.

    The effects of private enterprise and the emergence of 300 M strong affluent class are everywhere to be seen. Each year I visit my ancestral village for a few days in December. The village is in one of the poorer districts of West Bengal (Bankura) with rainfall scarce and soil arid. Even 10/15 years ago there were families there who starved. Now no one starves. Almost every poor family has adult members who work under NREGA. Under NREGA roads, canals have been built and now private buses run all the way. This was unimaginable 20 years ago. Almost all children go to school and get a full square meal under the mid-day meal scheme. Friends tell me there is a lot of money in the village, and this is a most backword village in rural WB.

    Sure all this is government spending. But such spending is critical for a country like India with its huge population. The point is all this goverment spending is financed from somewhere, and that is the famed 300 M affluent class. Without liberalization, it’s not that the poor will be any better. They will be much worse, and we all will share the poverty in varying degrees.

  32. Bade Miyan

    NC,
    “Sure all this is government spending. But such spending is critical for a country like India with its huge population. ”

    In fact, Paul Krugman has gone hoarse crying out for more govt. spending in the US.

  33. libertarian

    @Bade Miyan: In fact, Paul Krugman has gone hoarse crying out for more govt. spending in the US.

    Of course Krugman is a closet commie just like Barry Obama. Wonder what it is with these Nobel Prize winners and their commie-ness.

  34. Girish

    Bade Miyan and NC,

    There is a lot to be hopeful for – no question about it. My first exposure to Bihar came from my father’s stories. His first posting as a freshly minted civil servant was to set up a new office of the Government of India close to the India Nepal border, in a place called Forbesganj. My next exposure to Bihar came from my Bihari friends in college and by observing the highly dedicated group of people from the state preparing for the civil services examination in Delhi. And I even worked in the state for a couple of years, during which time I traveled into the deep interiors of the state. I have always believed in the potential of Bihar and have seen the progress (and in some areas, decline) from the days when my parents lived there in the 60s until now. It is heartening to see that some of the basic political failings in the state, that have held it back, are slowly starting to get addressed, so that people have the opportunity to realize their own potential. Bihar is a wonderful case study in what is possible through more rather than less democracy.

    My main point is that the economic growth in the state is a story for the future. The last five years have seen remarkable achievements, but these are in the areas of law and order, education, women’s empowerment and so on. These are necessary building blocks for economic growth, but not sufficient for growth by themselves, at least in the short to medium term. Growth will require concerted efforts in several areas. Power is one of the biggest priorities after law and order to attract manufacturing investments. And without manufacturing investments, Bihar will have a difficult time sustaining the high rate of growth necessary to solve its problems of poverty and underdevelopment. The right ideas are already there, now is the time to implement these ideas. And I do think that in the short to medium term, Bihar will need all the support from the rest of the country it can get.

  35. Kaalket

    About poverty in India , How many of them are Kaffirs ? Not percentage wise but by the number count.

  36. no-communal

    Kaalket

    You seem to be totally ignorant of the subcontinental strain of Islam. Here, watch this. It’s the trailer of the film “Moner Manush” (Inner Soul), which won the best film Golden Peacock award at the just concluded Indian International Film Festival 2010 in Goa. Let us know if you do not fall in love with Lalan Fakir after watching this.

    http://www.monermanush.net/trailer.html

  37. Girish

    While Adnan’s general thesis on the difference between the old India (with its emphasis on the public sector) and the new India (with the private sector driving it) is largely accurate, it is not univeral. A classic example is in metro construction. Delhi Metro is a public sector enterprise, staffed entirely by Indian Railways officials. Delhi has built a 195kms long metro line in the 9 years since the first line opened, on budget and largely on schedule. It is already one of the top metros of the world by length, and is poised to break into the top 5 metro systems of the world by the time the next phase is completed in 2015. By contrast, India’s largest private enterprise, Reliance is building the Delhi airport express line from the new airport terminal to the city center. This has been marred by delays – it was scheduled to open before the Commonwealth Games but is yet to open, with uncertainty about when it will eventually open. Reliance is also building a metro line in Mumbai, once again running behind schedule. While not all delays can be blamed on the entity building it (the line in Mumbai for instance has been partly delayed because of land acquisition issues), the metro example shows that the simple public/private sector divide is not universal. Following the case of Delhi Metro, many other cities are building public transit networks, either metros or bus rapid transit (BRTS) lines and many of them have proved to be comparable to Delhi Metro in efficiency. Public enterprises in India can be efficient, provided they have accountability, have good systems in place, and are freed from political influence. Delhi Metro, some of the other Metro/BRTS agencies in other cities across India and the Indian Space Research Organization are both examples of that.

    That said, the era for the public sector participating in all sectors of the India economy is over. The public sector has a role only in providing some of the public goods, where private enterprises are unlikely to want to enter, or where the profit motive is misaligned with the nature of the good. The engine of India’s economy henceforth will be the private sector.

  38. Girish

    Erratum: I meant 195kms metro ‘system’ in Delhi in my previous post, not a single line of that length. Delhi Metro has 6 lines, plus two branch lines.

  39. Kaalket

    no-communal
    I am well aware of the strain of Islam on Indian land mass and also have no quarrel with exception granted to this strain in india . But Pakisatn is is not India and Pakistani are not indian people . More than 90% of them are of Arabic, Irani , Anatolian or other alien stock and not native to the soil and land currently inhabited by the virtue of adverse possesion. None they hold sacred springs from this soil and all they hold sacred and imitate come from these distant lands. Please dont insult both indians and Pakistani by putting on equal terms. Your efforts are well meanning but not relevant and no applicable to these 2 different nations who happen to be neighbor.

  40. no-communal

    Kaalket
    “More than 90% of them are of Arabic, Irani , Anatolian or other alien stock and not native to the soil..”

    That I think is an astonishing statistic, which will make at least some PTH visitors proud.

    “None they hold sacred springs from this soil and all they hold sacred and imitate come from these distant lands.”

    That was partly true with Lalan as well, who by the way was abondoned by his Hindu relatives when he contracted small pox. He was given shelter by a Muslim family, a “sin” for which the Hindu community abondoned him (again).

    I have no expertise to get into a theological discussion, but did you see the trailer? At least watch it because it won the best film award from entries from 19 countries with an international jury, if such things matter.

    Lalan was from East Bengal; so if he were alive today, he would be a Bangladeshi (and before 1971, a Pakistani).

    “Please dont insult both indians and Pakistani by putting on equal terms. ”

    That, I am afraid, is the view of only a certain section of the people, not all.

    “Your efforts are well meanning but not relevant and no applicable to these 2 different nations who happen to be neighbor.”

    I have no idea if you are saying this from a feeling of hurt, or a feeling of real distaste, but I am assuming the former.

  41. no-communal

    Since we are talking about metro lines again, a stretch of the new Kolkata metro line will be under the river Ganges. Since it’s a public sector enterprise, everybody will be given a lifeboat when they board the trains.

  42. Girish

    🙂

    Actually, in the early days of the construction of the existing metro line in Kolkata, there were fears that passengers might need to bring life vests too (banish the thought of the metro ‘giving’ life vests to passengers). Even though the line does not pass under water, there were huge problems of and flooding. This partly contributed to the almost 2 decade timeline for construction of that line. The east-west metro line, although being built by a public sector company, is coming up pretty quickly. The contrast between the inefficiency of Indian Railways (which even recently has been struggling with the introduction of air-conditioned coaches on its line) and the public sector Kolkata Metro Rail Corporation cannot be more stark. The difference lies in accountability and systems.

  43. a 19yr old indian

    hi adnan, really found your artcle quite interesting.
    I ,an original resident of a semi rural Indian town can vouch for all the progress that you have mentioned. My dad was born in a lower middle class family and my grand dad, sometimes hadto even go to the villages on a cycle to sell clothes. Such was the economic misery.
    My dad finished his degree by getting loan from some of his friends. two of his other brothers couldn’t finsh their ug’s because they had to earn money . But the new India was kinder to their progeny . Almost all my cousins are very well educated now (including me, who is becoming an MBBS doctor);several of them work in Bangalore (in IT firms). When i was 6 or 7, going abroad was a ‘big’ thing that few lucky souls got to do. Next year i am going to Johns Hopkins University Hospital for a research fellowship for two months(My dad will accompany me on our first abroad trip).
    I have countless examples of how life is daily changing in India( for one, the AC— very few people used to have ac’s when i was small, now every home in our street in punjab has more than one AC’s)
    Cities are changing here. I came to delhi for studying in 2009. Every two months or so, i go sightseeing here. And every time , i see a new flyover or a footover bridge built or a rapid bus transit corridor(I was the happiest when a Metro train station was established right on the gates of my college AIIMS this october. It cut down the time from south delhi to chandni chowk by half hour and cost by 90%)

    last year i had plans to immigrate to the usa permanently after my mbbs. But now as big american style hospitals like Fortis,Medanta are getting built , i am rethinking my plans of permantly leaving india. I graduate in 2013 and i expect to see it more developed.
    yopu know the best thing ,,,nothing is more satisfying than such rapid change (economical and infrastructural) happening right in front of your young eyes.

  44. no-communal

    Girish
    When the first metro was being built in the 80’s, I doubt there was so much corruption. With the collapse of roof, foot bridge, etc. in CWG, it looks like a good idea to carry a lifevest just in case.

  45. no-communal

    Arjun

    As far as I can tell, the prices of these things have shot up in Pakistan too. In the US also they have gone up in recent years, but may be not as much as in India. The effects are felt less in the US since the prices are relatively low to begin with.

  46. Straight-Talk

    Thank you AZW for your analysis of growth story of India
    I don’t know the nuances for real economic development but one thing I’ve experienced and that was when I finished my 10+2 in the early 90’s, I’ve only very few options in the engineering and I’ve to compete very hard to enter in either IIT, JEE, MNR, Roorki and BHU with even very few options for service in private sector after finishing engineering. There were everywhere cry of increasing unemployment, people Q’d to register their name in Employment exchange. Competition was tough consequently I was successfully fail to qualify for engineering.
    But now when I see a sea of professionals, engineers, techies, software professionals and scores of opportunities for them, I’m realy happy. I don’t know this growth is sustainable or not but I do know that my father was not able to purchase a cycle 1970s and a TV in 1980s in his one month’s salary but I can purchase a 350cc bike in my one month’s salary with nearly same level of pay band.
    It is true that something amazing has happened and or still happening and there is a hope for even more brighter future. This is the hope for future that Nitish in Bihar, with only real work in road improvement in his last five years was brought back with 85% majority and this is what Lalu now days talking about, who in 2004 was asking “Ye aaity-vaity kya hota hai?”.