More India Shining, with a twist. Some more stuff
available for free at www.economist.com
Udhay
First leader from the cover story Business in India,
a special editorial survey, The Economist, June 03, 2006
Can India fly?
The Economist print edition
It has taken off at last. Only with further
reform can it spread its wings and soar.
WORKERS of India, you have the world's
attention. Long neglected in Western boardrooms
in favour of China, its yet more gigantic
neighbour, India now appears on every corporate
to-do list. Even in the furnace of pre-monsoonal
heat, linen-suited Westerners (and Easterners)
are appearing in Mumbai, Bangalore and Chennai, anxious not to miss out.
But will India fly? After all, it has been in
fashion before, only to disappoint foreign and
local companies alike. Despite its huge
potential market of 1.1 billion people, despite
its wealth of English-speakers and democratic
institutions, despite its vaunted 15-year-old
reforms, India has been a daunting place to do
business, its entrepreneurs chained down by the
world's most bureaucratic bureaucracy, lousy
infrastructure and lousier Fabian economic
ideas. The recent stockmarket gyrationsthe
Bombay index is down 9% in the past month,
having tripled in the previous two yearshint
that Indian business will once more land on the ground with a thump.
It won't. As our survey this week argues, Indian
business has secured a niche in the world
economy that can only grow in importance. The
question is no longer whether India can fly, but
how highand whether the success of its business
class can be spread throughout the country.
Some of the reasons why Indian business is in
fashion again are indeed ephemeral: a
well-orchestrated publicity campaign by India's
government and nervousness on the part of some
foreign companies about their exposure to China.
But two things are much more permanent. First,
India now boasts robust economic growth. Figures
published this week showed annual GDP growth
over the past three years has averaged 8.1%.
Even the gloomiest pundits believe India's
trend growth rate is at least 6%the rate it
has achieved since 1991, when Manmohan Singh,
then finance minister and now prime minister,
removed some of the most crippling constraints
of the licence raj. And growth should be faster
still if India is able to cash in its
demographic dividend. Its young population
will add 71m people to its workforce in the next
five years, or nearly a quarter of the world's extra workers.
More than just Bangalore
Second, India is producing far more world-class
companies than China. The best known are the
wizards of software and business process
outsourcingIndian firms have two-thirds of the
global market in offshore IT services and nearly
half that in BPO. But now they are being joined
by manufacturers. Again, unlike China, this
manufacturing boom cannot be explained by cheap
labour, but by the efficient use of technology.
India's merchandise exports grew by a quarter last year.
Flush with cash and rich stockmarket valuations,
Indian firms are now expanding abroad, snapping
up Belgian gear-box-makers and German
generic-drug firms. Indeed, parts of Europe are
in a funk about an Indian invasion. France's
Arcelor, the world's second-biggest steelmaker,
would rather jump into a hasty marriage with
Severstal, a Russian producer, than submit to
the harsh rigours of a union with the world's
biggest steel firm, Mittal Steel ( see article).
Lakshmi Mittal, that firm's boss, is an Indian
entrepreneur so global his firm makes no steel
at all in his homeland. A bid for Taittinger, a
posh champagne brand, by United Breweries, a
Bangalore-based booze giant, has also caused outrage (see article).
So expect to see a lot more of Indian business.
But can its success make India as a whole
richer? In economic terms, India is still poor
and small. It holds a sixth of the world's
population but accounts for just 1.3% of world
exports of goods and services, and 0.8% of
foreign direct investment flows (compared with
6.6% and 8.2% respectively for China). At $728,
its GDP-per-head is less than half China's. Put
as starkly as possible, Indian business will
make a packet if the economy grows at 6% a year;
but if the country is to catch up with China in
the lifetimes of its young population (and
provide them with jobs), India needs to grow
much faster. Otherwise, poverty will persist for
decades and social tensions will m ount.
Sadly, political India suffers from
complacencya belief that, desirable though
further economic reform may be, faster growth
will happen anyway. Demography, it is argued,
will help raise the level of private savings
from about 29% of GDP now to 34% over the next
five to seven years. Investment will follow, so
GDP will continue to grow at 8%, even if reforms
stall. Nothing can sap the momentum unleashed 15 years ago.
The 32-hour factor
In fact, government action is desperately needed
to unplug bottlenecks that will tighten as the
economy grows (it takes eight days, including 32
hours waiting at checkpoints and toll booths,
for a lorry to crawl from Kolkata to Mumbai).
Nor is it just a question of roads, airports and
electricity. Most village children lack the
basic literacy needed to find work off the land.
India's admired technical institutes will soon
be unable to keep pace with the demand for
well-qualified English-speaking engineers, chemists and so on.
Education has actually been the subject of
fierce political debate recently. The issue,
however, has not been raising standards, but
wrangling about quotas that would give nearly
half the places in India's colleges to members
of backward castes. Caste-based inequality is an
evil that should be uprooted, but this is a
cynical piece of vote-grabbing: the latest twist
involves promising that all eligible upper-caste
candidates will get places too. Meanwhile, other reforms go un debated.
Trade liberalisation is halting and partial; the
banking system allocates credit to the wrong
places (see article); labour laws deter
employment; privatisation is stuck; a fiscal
deficit, bloated by ill-directed price
subsidies, still sucks resources from productive
investment in infrastructure, education and
health; and foreign investment in many
industries is hampered. Mr Singh has impeccable
reformist credentials, but his government, which
relies on the votes of Communist parties, has
been timid in pursuing reform, and prone to populism.
India has taken off. Just think how high its
people could fly without all those chains .
Copyright © 2006 The Economist Newspaper and The Economist Group.
--
((Udhay Shankar N)) ((udhay @ pobox.com)) ((www.digeratus.com))
