Ten Years After

There's a country rising out of its slumber. It's called India. And it's poised to be one of world's great economic powers. If you believe this, rest assured that you are not daydreaming. You are just one of the billions inside and outside India who swear by this fact, those who know this is possible soon and are working towards it.

But why is the Elephant God suddenly up and dancing? What exactly has triggered the surge of optimism in the minds of Indians and India-watchers? Why is there such an enormous sweep of feel-goodness in the economy?

Because the next 10 years could belong to India.

And it could begin with a bang. Right now, India is one of the three fastest growing Asian economies. In 2001, it could become the fastest. The Asian Development Bank (ABD) predicts 7 per cent growth for India in 2000 and 2001. This year, India would be overtaken by South Korea, which is expected to clock 7.5 per cent. But next year, Korea's growth will slump to 6 per cent, the same as China's, and India will forge far ahead.

What happens when India grows at over 7 per cent? Per capita income doubles in 12 years. And with an 8-10 per cent growth rate, poverty can come down to 15-20 per cent in a decade. From Rs 11,000 now, India's per capita income could be Rs 22,000 by the early 2010s. And the next doubling could come in half that time. By 2020, your and my children could be studying or working in an India beyond our wildest dreams.

The ABD forecasts were not in finance minister Yashwant Sinha's books when he presented the Union budget in February. But he was bullish enough to target the first decade of the 21st century as India's Decade of Development, with a GDP growth rate of 8-10 per cent in the period. Post-budget, the markets reacted badly and for a while it seemed he'd been speaking out of turn. Then, in June, when the International Monetary Fund chairman Horst Kohler came visiting, Sinha found a believer in him. "I believe India is a country of the future," he said. "With accelerated reforms, an 8-10 per cent growth is possible."

In effect, the endorsement had come much earlier. In mid-April, Nirupam Bajpai and Jeffrey D. Sachs, two distinguished economists with Harvard University's Kennedy School, wrote: "We concur that India has a chance for a tremendous breakthrough in economic development this decade (authors' emphasis)." Agree India's Delhi School of Economics' Institute of Economic Growth (IEG) professors B.B. Bhattacharya, K. Krishnamurthi and Gopal Kadekodi, who have worked out a long-term growth model for the economy which says that if India worked to achieve its full potential, it could even grow at 10-12 per cent a year.

India has been on a high-growth path for some time. Says Subir Gokarn, chief economist at the National Council of Applied Economic Research: "Actually, we have been among the fastest growing countries for the last two decades. Our average rate was about 5.5 per cent a year in the '80s and 6.5 in the '90s." A decade of opening up has also produced new dynamism in many sectors, the emerging infotech and entertainment sectors, yes, but also in sectors where government control has receded. As a result, India is now at that historical turning point where this dynamism, assuming there is no going back on reforms and no untoward incident like the rupee crashing or major earthquakes or other calamities, can by itself propel the economy by 6-6.5 per cent every year! But, says Bhattacharya of IEG, "More relevant here is a growth based on the medium-term capability and better utilisation of resources. And that would easily be 7-8 per cent. " Adds Rajiv Vij, country head, Templeton Asset Management: "I'd like to take a medium-term view of the next three years and I would be extremely bullish on India."

Theory, however, must be matched by ground reality. Ask investors and they are confident that the bad times have bottomed out. Says K.N. Memani, partner, Ernst & Young: "We're definitely looking at 7 per cent growth this year." The revival is clear in industry, which took the full brunt of globalisation for the last three years. Explains Vij: "As globalisation hits, the first thing that happens is margins get squeezed. With increased competition, prices decline. But after a point, as demand picks up, the greater efficiency achieved in manufacturing adds to the bottomline. This will soon begin to happen."

It may be happening already. The latest CII Business Outlook Survey (April-September 2000) reports "continuation of an across-the-board resurgence of the feel-good factor". In 1999-2000, industry grew by 8 per cent. More important, in April, the first month of the current fiscal, year-on-year growth in the Index of Industrial Production was 12.2 per cent. Manufacturing industries grew by 14 per cent, a record in recent years. Says Raghvendra Jha, senior professor, IGIDR: "This year, growth has clearly tilted towards manufacturing from being only services- and consumption-led. This is a very important differentiator. The capital goods sector needs to grow faster than the current 8.5 per cent and on a more sustained basis for the first two quarters. If this happens, we're clearly in an expansionary phase."

Apart from the industrial turnaround, the other reason that has sparked off the sudden buoyancy is the 13th consecutive good monsoon. After an above-normal monsoon that, however, ignored groundnut, coarse cereals, pulses and cotton-producing regions last year, the news has sprinkled hope of an early end to the miseries in the water-starved lands. And also of a better farm output growth than the 1 per cent recorded last year. Compared to 191 million tonnes, foodgrains production may touch the magic level of 212 million tonnes this year, leading, ironically, to higher incomes in the sector and to a problem of prosperity (see box) for the government. Less than one-third of our GDP comes from the agriculture sector, yet most of the services and manufacturing demand is generated there. In consumer goods, where demand is threatening to reach saturation levels, higher rural incomes hold the key to a revival. Says Sunil Joseph, president, Dundee Mutual Funds: "For growth, we need to look to the rural economy."

And this is where the current moderate inflation can help. Says D.H. Pai Panandiker, advisor, RPG group: "When inflation is very low, the economy doesn't perform. Historically, a 6-7 per cent inflation has always augured well for the economy." But what happens when the latent inflationary pressures surface? Already, the Indian currency has depreciated to Rs 45 to the dollar and Assocham predicts it might travel further down to settle at Rs 46-47 by year end, forcing interest rates to harden. In most industrial countries like the US too, after a year (1999) when world inflation declined to its lowest level in 40 years, rates are inching up triggering bearish forecasts. In such a situation, how much money can flow to this part of the globe?

It could still be quite a lot. India's trade is already booming, exports grew 12 per cent last year-a double-digit growth after a long drought, and a lower rupee can only help. But the news of the global economy, particularly the US, hardening is not good news for Indian exports, though that may take some time to impact. The offsetting factor here is that imports also grew 43 per cent in April and non-oil imports by 25 per cent. It's because of this that Assocham feels the rupee slide will be halted soon. With forex reserves at $37 billion even after the rupee depreciation, the Reserve Bank of India can take a generous trade gap ($8.6 billion last year) in its stride.

And of course, India has its vibrantly growing services sector. Says Nikhil Khattau, ceo, Sun F&C Mutual Fund: "Over half of our GDP comes from the services sector which is quite under-represented, so the real economy is growing at a significantly higher rate." Adds Vij of Templeton: "Services like software, consulting, travel and express mail are all growing rapidly. The need for all kinds of services is driven by the intellectual capability of Indians and the cost of labour, which hasn't been factored into our GDP properly."

Vij is merely underscoring what Indians have already witnessed. Thanks to revolutionary technological change in services-growing at 8 per cent plus-and infotech, it is now possible for India to midway leave the slow industrialisation route to development and take a shortcut to the growth path followed by the Asian wonders. The $5-billion software industry already employs about 200,000 professionals and offers enough opportunity for the 75,000 plus computer professionals graduating every year. Prosperity in these two sectors has also helped create the maximum number of jobs in the last few years and resulted in sharp income growth in pockets.

According to one estimate, an investment of a mere Rs 5,00,000 (a little more than $10,000 and five months of average low salary in the US) is enough to create a software job. Michael Dertouzos, a professor with the Massachusetts Institute of Technology, has a laughably simple theory. He says India could easily boost its GDP by a trillion dollars in the next few years performing backroom white-collar jobs for western companies. This would generate 50 million jobs at an average annual salary of $20,000 each. Sounds absurd, but it's true; the only problem is that India may not have enough educated people for these jobs! Why, even that doesn't seem to be much of a problem when you listen to what Gokarn says: "We have a window of opportunity of high growth because of the demographic transition. For the next two-plus decades, the share of our population between 16 and 60 years, the economically active people, will be rising exponentially. This means a consumption and savings boom." The challenge for the government here is to broadbase this boom by investing adequately in the social sector and education in particular. Bajpai and Sachs, in fact, want the government to implement universal education by 2010, with focus on girls and disadvantaged groups.

It's a shortcut that threatens to turn economic theory on its head. Any classical economist will tell you that for India to go beyond 7 per cent, the investment rate and capital productivity need to be stepped up. And in this respect, the Asian tigers will beat us hands down. There is some truth in this. Compared to Southeast Asia and the newly industrialised economies, our productivity rates are abysmal, though improving. Our savings and investment rates are still stuck in the 22-25 per cent band; the tigers are, except for South Korea, closer to 40. But then again, since today's practical economic experience suggests savings to be a direct result of higher incomes, not the other way round as we have all believed so far, there's a lot of room for India's savings to go north.

The problem with our savings rate is that it not only covers government dissavings but also underestimates household and private savings. But with investment, the problem is less technical. First, most growth areas in India now need much less physical investment. Second, as Intel Corporation ceo Craig Barrett put it recently, India can have enough dotcoms but where are the telecom and broadband networks? India needs massive investment now to put growth infrastructure in place and for this, reforms need to be fast-forwarded. Of late, the government has taken several steps to encourage flow of foreign capital in power, banking and ice (infotech-communication-entertainment) sectors, which indicate that the reform fatigue may, finally, be getting over.

As for productivity, globalisation is already working at it. Studies have proved that post opening up, capital efficiency of firms has improved dramatically. Says Bhattacharya of IEG: "Efficiency requires things to be priced properly. And the biggest defaulter here is the government, which undercharges everything it offers." Labour productivity, on the other hand, can improve only after the two pending reforms-exit policy and sell-off of public sector firms. Says Jha of IGIDR: "Standard economic theory is that when you press for economic reforms, you press the hardest on the toughest issue, which for us is the labour policy. There is a vrs policy but that is no option to a proper exit policy."

Is there any reason why the government will do all this? Especially now that the biggest vested interest, government employees, has been hit? Cribs Ernst and Young's Memani: "The biggest bottleneck to growth is the coalition government, which harbours contradictory views on crucial economic issues." Well, which government would have striven to cut its own nose and bring out a Fiscal Responsibility Act? Sinha did try to stop the communications minister from bargaining with his employees, didn't he? Says Bhattacharya of IEG: "Long-term acceleration everywhere has required a long-term commitment and growth plan. The government has wasted half of the '90s debating over selling off inconsequential companies like ITDC, rather than allowing the banks freedom to deal with their bad debts." We agree, but we'd rather go with the ABD economist who's convinced that the genie has been unleashed and that it's rather difficult for even the government of India to put it back in the bottle. Wouldn't you too? n