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Last Updated: Wednesday, 7 January, 2004, 08:46 GMT
India's economy: Can the boom last?

By Kaushik Basu
Professor of Economics, Cornell University

For the Indian economy the year 2003 ended on a high - on 20 December, the foreign exchange reserves breached the $100bn mark.

Shopping mall in Delhi
Fancy shopping malls cater to newly-enriched consumers

The year also saw Indian companies breaking into the international corporate market, making 35 global acquisitions totalling $450m.

Thinking internationally, Prime Minister Atal Behari Vajpayee floated the idea of a common currency for South Asia.

And the industrial sector is booming. Car sales in November were 41% higher than the previous year. Overall, Gross Domestic Product is expected to grow by more than 7% in the financial year ending in March 2004.

But it is easy to over-interpret this news.

Growth challenge

A sober analysis indicates that India is continuing to do well, as it has done since 1993, with 6% per annum average growth.

Bombay traders
Boom-time in Bombay: Record share prices spark a trading frenzy

This robustness, combined with the advantage of its size, means that it is a country that global players cannot ignore.

But if India is to go beyond this, to a sustained annual growth rate of over 8%, and with benefits reaching all levels of society, more needs to be done by government than whipping up electoral support by pointing to the headlines.

It is worth remembering that India has seen brief growth spurts before - its growth rate in 1988-89 exceeded 10%.

The challenge therefore, is to bring about sustained growth.

Economic interest

Consider the $100bn foreign exchange (forex) news.

India is a potential global economic power. But for that potential to be realised, its promise must not be treated as an instrument of short-term electoral popularity.

The large reserve points to a good performance by the Reserve Bank - the reserve was $5.83bn in 1991.

But, in itself, this does not mean as much as the screaming newspaper headlines on 21 December suggested.

What was more significant was the fact that the news made the headlines.

Never before has dry, economic news been celebrated so widely in India.

The interest of the citizenry in such matters was reminiscent of South Korea in the 1980.

It augurs well for India as it compels politicians to divert some of their attention from politics to economics.

The forex reserve of a government is like an individual's bank balance.

The fact that it is high does not indicate economic strength and preparedness to respond to emergencies. Rather, it reflects the person's preference for keeping money in a bank rather than investing it in assets.

Indeed, there are economists who argue that India should run down a part of its reserve to increase investment.

Order first

The other big news was also one where the symbolic value outstripped the actual.

Indian diamonds on sale
Appetite for luxury: A saleswoman shows off costly Indian jewels

This was the idea floated by Indian Prime Minister Vajpayee of a common currency for South Asia.

Although this is not about to happen, the suggestion shows a level of maturity that political leaders can think in terms of economic co-operation even while political irritants remain.

Moreover, the very effort to build such co-operation could serve to reduce the risk of political conflict.

To guarantee long-run strength, the Indian Government needs to:

  • Raise the level of investment (and that includes investment in people)

  • Make a fetish of efficiency

  • Make it easier for new private firms to start up business.

    India's investment rate has remained virtually stationary at 24% (with a slight fall in the last three years).

    A sustained growth rate of over 8% will not be possible unless the investment rate rises to 30%. That, in turn, requires the government to put its fiscal house in order.

    Sweet subsidies

    On the human side, India has done better than Pakistan, but worse than its much poorer eastern neighbour, Bangladesh, in many dimensions.

    In 1990, under-5 child mortality (that is, the number of deaths before age 5 per 1000 children) was 144 in Bangladesh, 128 in Pakistan and 123 in India.

    By 2001 the numbers were Bangladesh 77, India 93, and Pakistan 109.

    Village women
    India's rural poor are still waiting for their share of the economic pie

    As far as school enrolment of girls as a percentage of boys go, the figure for Bangladesh is an exemplary 103%, whereas for India it is 78 and for Pakistan 61.

    India is a potential global economic power.

    But for that potential to be realised, its promise must not be treated as an instrument of short-term electoral popularity. Instead, the government must invest more on infrastructure and social improvement.

    For the Indian government to spend as much as it does - on subsidies and the bureaucracy - and then to wonder why the economy is not growing faster is like my father's youngest sister who in her old age lamented to me, "I don't know why I keep such poor health - I eat only sweets."

    Here is a selection of your views about India's economic prospects.

    India has done exceedingly well in the last 10 years. As the private sector becomes more and more prominant, we should start to see a sharp increase in education levels (not just literacy rates). This will also mean reduction of government-based jobs and increase in automation in government sectors. This would lead to decrease in corruption at lower levels of the government. This will be the true turning point, as people will really start believing in the system that works. In addition, India will start increasing the infrastructural expenditure as USA did about 30 years ago. This will turn things around very quickly. I think India's true growth is yet to be seen and the next decade or so are set to be very exciting.
    Sam Shrivatsa, USA

    India, has been doing it the right way, it would be foolish for the country to allow full privatization of foreign businesses in India. The Indian companies are learning from their partnerships and producing a better product. Who wants India to start looking like your local American neighborhood suburban strip mall? Let them do their thing and watch as it grows. They have a billion people and the middle class is growing.
    U Shah, USA

    Much as improved and a lot still needs improvement.It is a big accomplishment for India to come this far. However, Indian governement need to make right kind of changes in the infrastructure of the country so that the growth can be reflected.
    Jatin Batra, USA

    I recently returned from a month's vacation in India and confined myself mainly to New Delhi,the capital and the State of Punjab. Although the economic situatin has definitely improved judging from the lifestyle of acquisition of cars, tvs, computers, foreign cable connections and advanced education in every field especially technology, all these remain in the hands of very few compared to the vast majority who are still entrenched in grind- ing poverty trying to eke out a living from their meagre resources. India will only be a prosperous society when every level of society enjoys a taste of its economic wealth.
    Alan E. Francis, U.S.A.

    India has come a long way, but it has a longer way to go. Economic growth has been spurred by one or a few sectors - IT and to an extent, services. But balanced growth and prosperity across all sectors and all levels of society is conspicious by its absence. Though a few states like Karnataka, AP, MH, Punjab/Haryana, Kerala, TN and Gujarat are way ahead of the pack, most states (typically highly populated ones) are still struggling with corruption, bribery, red tapism, poor infrastructure, unemployment, a crumbling bureaucracy, and a general attitude of fatalism. The rural poor are still going without basic food, shelter, sanitation, education and healthcare. Brides are still getting killed for dowry. In order to have long and sustained growth, the entire socio-economic-political-environmental framework of the country needs to be strengthened, not just bits and pieces of it.
    Papiya Gupta, US

    It is heartening to see the perceptible change in the mindset of Indians. The solution to corruption and inefficiency is to reduce the role of government and restrict it to providing defence, basic healthcare, infrastructure, and basic education. In fifty years of independence, the Indian government has tried to meddle in everything it shouldn't, and done very poorly in everything it should do. Let a million businesses bloom and a billion people prosper. Happy New Year!
    S. Ghosal, U.S.A.

    I feel that India can be optimistic about its economic future - but only parts of India can celebrate... I would also argue that the development is taking place in regions. The north-west (Delhi, Harayana, Punjab, & Rajasthan), the South (all southern states) the west ( Maharashtra and Gujarat). Apart from these regions, including perhaps southern West Bengal, very little headway has been made in economic development... For instance, Uttar Pradesh, Bihar & Northern West Bengal,) and the North-East - which accounts for almost 1 on every 3 Indians - have seen a decline in the general standard of living... for a real all-India optimism to take place the central government will have to tackle the problem of the lack of development in the North and North-East regions.
    Bala Sinha, UK - Birmingham

    India has finally got its act together particularly by approaching important subjects such as economic development and security with a sense of maturity and responsibility. I expect India to continue to grow and to develop its infrastructure so that meaningful large scale investment could be attracted. I was in India earlier this year and one thing I noticed from the previous visit was a considerable attitude change by people in business. I sincerely expect the SAARC region as a whole to play a significant role in enhancing the quality of life for all people in the region. In fact, the indicators at the moment are that most countries in South Asia are converging their efforts and resources to improve the quality of life of their people.
    Bernard De Livera, Canada

    It is imperative to say that the India's 'controlled open economy' policy was the major reason for this impressive economic growth. While it is true that the real growth benefits haven't yet reached the rural and poor, we have to realise that is not going to happen over-night. With the involvement of strong fresh minds in every arena of Indian growth, I am confident that the nation would be soon be a global economic power. The next important step for the government should be to categorically eliminate red tapism and corruption at all levels.
    Umapathy KA, USA

    I strongly believe that India will be next economic trend setter. Our leadership lacks somebody like a Mr Lee of Singapore or a Dr Mahathir of Malaysia who can take some quick bold decisions. Given the India's size, culture, potential and values if all goes well India may end up as a happiest SUPERPOWER for ages to come. Come On India!
    Sathish Murthy, India

    India is progressing at a rapid pace. The Government however must insure that the wealth is spread to rural India. India lives in its villages and we can not forget this. India needs to work on its infrastructure by building modern highways that connect all corners of the country so as to integrate the various peoples of India. Further, if it is possible, corruption has to be stamped out so doing business in India is not hindered by red tape and baksheesh (bribes). India is now a world powerhouse, but it must insure that it doesn't overlook the plight of all its citizens.
    A. Rastogi, USA

    I think India is definitely on the right economic road. The reforms of the 1990s is finally showing results. There is still a long way to go but at the same time we have come a long way also.
    Dhurinder Bhatwatekar, USA

    Of course India can be very optimistic about its economy. India's economy is expected to grow 8% this year. It has a mass of skilled workers willing to work for a salary much below the poverty line of America. It's power parity is 4th in the world. It will need to fix labour laws to attract manufacturing industry which can greatly help India's rural poor.
    Anil Gaddam, USA

    In my opinion, India is on the threshold of becoming an economic Super Power. For this to materialise, India has to boost the growth rate over 8%,cut subsidies, reduce fiscal deficit, increase investment, eliminate red tape, ramp up efficiency and above all develop human capital. Then in fifteen years time, it will be the economic engine of the world.
    Swapan, UK/USA.

    Until the caste system is truly abolished in India, the only people that can look forward to a bright future are the wealthy. India's millions of poor people need social change as well as economic success.
    Alex Watson, Great Britain

    India needs to quickly shed it's third world shabby image. Despite the 100b billion reserves look at the perpetual garbage-strewn, unhygienic, filthy and decrepit cities. India needs to build bottom-up and not merely drive new cars.
    John Kumar, USA

    Yes I believe India can be optimistic about its economic future. Where India has come from there is only one way to go. There is a new found awareness and a sense of confidence that we can do it. The confidence is half the battle. Today's generation have been brought up in an environment of freedom and democracy... Gone are the days of Nehru-Gandhi Socialism where the Indian State was the leader. Now that the onus is on the Indians and they will succeed.
    Ramesh Kadambi, USA

    Yes, I think in the years to come India will be a economic power in the region. To realise a long term benefit of becoming an economic power India should invest generously in sectors like poverty alleviation, education, research and development. Poverty alleviation and education will lead to better exercising of the democratic values and eventually will pave a way for more number of sensible people to participate in the political front. Right political decisions with sustained economic growth will make India an economic giant.
    Prashanth, The Netherlands

    India can and should be optimistic about its future growth. However, the real challenge is to bring about a working social safety network. At the present this is next to nil. The way things are going right now, the rich are getting richer, the middle class are experiencing some betterment, but the growth is not trickling down to the poorest.
    Madhukar Tomar, India/ UK

    Growth is evident and is not short-term spike. The fundamentals of Indian economy are indeed becoming better. Industrial efficiency has definitely improved over the past 4-5 years. More importantly, competition has set in. When you see consumers gleefully relishing this new-found choice (so many cable TV channels, so many cell phone providers) the bargaining power has shifted to consumers from the erstwhile monopolists. ... What is needed is how to spread these reforms and gains to the social, political, and judicial sectors?
    Natarajan Ramachandran, India/US

    I believe India's economic success is blown out of proportion. Majority of the population is under the poverty line and in the rural sector. Other than a few states such as Maharashtra, Andhra Pradesh, most are stagnant economies. We can see a rising divide among states in every aspect especially regarding poverty and within a few decades we might we able to a developed and an extremely underdeveloped state side by side in India.
    Dabu Dhabawala, Kenya

    Naturally, India in lieu of its position of both economic strength and defence prowess would be the next superpower. What has to happen is a gradual but certain transformation from a name-sake democracy to an actual functional democracy. India minus corruption is probably a nightmare for most countries.
    Ashwin, USA

    If majority of people are living under poverty line then what is point of having $100bn in reserve. Government should invest this reserve to create better infrastructure in the country - better roads, and water & electricity supplies. The sewage system needs to be upgraded throughout the country. There should be water network pipe lines so everybody should have access to pure drinking water, better railway and other transport systems.
    KN Saigal, UK

    The mindset of the people in India is changing and becoming more west oriented. When that happens, any country will achieve prosperity, not just India. However, India will just out compete any challenger and take its place in the world as number 1A if not number one.
    Chad Khanna, Canada

    India has long way to go... transportation Systems are in poor shape. Real Estate is in poor shape. Financial Systems needs big changes. Infrastructure is primitive. There is no need to celebrate at this juncture.
    Sam Rupani, USA

    I've heard loads about foreign investment in India. It would be interesting to see how much of this is simply because labour costs are so cheap. e.g. UK telephone call centres. Will this growth just transfer to another developing country when wages start to rise (particularly if investment in the economy continues to be low)?
    Alex, UK



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