News: Can India sustain 9% growth?

(BL 24/11/2006) Mumbai - China has maintained a GDP growth rate of 9 per cent plus for the last 25 years. A similar feat was performed by Japan earlier. Recently, an optimistic Planning Commission stepped up India's growth target from 8 per cent to 9 per cent for the latter years of the Eleventh Plan to be launched in 2007. But can India achieve this on a sustainable basis? What are the factors in its favour? First, the days of 3.5 per cent Hindu growth rate are long over. The average growth rate of GDP is 6 per cent plus for the entire post-liberalisation period. In the last four years, the average has been around 8 per cent. There is a belief that this steady acceleration in the growth rate is not accidental, but is the result of the economic reforms of the last two decades and hence the growth momentum can further pick up. Second, the global perception about India is changing. Foreign investors have started believing in the growth potential of a resurgent India. As a result, the Sensex is booming. Foreign direct investment flows have also been picking up. Third, India has already proved its prowess in such areas as information technolgy, ITeS (IT-enabled services), pharmaceuticals, auto components and financial services in a highly competitive global market place. It has huge potential in biotech, healthcare and medical tourism, higher education, films and entertainment, media, advertising and so on. Competitive across sectors India's engineering skills are available at low cost. It also has a large English-speaking population. These can make India competitive across a range of industries. In addition, the earlier stigma associated with the "Made in India" label has been largely eliminated by the much improved quality of Indian products, mainly as a result of stiff competition from world-class products and collaboration arrangements with multinationals. Apart from services, the manufacturing growth rate, too, has been picking up. India has the potential to become a small-car manufacturing hub in Asia. With domestic demand growing rapidly, several foreign companies in the consumer electronics space have started production in India (rather than importing) in a big way. Fourth, some economists think that India has more home-grown, world-class entrepreneurs than China. In fact, Indian corporates have now started acquiring foreign companies and brands - a total reversal of earlier roles. Faster growth than China Fifth, the widely quoted BRIC Report of Goldman Sachs projects that in the next 40 years, India will grow faster than China. This projection relies mainly on the so-called "demographic dividend". In other words, the ratio of working age population to total population will be higher in India relative to China. China will face a labour shortage in the coming years but India won't. The higher proportion of working people would also imply a lower dependency ratio (that is the number of non-working people supported by a working person), a higher output and income per capita and a bigger market. Sixth, the traditional constraints on growth - food, foreign exchange, savings and technology - are no longer a problem. India is mostly self-sufficient in food production. Its foreign exchange reserves are more than $165 billion. Indian companies have access to state-of-the-art technology as a result of free import of machines and technology and FDI from abroad. India's savings rate has gone up from 20 per cent in mid-80s to 29 per cent now. No doubt, China's savings rate is much higher at nearly 50 per cent. But, then, India's use of savings is more efficient in that it is extracting 8 per cent growth from 30 per cent savings rate whereas China is having 10 per cent growth with 50 per cent savings rate. This is all about the strengths. But what are the major problem areas that may slow, if not derail, India's growth engine? Problem areas First, the poor state of infrastructure - bad roads, congested ports and airports, power shortage. For example, even if one can produce cars at globally competitive costs, one cannot export them in large quantities, given the current condition of ports and cargo handling capacity. According to the Managing Director of Maruti Udyog, Jagdish Khattar, the transit time of cars from the factory to the ship is 48 hours in Japan. For Maruti, it is two months. Second, according to Planning Commission estimates, agriculture has to grow at four per cent if India has to attain an overall 8 per cent plus growth rate. This is well above the average agricultural growth rate of 2 per cent achieved in recent years. The major bottlenecks are inadequate irrigation and storage facilities, erratic power supply in rural areas and lack of connectivity to markets. Massive public investment All this requires massive public investment but neither the Centre nor the State governments have the resources. Third, the recent spurt in growth has been mainly consumption-driven, supported by cheap consumer credit and housing loans. Consumption- and real-estate-driven growth may slow as interest rates harden. The growth in the urban market is approaching a plateau. Consequently, sustaining a high industrial growth would require tapping the huge rural market - the so-called "bottom of the pyramid". Buoyant secondary market Fourth, the booming Sensex as a result of foreign funds flow only indicates a buoyant secondary market in stocks. This is not new investment. Moreover, the booming stock market poses another danger. Savings may go into stock market speculation, rather than into productive investment. For growth, more new investment is needed. China gets 10 times more FDI than India. Fifth, the labour laws. Many manufacturing industries prefer to go to China - not India. Labour is not cheaper in China but labour discipline and productivity are much better. No independent trade union activity is allowed in China. This is possible in a single-party "people's democracy", but not in a multi-party parliamentary democracy such as India. Flexibility in hiring and firing (including contract labour) is particularly crucial in export industries. Sixth, by all indications, the price of oil will rise in the medium term. Seventy per cent of India's requirement of petro-products is imported. This poses the double risk of raising the infltion rate by pushing up the energy cost and inducing a fall in demand through higher prices. A "stagflation" - combination of inflation and stagnation - may set in. Demographic divide The so-called "demographic dividend" is an advantage, provided labour can be productively employed. India needs employable labour with skill-sets comparable to workers anywhere in the world. The days of sheltered production and jobs are over in a globalised economy. There is an acute shortage of the technically skilled whose salaries are skyrocketing. This is eroding the price competitiveness. At the same time, India has thousands of educated unemployed or underemployed. Here, the quality and reach of the education system basically holds the key to stepping up the rate of growth along with making it more `inclusive'. Therefore, despite huge potentials, India cannot be too optimistic about achieving the 9 per cent growth target on a sustained basis.