Living Up to the Fables, Ancient and Modern

MOSTLY TO the delight of Indians, but at times to their consternation, the outside world has always had a fascination for the country. Foreign travellers and writers spoke of the fabled riches in the past – Walt Whitman described it as "The old, most populous, wealthiest of Earth's lands" – and of the wonder that its art, culture and spiritual heritage evoked. Not all were enchanted though, and there were the likes of Catherine Mayo who pointed to the dark side or of James Mill and Macaulay who were contemptuous. When in the modern period other nations started leaving the country behind in economic terms, there was no more the talk of riches. Indeed until quite recently in the modern period, with the performance of the Indian economy remaining quite uninspiring, foreign leaders required by diplomacy to pay compliments were given to extolling the greatness of Indian democracy. In the process, they seemed to be damning the country with faint praise, as if its survival as a democracy was about its greatest achievement.

Perceptions have changed dramatically during the last few years with the Indian economy showing a robust and sustained growth and when the British Prime Minister Tony Blair used India along with China as the bogeyman to persuade the European Union countries to reform their economies, there was not inconsiderable satisfaction in India. Mr. Blair was of course trying to sell the Anglo-American model of lower taxes, rolling back of government and flexible labour laws enabling easier hiring and firing of workers as an alternative to the social model of France and Germany with high taxes and high levels of social security which is seen as leading to economic stagnation and high unemployment. "The USA is the world's only superpower. But China and India in a few decades will be the world's largest economies, each of them with populations three times that of the whole of the EU," he told the European Parliament on assuming the presidency of the European Union.

How realistic is it to assume that India will in the not too distant future be joining China among the half a dozen leading economies of the world, living up to the fables, both ancient and modern? Three sets of issues seem relevant here. The first is the gap between the industrial economies and India, and how fast it is being narrowed. The second is how far behind China India is, and when it can make up the leeway. And the third set of issues concerns the state of India's economy and its growth performance in the recent period.

A frequently invoked long term forecast on the Indian economy is from a Goldman Sachs report of 2003, which predicts that it would emerge as the fourth largest after the United States, China, and Japan by 2025. Such reports speak of the overall size of the economy, which by its weight would be a major influence on the world economy as a whole. In terms of size, India's gross national income adjusted for purchasing power parity stood at $3068 billion in 2003, according to the World Bank's World Development Report 2005. In contrast, the GNI of the United States was $10, 914 billion and of China $6435 billion. However, per capita income is a better measure of a nation's productivity and its general level of prosperity, and in per capita terms India's ratings go far down the list. India's per capita GNI adjusted for purchasing power parity stood at $2880 in 2003. As against this, the figure for the high income countries as a whole was $29,450, for the United States $37,500, for Japan $28,620, and for China $4990. In per capita terms, the leeway cannot realistically be made up in the medium term.

The second question relates to how India compares with China. China's social sector policy since its early years had led to dramatic improvements in literacy, health, longevity, and infant mortality rates while its switch to an outward-oriented strategy in the 1980s that encouraged exports, foreign investment and the private sector led to a sustained growth of 9 per cent over two decades. In contrast, the growth rate in India averaged 5 per cent during the last two decades and its social indicators remain far below China's. In the area of trade and finance, China is more closely integrated into the global markets, with exports from mainland China touching $483 billion in 2003 in contrast to $60.6 billion from India. The contrast is most dramatic when one looks at foreign direct investment: as against the $49.3 billion that China received in 2002, just $3 billion came into India, according to the figures of the World Bank.

Despite such figures, there are economists and analysts who see India holding a greater potential in the longer term. Dani Rodrik and Arvind Subramaniam believe that growth in China is running ahead of what its institutions can support and is less sustainable than India's. India's strength is seen as lying in its large pool of university educated workers and strong institutions. In an article that created quite a stir in 2003, Huang Yasheng and Tarun Khanna raised the question if India can overtake China and concluded that while India was not outperforming China overall, it was doing better in "certain key areas." "That success may enable it to catch up with and perhaps even overtake China," was their cautious conclusion.

To them, China's growth was dependent on foreign direct investment and its domestic private sector was weak, held back by bureaucratic barriers and limited access to capital. Also, migration to the cities, state enterprises with huge accumulated losses, and financial institutions with substantial bad debts were worrying signs. In contrast, India's home-grown private sector was strong and thriving and its financial institutions were less vulnerable to defaults. The major constraints in India were its indisciplined political class and an economy that was over-regulated for its level of per capita income.

The third set of issues relates to how fast the Indian economy can grow. Conventional wisdom has it that the Indian economy moved up from "the Hindu rate of growth" of 3.5 per cent to over 5 per cent growth because of the Narasimha Rao-Manmohan Singh reforms of 1991. De Long and after him Rodrik and Arvind Subramaniam challenge this view, pointing out that the move to a 5 per cent rate happened much earlier, in the early 1980s. On the other hand, Arvind Virmani and Arvind Panagariya assert that the spurt in the 1980s led to the crisis of 1991 and would have run out of steam but for the reforms, which made it sustainable.

Acceleration of growth?

The latest pre-Budget Economic Survey of the Government of India is quite sanguine about the prospects, asserting that the performance in 2003-04 and 2004-05 suggests that the Indian economy might have moved up from around 6 per cent to a higher growth path of around 7 per cent. Joining the debate on India's prospects, the IMF staff in their 2005 country report on India note that the long term growth rate (including the performance of 2003-04) had levelled off and showed no signs of acceleration. They are, however, optimistic over India's ability to move to a higher growth path in the near future because of the corporate sector embarking on a new investment cycle, the country's rapid integration into the global and regional production chains, and the growing skilled and unskilled labour force.

While even coasting along at the current respectable growth rate the country would reach the big league in terms of overall size, the more vital question is to eliminate the massive poverty, with an estimated 28.6 per cent of the population living below the poverty line in 1999-2000. In such a climate, accelerating growth to 8 per cent or more becomes an imperative, and to do that reforms are needed in three broad areas. The first involves eliminating the persisting regulations that serve no public purpose and vest discretionary power in the bureaucracy and political office holders. The second is to step up public investment in rural infrastructure and agriculture, which has fallen significantly in the recent period. The third is to invest more in the social sectors of education and health and find money for income transfer schemes such as the national rural employment guarantee programme.

Improving public finances to both step up investment in agriculture and rural infrastructure and find the money for the social sector then assumes critical importance. The United Progressive Alliance Government and the Left have their differences over strengthening public finances – whether through holding down or even cutting subsidies as the Government would prefer to do or by stepping up collection of taxes including arrears as the Left would suggest. Again, with the National Common Minimum Programme remaining committed to strengthening the public sector, it remains uncertain if the Government can proceed with disinvestment and can use the money raised for social sector investment. The course that the Indian economy will take over the medium term will depend critically on how these differences are resolved and how soon the basic policy approach falls into place.