INDIA's software prowess has helped to revolutionise the
country's foreign exchange situation, which in 1991 had almost
broken the economy. Then, India's reserves were less than $1
billion; by 2006 they had climbed to $140 billion. This is as good
a barometer as any of India's new confidence. India's software
sector clocked up a milestone in 2003 when it earned more dollars
than the cost of India's oil imports — the erratic energy bill
that has haunted the country for decades. Rising prices from the
deteriorating situation in Iraq sent India's oil bill shooting up
in 2004 and 2005, but this time it had minimal impact on the
balance of payments situation.
Having kept a straight face in the 1990s while it profited from
the West's paranoia about the Y2K computer bug, which provided the
lift-off for India's software companies, India's IT and IT-enabled
sector had boomed to an extent that was changing India's urban
economy.
India, as many Indians like to remind you, is unique.
Particularly unusual, especially in comparison with China, is the
character of its economy. China is developing as most Western
economies have: it began with agricultural reform, moved to
low-cost manufacturing, is now climbing the value-added chain, and
probably, in the next ten to 20 years, will break into
internationally tradeable services on a larger scale. India is
growing from the other end.
Its service sector accounted for significantly more than half
its economy in 2006, with agriculture and industry accounting for
equal shares of what remained. This resembles an economy at the
middle-income stage of development, such as Greece or Portugal.
But Greece and Portugal do not have to worry about a vast army of
470 million labourers. India's problem, and its way of addressing
it, present a daunting challenge. The cure may be economic, but
the headache is social.
When India started to liberalise its economy in 1991, there was
effectively only one television channel: Doordarshan, the state
broadcaster. By 2006, there were 150 channels. In 1991 Doordarshan
reached just a small minority of homes. India's general election
of 2004 marked the first national poll the majority of the
electorate could watch on television. Roughly a third, 150 million
people, had multichannel cable television in their homes.
What today's villagers and small-town dwellers in India see
seductively paraded as they crowd around the nearest screen are
things most have little chance of getting in the near future: the
cars, foreign holidays and electronic gadgets that dominate TV
commercials. Most of these are not meant for them at all. Such
items are well beyond the majority in a country where average per
capita income in 2006 was still below $750. Sooner or later, if
you are unable to get what you are repeatedly told you should
want, something has to give. India's more far-sighted policymakers
frequently remind themselves that if the country is to forestall a
social backlash, rising crime and further lawlessness, which
blights many of its poorer states, they must ensure that economic
growth keeps accelerating. Manmohan Singh, the quiet Sikh who was
India's Finance Minister in 1991, when the country began to loosen
its regulatory stranglehold on the economy, and became Prime
Minister in 2004, emphasised: "The best cure for poverty is
growth." Judging by India's record, it is hard to disagree.
India's economy has on average expanded 6 per cent a year since
1991, almost double the "Hindu rate of growth" in its first four
decades after independence. This sharp acceleration has coincided
with a fall in the rate of population growth, so relative growth
of individual incomes is even better than economic growth figures
suggest. The difference between India's abysmal decade that began
in 1972 and the more impressive decade that began in 1995 is the
difference between countrywide unrest — which led Indira Gandhi to
declare the Emergency, in which she suspended democracy amid
strikes and violence — and the relatively normal functioning of
democracy after Dr Singh ushered in economic reform.
In the first decade, India's economy grew 3.5 per cent a year
while its population grew 2.3 per cent. In the second, the economy
grew 6 per cent a year while population growth fell to 2 per cent.
It would have taken 57 years for an Indian family to double its
income in Gandhi's decade. In Dr Singh's decade, it would take
just 15 years. In an age when you can watch how the other half
lives on a screen, it is the difference between anarchy and
stability.
Less than 7 per cent of India's dauntingly large labour force
is in the formal economy, which Indians call the "organised
sector". That means only 35 million people out of 470 million have
job security in any meaningful sense; and only 35 million pay
income tax, a low proportion by the standards of other developing
countries. The remainder, in more senses than one, are in the
"unorganised economy".
They are milking the family cow, making up the armies of mobile
casual farmworkers, running street stalls, and working as maids,
watchmen and mechanics in small-town garages.
Of the 35 million Indians with formal sector jobs — to some
extent, registered and audited — 21 million are employees of the
Government. This leaves 14 million in the private "organised"
sector. Of these, a million — 0.25 per cent of India's pool of
labour — are in information technology, software, backoffice
processing and call centres.
Software is helping to transform India's self-confidence and
its balance of payments, but IT is never likely to answer the
hopes of the majority of its job-hungry masses. Nor do foreign
companies employ large numbers of Indians. Estimates vary between
one and two million, depending on the definition of a "foreign"
company. The remainder are employees of Indian private sector
companies.
Understanding the difference between organised and unorganised
India is the key to realising why the country's economy is so
peculiar: at once booming yet unable to provide secure employment
for the majority. Contrary to conventional wisdom in the West,
which often wrongly sees Indian employees of foreign
multinationals as exploited labour, the 14 million who work for
Indian or foreign private companies are the privileged few. In
1983, average labour productivity of the worker in the private
organised sector was six times that of his counterpart in the
unorganised sector. By 2000, that had risen to nine times.
Disparity in earnings was similar. This is a world of difference.
Crossing from one world to the other requires good education and
skills, or huge luck.
If India is to build a better bridge between old world and new,
it must provide jobs for unskilled and semi-skilled in
manufacturing. In scale, India can be measured only against China.
In 2005, India employed just seven million in the formal
manufacturing sector, compared with 100 million in China. Given
the large investment that Nehru accorded to industrialisation,
many find it puzzling that 60 years later India's manufacturing
employs so few. That is because Nehru's strategy was to develop
technological capacity, rather than employ the maximum. It does
not follow that Indian manufacturing is weak or uncompetitive. By
quality, if not quantity, many of India's home-grown private
sector manufacturers are considerably more impressive than
counterparts in China. Again, India finds itself higher on the
ladder than one would perhaps expect. It is just that most of its
population are still at the bottom.
Edited extract from In Spite of the Gods: The Strange Rise
of Modern India, by Edward Luce (Little, Brown, £20).
Available for £18, including p&p, from BooksFirst, 0870
1608080, timesonline.co.uk/booksfirstbuy
