INDIA:The World's New Economic Super Power

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UNLIKE CHINA, INDIA IS A MULTI-PARTY DEMOCRACY UNDER EXTREME ASSAULT

FROM ENEMIES WITHIN AND WITHOUT. UNDER THESE CIRCUMSTANCES INDIA'S

ACHIEVEMENTS ARE NO SMALL FEAT.

 

 

 

 

Will India go China's way?

 

Maybe, but it's time to view the Indian economy through a different

lens

 

By

Vikram Khanna

 

 

 

OF all the economies in Asia, India's has probably been the most

under-rated in recent years. Even as recently as the mid-1990s, few

observers foresaw that India would be a global leader in software and

IT outsourcing or earn a reputation as 'the back office of the

world'. Nor did many guess that Indian pharmaceutical companies would

more than quadruple their exports over the last decade. Nobody also

imagined India's foreign exchange reserves would approach US$70

billion. And in Singapore, had anybody suggested, even five years

ago, that there would be more than 300 Indian companies established

here by 2002, they would have met with a sceptical response.

 

Well, all of the above, and more, has happened, and a lot of people

are surprised - including myself.

 

 

 

 

 

Now, a new report put out by Deutsche Bank economists Michael Spencer

and Sanjeev Sanyal entitled 'Will India Challenge China' takes the

India story several steps forward. It suggests that the Indian

economy will follow the same trajectory as the Chinese did during the

last decade, attracting increasing amounts of foreign direct

investment, or FDI (which could well double over the next five

years), moving to a higher growth plane partly on the back of soaring

exports, and - surprise, surprise - becoming a manufacturing

powerhouse as well.

 

One salient fact, notes the report, is that in some respects, India

is about where China was 10 years ago, with exports accounting for

around 10 per cent of GDP and a per capita income just shy of US$500.

The basic thesis of the report is that just as globalisation drove

foreign manufacturers to China, 'it will drive them to India for the

same reasons . . . Only India can compete with China on both labour

costs and domestic market potential.'

 

Moreover, India has certain advantages, such as better legal and

banking systems, better intellectual property rights protection and

stronger English language skills.

 

The report then sets about demolishing some of the hoary cliches -

many of them accepted as conventional wisdom even within India

itself - about what India can and cannot do.

 

Cultural assumptions: One of these is that 'Indians aren't good at

manufacturing'. The report notes, correctly, that this idea is based,

not on any economic logic but on certain cultural assumptions. One

such assumption, for instance, is that Indian culture is more service-

oriented, individualistic and disorganised, and so does not lend

itself to large-scale coordinated activities.

 

This is simply untrue, the report points out - Indian companies can

manufacture just fine if the incentives are right. But often they are

not, though where they are, the results are telling, as in the

automotive and pharmaceutical sectors.

 

A second objection is that India has poor infrastructure. True, says

the report. But if India could transform its telecommunications

system over the last decade, why can't it improve its roads, ports

and power industries? The answer is that it can, and it is, improving

its infrastructure.

 

Fourteen million kilometres of roads will be built or upgraded by

2007 under the National Highway Development Project (almost a quarter

of the new highways linking the country's four largest cities is

already complete); the turnaround time for container ships has fallen

by more than one half over the last decade; and power generation and

distribution are being privatised, with good results. The bottom line

is that India's infrastructure is set to improve vastly over the next

decade.

 

The high cost of capital (the third objection, according to the

report) has also fallen, with interest rates having declined to 11.5

per cent, from 16-plus per cent in 1992. Moreover, Indian banks' non-

performing loans are just 10 per cent, way below that in China - or

even most of Asean. And foreclosure laws have been tightened and the

banks are using them.

 

India's infamous labour laws, which make it all but impossible to

fire workers (and thus acts as a disincentive to hire them, or for

companies to restructure) are being circumvented in practice and

major companies have restructured, with dramatic improvements in

productivity. Companies are also finding ways around the 35-year-old

policy of 'reserving' hundreds of manufacturing industries for

the 'small-scale sector' - which has inhibited economies of scale or

technological upgrading up to now.

 

The report has its limitations. For a start, its title - Will India

Challenge China? - is misplaced: as no views are offered on China's

economy, or how it will evolve while India is reforming itself, that

question remains unanswered. Nor does the report address the

political-economy issues which critically affect India's pace of

reform; the question is not only whether the obstacles to growth are

insurmountable (of course, they eventually are) but also how rapidly

they will be surmounted.

 

Reform constraints: Another constraint to reform - India's poor

public finances - is likewise ignored. The report also fails to

discuss agriculture - the sector in which most Indians still earn

their living - and how that is being transformed (or not), and with

what effects.

 

Still, the report does make the important point that it's time to

start viewing India through new, upgraded lenses; it's time to

reconsider some of the cliches about the Indian economy and its

capabilities that we have, thus far, taken for granted.

 

Remember, in 1990, China's economy, too, was still seemingly modestly

positioned and wasn't much heralded. It was only towards the end of

the decade that most observers really woke up to what had been going

on there. An important message from the Deutsche Bank report is it's

time to wake up to what's going on in India as well.