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By Aseem Shrivastava Much is being heard nowadays about the high growth rates that the Indian economy is clocking. India's economic performance is repeatedly - and inappropriately - compared to China's. In fact, the comparison is somewhat unmerited. China's growth record stands atop robust foundations of physical infrastructure, education and health set up during the period when it was closed to the world economy. Moreover, even more importantly, it abolished feudalism in principle and practice after the Communist revolution in 1949. Deng Xiao-Ping in fact redistributed land to the peasantry and created small town and village enterprises after the reforms began in the late-1970s. No such land reform was ever carried out in most parts of India (Kerala and West Bengal being partial exceptions). In fact, judging from recent land acquisitions by the state for purposes of 'development', one would infer that exactly the opposite policies have been pursued in India. Feudal socio-economic relations are still intact under the dazzling surfaces of modern capitalism. This may prove to be the lasting stumbling block to the economic breakthrough that India is looking for. All talk of being a 'superpower' is rudely misplaced when India's per capita income is about $2 a day at market exchange rates. For comparison, we may remember that China's is about $6-7 a day and America's and the EU's are both above $100 a day. Is the Indian growth rate sustainable? "India's economy displays an alarming number of signs that things have gone too far. Consumer-price inflation has risen to almost 7% (see chart), well above Asia's average rate of 2.5%. A recent report by Robert Prior-Wandesforde at HSBC finds many other signs of excess. For example, in a survey of 600 firms by the National Council of Applied Economics Research, an astonishing 96% of firms reported that they were operating close to or above their optimal levels of capacity utilisation-the highest number ever recorded. Firms are also experiencing a serious shortage of skilled labour and wages are rocketing. Companies' total wage costs in the six months to September were 22% higher than a year earlier, compared with an average increase of around 12% in the previous four years. 
"India's current account has shifted to a forecast deficit of 3% of GDP this year from a surplus of 1.5% in 2003-a classic sign of excess demand. Total bank lending has expanded by 30% over the past year, close to the fastest growth on record. "India's share and housing markets also look bubbly. Draft proposals by the central bank on November 17th to cap banks' exposure to stockmarkets and curb reckless lending only mildly dampened the optimism. Share prices are almost four times their level in early 2003. India's price/earnings ratio of 20 is well above the average of 14 for all Asian emerging markets. House prices have also gone through the roof: Chetan Ahya of Morgan Stanley reckons that prices in big cities have more than doubled in the past two years. Housing loans jumped by 54% in the year to June (the latest figures available) and loans for commercial property were up by 102%. "Indian policymakers seem reluctant to admit that economic growth has exceeded its speed limit over the past three years, let alone slow it. They prefer to bask in the belief that India has become another China, able to keep growing ever faster without inflation rising. Palaniappan Chidambaram, the finance minister, has said the Indian economy will continue to grow by more than 8% in the next few years. "India's trend growth rate has almost certainly increased but it is still nowhere near as high as China's. Mr Prior-Wandesforde estimates that it is now around 6.5%, up from 5% in the late 1980s. But India's recent acceleration largely reflects a cyclical boom, thanks to loose monetary and fiscal policy. The Reserve Bank of India has raised one of its key interest rates by one-and-a-half percentage points to 6% over the past two years, but inflation has risen by more, so real interest rates have fallen and are historically low. This makes the economy more vulnerable to a hard landing. "India cannot grow as fast as China without igniting inflation because of its lower investment rate, particularly in infrastructure, and labour bottlenecks. The latest government figures, for the year ending in March 2005, put total investment at 30% of GDP, compared with over 45% officially reported in China. "Some, however, believe that an investment boom is under way. A recent report by Surjit Bhalla of Oxus Investments, an economic research firm and hedge fund, has caused a stir by estimating that investment in the year ending in March 2007 will reach between 38% and 42% of GDP. Such investment, he says, would allow India to sustain 10% annual GDP growth. "Sadly, Mr Bhalla's estimate for investment is almost certainly too high. Unless saving (29% of GDP in 2004-05) has also surged over the past two years, an investment rate of 40% would imply a current-account deficit (which must equal the gap between saving and investment) of close to 10% of GDP. This does not square with trade figures and, in any case, it would hardly be a sign of economic health. Nor does a significant increase in saving look likely given strong consumer spending this year and only a modest fall in the government's budget deficit." http://www.economist.com/displayStory.cfm?Story_ID=8326793 |
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Numbers can numb us into thoughtless, heroic, optimism. Some of the aggregate figures for the Indian economy - especially the short-term growth rate - can look so impressive that one may be misled into thinking that the future will look much like the recent past. That the IT/BPO-led boom will continue to generate revenue and employment in the future, if anything at an even faster pace. No matter how rosy the short-term outlook may appear to some, there are deep-seated reasons for scepticism as the Economist article mentions. In addition, there are at least two sets of problems, one less long-term than the other. First, the increasingly external orientation of the Indian economy exposes us to new dangers and vulnerabilities arising from the cycles and instabilities of the global economy. Not only are agricultural incomes more exposed to the uncertainties of the global marketplace (in addition to the great uncertainties associated with agriculture generally), the greater the share of international trade in GDP, the larger is the risk arising from fluctuations in world markets. A recession in the US, for instance, is likely to have an immediate contractionary effect upon the Indian economy, thanks to the outsourced businesses in India. The Indian IT boom is so far untested by a US recession. Further, the Indian economy is vulnerable to shocks arising from the fragility and instability of the global financial system. The danger is heightened if the rupee becomes fully convertible on the external capital account, as appears to be on the agenda of policy-makers today. Secondly, the boom of the last decade has been fuelled largely by an exploding consumer demand from the middle classes. Export growth has been substantial (even impressive in some areas like IT, BPO and light manufactures), but hasn't kept pace with the growth in imports. Investment has not grown as rapidly as might be desired. It is the demand from the middle classes - repressed for ages - which has been the source of most of the growth in demand. Recall that it is effective (income-backed), not potential demand that matters for the macroeconomy. What happens if and when middle class demand gets saturated, and the bills for consumer durables purchased on debt come home? In the absence of a growth of incomes (and demand) from the lower classes (an accretion to the ranks of the middle classes), and the absence of equity in the economy, there might well be a problem of inadequate demand facing the Indian economy, much like what happened to the West in the 1930s. In the 1930s the problem was addressed in the West by the government increasing its spending and generating secondary cycles of expenditure in the economy. Ultimately, the empty factories and unemployed workers were thus put to work and growth resumed, thanks to the boom because of World War II. In India, with the tax cuts that have been given to rich classes, both urban and rural, the government's spending options are limited. The more serious problems, even if the demand constraint on the growth of the economy can be faced, are long-term in nature. Sustainable growth requires a far wider base than the growth of a few lead sectors like IT and BPO. It is worth recalling that well under 1% of Indians are employed in these two service areas of the economy. Besides, there are severe long-term bottlenecks and challenges that are likely to slow down the growth rate or even bring Indian globalisation to a complete halt in the not-so-distant future. There is, first of all, a desperate shortage of physical infrastructure. Investments in roads, bridges, ports, airports, power generation, and irrigation continue to be low despite a crying need for them in all sectors of the economy. The reason is not hard to find. Unremitting recitation of the market mantra has lulled political leaders, the policy-making elite, the media and laypeople alike into an unfounded belief that somehow the free play of market forces will ensure the provision of whatever is demanded. That demand shall call forth its own supply, to reverse an old law of classical economics. In the rush towards privatisation of state enterprises that started in the 1990s Indian policy-makers forgot that private investors have few incentives to invest in infrastructure. But economists should be the first to recognise that the market is all too poor at providing public goods (goods whose use by non-payers, once provided, is hard to prevent). Infrastructural investments tend to be too large for most private parties and, necessary as they are for modern economic growth, the returns on them are slow to come by. It is precisely for this reason that in rich countries they have been provided typically by massive state investments, at least in the initial stages of economic growth. Everyone today - large and small companies as much as ordinary citizens, not to mention the government itself - pays the price for the Indian state reneging on one of its key economic responsibilities since the early-1990s. There is then the huge constraint imposed on future growth by widespread illiteracy and lack of education. Educational inequalities in India are perhaps the worst in the world. India has the largest illiterate population on the planet even as it has one of the largest pools of qualified manpower (now fully occupied). This is not merely morally unconscionable, it makes Indian growth rates unsustainable in the long-term, especially when it is remembered that we are meant to grow on the backs of a so-called 'knowledge-based economy'. Our famed skilled labour pool is drying up rapidly as companies both Indian and foreign, both within India and abroad, entice technically trained labour at ever higher prices. There is a near-universal complaint from businesses operating in India about the difficulty of finding and retaining qualified workers - engineers, software technicians, draughtsmen and others. The ironic truth is that by denying common people the fundamental right to education Indian elites might have dug their own economic grave over the long haul. Feudal prejudices against education for the masses survive in India. By comparison, China, thanks to huge investments and commitments made under communism, suffers no such bottleneck to its growth process. It is thus far better placed to harness the potential for growth and development in a globalised world. The outcomes resulting from globalisation are shaped and determined by the underlying and pre-existing conditions under which globalisation takes place. Further, while it has not eliminated poverty, China still has a far healthier population, something which is undeniably an asset in the pursuit of long-run economic growth. You can't grow at 9 or 10% for too long when almost half your children are malnourished, as is the case with India. The cumulative consequences of bottlenecks in physical and social infrastructure (health and education) for the process of growth are profound. The sad truth is that shortcomings like these cannot be rectified within a short time horizon. Bharat - and India - will continue to pay for a long time for the failure to make the right public investments at the right time during the past several decades. All reports -- official and otherwise -- confirm that globalisation hasn't altered the basic picture of human development at all. If anything, recent data (like the Family Health Surveys) show that it might well have compounded problems over the last one-and-a-half decades. InfoChange News & Features, January 2007
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