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| World Marketplace |
India Ascendant
Sunil Khilnani
09/01/2004
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India’s democracy has long been one of the wonders of the world. This country
of more than 1 billion people—most of whom are poor and lack a formal education,
and over two-thirds of whom live in the countryside—has sustained, since its
independence in 1947, a robust, sometimes tumultuous political tradition. By
contrast, India’s economy has been something of a cabinet of curiosities, where
extreme opposites jostle side by side. A lumbering state-controlled sector,
still directed by five-year plans, coexists with some of the world’s most
dynamic high-tech companies and scientific research centers. The consuming
aspirations of an exuberant middle class are fed by nimble private
entrepreneurs, while some 300 million others live on less than $1 a day.
| Investors, particularly those with short attention spans, should certainly approach India cautiously, and brace for political
surprises. These undulations are an authentic expression of a
uniquely complex society. |
The results of the general elections in May—in which the opposition Congress
Party defeated the governing coalition, led by a Hindu nationalist party—testify
to the intricacy of this massive cociopolitical enterprise. It was a dazzling
affirmation of the political freedoms that Indians possess, but also raised
questions about the direction and character of India’s economic future. The
markets greeted the Congress Party’s return to power, after eight years in
opposition, nervously, interpreting the result as a mandate against the program
of economic reforms that India has gradually pursued since 1991. Investors who
had once piled in enthusiastically now withdrew, fearful that the new government
and the communist parties on whose support it relied might slow or even stop
liberalization. However, those who reacted this way misread both the immediate
situation as well as India’s deeper trends.
Investors, particularly those
with short attention spans, should certainly approach India cautiously, and
brace for political surprises. These undulations are an authentic expression of
a uniquely complex society, whose economy varies sharply between regions and
sectors. India’s most prosperous state, Punjab, boasts a per capita income five
times higher than the poorest one, Bihar, while communist-governed Kerala’s 94
percent literacy rate contrasts with that of just 38 percent in Bihar. Such
disparities, in a federal system of 28 states xperiencing rapid and uneven
social change and where expectations are rising fast, are a recipe for political
volatility—and will from time to time find voice in populist parties and
programs.
Pragmatic Accord
Despite this, India’s economic reform process is
irreversible, based as it is on a consensus that extends across all political
parties. Although some raised the specter of a swing back to the era of state
control—the license-permit Raj—India’s pragmatic economic tradition renders such
worries baseless. Even in West Bengal, where communists have governed since the
1970s, companies like IBM have recently been welcomed with special provisions.
(For example, the government insulates the software industry from labor
strikes.)
| In a paper published last year, Goldman Sachs estimated that India’s
economy could be larger than Japan’s by 2032, and by midcentury,
per capita income will have increased 35 fold. |
Further, the new prime minister, Manmohan Singh, inherits not just
a healthy economy, but one that he did much to create. A professional economist
with an Oxford PhD, Singh was last inducted into office as finance minister
during India’s worst economic crisis, in 1991, when the country found itself
with just two week’s worth of foreign exchange reserves. In 2004 he takes charge
of a treasury with foreign exchange reserves nearing a record $120 billion. GDP
growth in the first quarter of 2004 surpassed 10 percent, and it may be as high
as 8 percent for the year. India’s skilled service sector, spearheaded by its
software industry (which grew by 30 percent last year), continues to consternate
the developed economies.
Deeper trends underpin this recent bounty. India has
decisively pulled itself out of a decades-long economic waddle, which yielded
steady but modest expansion of around 3.5 percent a year—famously dubbed the
“Hindu rate of growth.” Since the 1980s, annual growth has averaged around 6
percent, and the 1990s saw the fastest growth in India’s recorded history.
Poorer, late-developing countries have the potential to catch up rapidly. In a
paper published last year, Goldman Sachs estimated that India’s economy could be
larger than Japan’s by 2032, and by midcentury, per capita income will have
increased 35 fold.
The fundamental resource that will drive India’s
economic rise is its people. By 2050, India will surpass China as the world’s
most populous nation, and its citizenry is increasingly youthful. India is only
just beginning to experience what Japan, Western Europe and the United States
have already passed through: a youth bulge. In these economies, and in those of
East Asia, the working population is declining as people age.
The country’s
class of talented private entrepreneurs is only beginning to tap India’s large,
youthful and poor labor pool. Many indigenous start-ups have grown into global
success stories. The best known are software companies like Wipro and Infosys,
but they are also to be found in pharmaceuticals—Ranbaxy, Dr. Reddy and Cipla—as
well as in more traditional sectors such as automotive parts and steel. These
companies, which raise money from India’s developed capital markets and benefit
from low interest rates, are now looking to invest beyond its borders. Indian
business has thrived in this more competitive atmosphere since the 1990s. In an
important analysis of India’s recent growth, Dani Rodrik, of Harvard, and Arvind
Subramanian, of the International Monetary Fund, have shown that much of this
success was the result of more efficient use of resources, men and machines. The
productivity that is driving Indian growth over the past two decades is close to
the highest in the world.
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