THE GREAT INDIAN GROWTH STORY.........
India is the world’s second-fastest growing major economy, having clocked growth rates averaging 8.9% in the four years prior to the global financial crisis that began in September 2008. The Indian economy is now poised to resume its fast pace of growth, recovering double-quick from the crisis-induced slowdown. Population growth having come down to 1.5% a year, India’s per capita income is growing at close to 7.5% a year, a rate that will allow it to more than double in ten years. This is a remarkable achievement in human history, with China’s example as the only precedent.
India’s emergence as a fast-growing trillion plus dollar economy has enormous significance for the rest of the world. The remarkable thing about India’s rise is that it is mostly benign and perceived as such by much of the world. It is also true that India faces numerous economic challenges. But India’s new prosperity is indeed trickling down to the bottom of the pyramid. The government’s redistributive policies play a major role - direct tax collections (essentially, tax on personal and corporate incomes) have been growing at close to 30% a year, thanks to lower rates and better tax administration and the government has initiated sizeable rural development and employment schemes.
Considerable emphasis is being given on infrastructure development and urban renewal. New national highways are being built across India, and this road building activity also drives growth in the rural areas. Indeed, highway projects have been a trigger for a state like Bihar, (one of India’s 28 states), to register growth in excess of 11% a year for five recent years.
The Planning Commission pegs investment in physical infrastructure to be a cumulative $542 billion during the Eleventh Five Year Plan period of 2007/08-2011/12. And this is expected to go up further to $1,000 billion over the 12th Five Year Plan 2012/13-2016/17. A steady rise in infrastructure investment is already visible. Infrastructure investment has moved up from 5.4% of GDP in 2005/06 to 7.5% of GDP in 2009/10. The Planning Commission forecasts this figure to climb up to 8.4% of GDP in 2011/12. What is of special interest to foreign investors is the ever more significant role of private investment in building India’s infrastructure. The share of the private structure in infrastructure investment has moved up from 2.2% of GDP in 2007/08 to 2.6% of GDP in 2009/10 and is expected to touch 3.3% of GDP by 2011/12.
No economy can sustain fast growth without undergoing accelerated urbanisation. The 2001 Census put India’s urban population at 28% of the total. It probably has already moved past 31%. It is a safe bet to expect half of India to live in towns by 2030, which means that over 230 million additional town dwellers. The urban space that is required to accommodate these many additional people would be upwards of 20,000 sq km. While this is a great policy challenge, there is little alternative but to build this required space, to house the fast growing sectors of industry and services. Building new towns as energy efficient, climate-friendly habitats, using mixed land use to minimise commute, extensive public transport, green building codes and green energy would be a policy challenge and a great investment opportunity. India allows 100% FDI in building new townships.
The UN estimates that India would contribute fully a quarter of the addition to the world’s workforce over the next 10 years. India would produce 136 million workers, while China would contribute just 23 million. The main challenge for India would be to ensure that these young people are educated, skilled and productively employed. While school retention rates have gone up over the last five years, raising the quality of education and increasing the proportion of students to who go on to college would be major challenges. India’s education sector offers huge opportunities.
The government has been extremely keen to use public-private-partnership (PPP) to build infrastructure. Thus, national highways, power plants and airports are being built under PPP at great speed. New Delhi’s latest international airport terminal, T3, one of the largest in the world and the fastest built, stands as gleaming testimony to the efficacy of the PPP framework. A national skill development programme is underway, with extensive collaboration between the government and the private sector.
Thanks essentially to a sustained rise in the demand for food, especially for superior food from rural households due to their additional purchasing power arising from enhanced transfers and new economic activity, India is also facing the challenge of food inflation, in recent times. This is both a problem and an opportunity to raise farm output and boost farmer incomes. While agriculture now contributes less than 18% of gross domestic output, it still employs a little more than half the workforce.
But is this growth sustainable? Such scepticism is commonplace, given the infrastructure deficits and shortages. But every such shortage is also a growth opportunity and India is putting in place a robust policy and regulatory framework that will allow each infrastructure sector to grow, as the spectacular growth of telecom has shown. India’s tele-density now stands at over 50%, with the 127-fold increase in the number of mobile phone connections from roughly 5 million in 2001 to 635 million by mid-2010 leading the way. It is entirely feasible that other sectors would replicate telecom’s success story.
There is an under-appreciated side to India’s growth story. India saves a little more than one-third its output and invests that much and little bit more, drawing on global savings, to squeeze out 9% growth. Per unit of capital, India produces far more output, thanks to two things: capital is unsubsidised and costly and this forces Indian companies to constantly innovate production processes and business models. India’s pharmaceutical industry’s cost efficiency might have its origins in the erstwhile process patent regime (now superceded by a TRIPS-compliant product patent regime), but its culture of constantly improving its own process continues to pay dividends. Bharti Airtel created a new paradigm in the telecom industry by outsourcing its networks, customer service and much else, focusing on brand building and customer acquisition. Companies around the world have adopted the model now, including Sprint in the US
India’s exports are less than a quarter of its GDP and net exports (exports less imports) are negative. This means that Indian producers depend mostly on the domestic market, making them, for the most part, less vulnerable to economic trouble abroad. The information technology sector, of course, is a major exception.
India depends, again, for the most part on domestic savings for capital formation. Yet foreign capital inflows do play a significant role in the Indian economy: it stimulates the stock market, reduces the cost of debt for large firms with access to global sources, feeds a veritable frenzy of entrepreneurship taking good advantage of venture capital and private equity and, in general, meets the gap between investment and domestic financial savings (a large part of domestic household savings are in a physical form and not available for investment by anyone other than the saver concerned). India’s fast growth attracts a lot of foreign capital. As significantly Indian industry’s outward investment, is also growing proportionately, with India for example, emerging as the second largest foreign investor in London.
India maintains control on foreign debt (total debt stock is roughly equal to total foreign currency assets), its debt service ratio is low (a healthy 5%), the share of short term debt in total debt is about 18%, even as the share of concessional debt in the total has come down by half to about 18% from the early years of the decade. So, foreign creditors have little reason to be concerned by the recent widening of India’s current account deficit, stubbornly below 2% of GDP and even negative in the early part of the decade.
India also regulates foreign investment in some crucial sectors of the economy - banking, insurance, retail, the media, telecom, and so on. The historic record is that most such caps are gradually raised and finally abandoned, over time. Such caution has served India well and it is unlikely that India would be rushed off its feet by any foreign wooer of its domestic opportunities.
For quite some time, it was fashionable to see India as a nation specialising in high-end services, particularly those related to information technology. No more. There is a new confidence in Indian manufacturing - only about 15% of outward investment from India are related to information technology. The world’s lowest cost car was conceptualised, engineered and manufactured in India, not any everywhere else. So, while services still grow faster than industry and account for about 54% of the output, manufacturing is getting only better - in volume and in sophistication.
Like any other fast developing major economy, India has to further accelerate its growth rate while being conscious of environmental aspect. India’s carbon footprint is small, per capita. The country has also committed to reduce the emission intensity of its growth - units of emissions per unit of additional output - by more than a fifth over the next one and a half decades. Green energy, green buildings, green habitats, greater energy efficient factories, offices and commercial places - these are daunting challenges and, simultaneously, goldmines of opportunity for high-tech firms around the world.
As India grows in size and clout, it will inevitably have an impact on the correlation of forces in the world. While India has no aggressive designs on foreign lands, it is inevitable that India’s defence forces should become stronger and more sophisticated. Larger procurement of advanced equipment leads on to offsets, joint ventures, domestic manufacture and eventually, India-based research and development, drawing on the tens of thousands of engineers who come out of India’s colleges every year, the best among them being world class.
