|
|
 |
|
| World Marketplace |
India Ascendant
Sunil Khilnani
09/01/2004
|
Policy Pitfalls
India’s current push for growth
will come up against significant barriers if it cannot finesse its main foreign
policy challenge. South Asia is today the least integrated of all Asia’s
regions, with minuscule levels of cross-border trade among its seven countries.
The greatest obstacle to closer integration and higher growth is the almost
60-year conflict with Pakistan over the state of Kashmir, a dangerous face-off
between two nuclear powers. The new Indian government has committed itself to
furthering the peace process, but much will depend on how Pakistan responds.
Both sides need to recognize that high economic stakes trump narrow issues of
sovereignty. The South Asia market contains 1.4 billion people, and the
different national economies complement each other in significant ways. When it
finally emerges as an integrated economic region, India will be its economic
engine, and the rewards of growth will be plentiful.
Domestically, India’s
fiscal management has typically been prudent, and committed to economic
stability. Unlike many other developing economies, India has never had extended
periods of high inflation, because governments have not resorted to printing
money to get themselves out of trouble. Yet the managers of India’s public
finances now face a major task in taming the country’s fiscal deficit, which
amounts to roughly 10 percent of GDP, and slows growth by swallowing a large
chunk of India’s private savings.
More than 40 percent of the government’s
recurring expenses involve servicing past borrowings, and much of the remaining
revenue pays for salaries, defense and subsidies. Cutting the deficit is
difficult because subsidies have hardened into a fixture of the country’s
political economy. Free electrical power and fertilizers are used to buy off
prosperous farmers, while tax breaks and preferential savings rates keep
middle-class voters smiling. Governments have shied away from confronting these
powerful electoral groups, and the new one is likely to try to address the
deficit by improving tax revenues—which at present are only 14 percent of
GDP.
Within these constraints, very little is left for social spending on
education or health, and on physical infrastructure. Because of this, India will
need to hand off the financing and development of power, transport and airports
to the private sector. (India’s mobile telephony market, which is the fastest
growing in the world and is projected to reach 100 million subscribers by 2010,
is an outstanding example of the success of such a strategy.)
Colonial Memories
Indigenous capital has financed most of India’s growth
so far; the country sees barely one-tenth of the $50 billion direct foreign
investment that China sees every year. However, foreign investors who want the
sort of freedom from regulations they enjoy in China’s special economic zones,
or to extract massive profits, will be disappointed. Exploitive projects like
Enron’s power plant at Dabhol, accused of having a distorted pricing scheme,
will run into popular opposition that draws on India’s colonial experience, as
well as its democratic traditions.
India needs jobs above all. Its service
sector, with its software flagship, now accounts for half of India’s GDP. But
the software industry employs fewer than a million Indians, from a labor pool of
470 million, to which 9 million are added every year. Agriculture (which
accounts for less than a quarter of GDP) and industry have been painfully slow
to grow. As a result, the economy is creating less than half the number of jobs
it needs each year, leaving around 5 million more youths without prospects.
Growth and modernization inevitably bring social strains in their wake, and
India may face more than its expected share unless it can spread the benefits of
that growth by expanding employment opportunities.
Over the past six decades,
India has invested consistently in its political and legal systems, and has
accumulated considerable institutional capital to deal with problems of
social development—something that again sets it apart from China. Democracy and
its institutions provide India with powerful mechanisms of learning and
self-correction. These mechanisms, for all their flaws, are more stable (because
they are more supple) than those of solid-seeming China. India’s more
gradualist, consensus-building path to liberalization should thus ensure a more
durable basis for growth within a diverse society. The new Indian government
seems poised to demonstrate that even in a country of unprecedented complexity, political freedom and sustainable economic growth may
coexist.
Sunil Khilnani is the author of The Idea of India and director, South
Asia Studies, at Johns Hopkins University’s School of Advanced International
Studies in Washington, D.C.
|
|
|
|
|
|
|
