The pitfalls of the 'economy game'

By Kaushik Basu Professor of economics, Cornell University

'India is on a materialistic high'

This is the time of the year in India when interest in the economy peaks. With the annual union budget presentation coming up at the end of February, one can feel the tempo in the Delhi air.

This financial year, 2006-07, is expected to close with a GDP growth rate of 9.2%, which will make it three consecutive years of over 8% growth.

Also, Foreign Direct Investment (FDI) into India has risen sharply this year.

The prime minister's Economic Advisory Council has estimated a figure of $9bn, and, more recently, the commerce ministry suggested that it will be above $12bn.

Handsomely endowed

Whatever the final estimate, it is beyond doubt that it will be a sharp rise over last year's FDI of $4.7bn.

Your views on this issue

This will also be the year that FDI will exceed money that comes into India as portfolio investment.

Inevitably, there is mention in the press about how India has not only broken away from the relatively slow Hindu rate of growth but may actually be entering into a Confucian growth path.

The comparison is especially interesting to me since in December I came into India directly from China.

I had gone to Xiamen University, located where China abuts into Taiwan - in fact one can see some Taiwanese islands from the beach next to the University.

The Chinese boom is now so obvious that it needs no statistical reiteration.

Xiamen airport, which is small by Chinese standards, is a top-class international airport, much bigger than Delhi or Mumbai and more handsomely endowed with shops and traveller facilities than any Indian air terminal.

The city of Xiamen seemed on an entrepreneurial high.

'The Chinese boom is so obvious'

The periodic chimes from the Nanputuo Buddhist temple situated on a slope next to my hotel sounded serene and beautiful because they were so anomalous with the new materialism.

Coming into India a traveller cannot but notice the gap - the poverty is visibly greater and the infrastructure palpably worse.

Yet it is evident that India also is on a materialistic high.

It is an irony of our times that if you want to get away from extreme materialism you may have to think of going to Europe or America.

Banks are like bustling bazaars with people seeking advice on where to invest their money and entrepreneurs seeking loans.

Car show rooms are spilling over, with new models and customers vying for the attention of overworked agents.

Much of this visual impression is statistically confirmed.

Employment generation

India's industrial output growth rate reached 14% per annum by the end of last year - the highest since 1996.

Given that most of India's boom thus far has been in the area of services, this stirring of the industrial and manufacturing sector is reason for hope.

Since the country is starting out on a low base in manufacturing, the growth potential is large. And this sector also brings with it the potential for greater employment generation.

Also, India's fiscal situation is better than it has been in decades.

Millions have been bypassed by the economic boom

It looks as if for the first time India could get into a sustained annual growth rate of nine to 11%, which would indeed be comparable to China.

It is important at this point to realise that the "economy game" is not like cricket or war.

Your opponent's loss does not mean your victory.

Typically, when another nation does badly, it is bad news for you too - the global economy is not a zero sum game.

Hence, India doing well should be good news for China, and vice versa.

The government needs to be active in redistributing the spoils of high growth to those who are bypassed by the market

Amid the good news I must sound a note of caution. Indian inequality, especially regional inequality, is on the rise.

There are vast tracts and millions of people who are completely bypassed by the boom.

It would be foolish of our government to ignore this, since it can destabilise the nation politically and stall the economic resurgence.

The government needs to be active in redistributing the spoils of high growth to those who are bypassed by the market.

There is also a huge amount of work to be done in cutting down bureaucratic inefficiency and controlling corruption - India is among the worst in the world in these respects.

But even with all these caveats, there is no denying that the Budget of 2007-08 is coming at a propitious time, and the Indian economy could well be at the start of the best 20 or 25 years in its history.

This debate is now closed. Here is a selection of your views on Kaushik Basu's column.

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I do not agree that a whole section is totally bypassed by the booming economy. Growth at the lowest strata of the Indian population is happening albeit at a slower pace. It is important to keep in mind that the government do not revert back to socialist economic policies under the pretence of "redistributing the spoils". I believe it is time to allow full private investment in higher education (colleges/universities) sector to make sure that the lowest strata of the Indian population is involved in the economic boom. India has 29000 medical seats for a billion plus population and compared to that the US has about 24000 residency spots for 300 million people. These situations need to be remedied by direct domestic and foreign direct investment.
Amar Dave, Portsmouth, Dominica

We can still find unfortunate farmers committing suicides and beggars are still visible at the junctions. No doubt there are so many software professionals who earn very much and whose standards of living are on par with any other developed nation, yet still millions of people are still hopeless and the politicians are still indulging in non productive and populist policies.
Santosh Reddy, Hyderabad, India

Observations of Professor Basu are not only accurate but also timely. If overwhelming majority live below the poverty line in the booming economic growth there should be cause of concern. Maoism is growing in India while it is a forgotten chapter of the China's history. Rampant corruption that affects common man, rising unemployment among the educated youth, inefficient administration of justice, deplorable infrastructure, poor public health service and finally fractious governance with each organ going in its way typify the Indian scenario.
Vive Pattanayak, India

It is true that though india is growing economically, competing with other countries. it is difficult to meet up both the ends, the main reason being population and democracy.
Krishnakumar, India

India's escape from poverty, when it happens, will transform human history. The chances of a 'great escape' are better now than at any time in recent history. What impact it has on our physical environment is also an important question. Whether India will become less chaotic, its public spaces cleaner, and its people more civic minded, is also an important question. I expect with rising levels of education and income, civility too is bound to increase, but don't count on it happening within our lifetimes.
Eklavya Sareen, UK

I think its only the already rich segment that is pocketing all the money. If government does not invest in infrastructure and edication now, the growth story would soon come to stand still.
Raghunath, India

Poverty is indeed a problem which directly affects the political stability of the country in the long run, and should be addressed. However, doing so by socialistic principles such as "redistributing the wealth" will only cripple the engines of production and take India back to the days of economic stagnation. Instead, means must be found to encourage and allow the participation of the poor in India's new economy.
Pankaj Saxena, USA

Economic growth is definetely good, without it we cannot hope to pump millions for providing basic neccessities to the poorest of the poor and feeding the masses. Required are tax reforms and enforcements to bridge the gap. The taxes are too disproportionate that the rich find it easier to evade it than be honest. It is a sad fact that right now only a very tiny minority of people pay the right amount of tax.
B Senthil Priya, India/Singapore

I do not fully agree with the Kaushik Basu. We in India have this debate almost everyday. Should we be happy that 10-20% of the 1.2 billion people in India are having a better life now thanks to the open economy or be sad about the 80% that still do not have it? My question to the professor is - has there ever in the history of mankind been a economic model that ensured that 1 billion people overnight had their life transformed? I can't think of one. Any system has to start somewhere. And we have a lot of work to do. Today 20 people in 100 have a better better life. That 20 are trying to increase this number to 25. Someday this may become 50. I know the "feeding frenzy" is scary to some. But, believe me there is a system to this "madness". Trust in us. We will do it.
VK, India

I have travelled widely in India and China. Both countries have made tremendous growth in its economy. One can really admire China for its extensive growth of its majors cities especially for its tall buildings, housings, railways, roads and network of transportations within nine years. Although India has grown economiclly, It seem to have a long way to go especially to reduce poverty and improve its city development, roads, railways, housing and transportation system.
Bobby Moodley, USA

The most important part is that inflation in India is very high. Corruption is also high. Only in cities that too in certain parts of the cities you can see the economic growth other than that no one else is enjoying this economic growth. The rich are getting richer and poor are getting poorer. You can see this fact as the wealth is rising amongst the rich so ofcourse some body has to lose it. So the wealth is getting shifted from poor to the rich. Thats it. One more thing there is no social security in India. Minorities don't have any share in the Indian growth as well.
Mirza Danish Baig, Canada

It is true the distribution of wealth has to take place. It is only for the last three or four years that India is witnessing this type of growth. The change is visible in the form of development. The change in the living standards is also visible. The standard of living of the middle class and the upper middle class has improved over the last few years. It would take time to percolate down. We have to be patient and frame policies and work towards distribution of wealth. Rome was not built in a day.
G.Sridhar, India

I think Mr Basu has a point in stating that the economic gains in India are not as visible as in China, and standards of cleanliness and infrastructure lag far behind many parts of the world. But his suggestion that the Government should actively engage in redistribution seems counterproductive. The Government's priority should be to engage in the duties of infrastructure building and the promulgation and enforcement of public health standards. Let the economy grow freely, historically the Indian Government has not distributed wealth as efficiently as India's market.
Andy Sarkar, US

India's younger generation has pride, drive and the hunger to be the best. It has been proved in the past decade. It will be proved again and again in coming years.
Nitish Singh, USA

Mr Basu's article and his analysis rings the real truth of the situation in India. You hear so much from outside that how India is shining with the progress but as soon as you landed in in India and visit few places you started questioning all the propaganda been put out by media. Rural India still has real poverty, progress hasn't touched 30-40% of the nation's population. Even in the city you can't avoid people who are still living in the slum or in the street. Those few luckey ones has no time for their neighbours of the slum. They behave like those poor souls does not exist. They are indulging themselves with luxaries as if there is no tomorrow.
Nirmal Das, USA

The growth of India depends on its professionalism to deal with corruption. Full credit have to be given for having steel in hands of India, the question is how consistent our business leaders are and will politics and business work together to bring more employment opportunities.
Gopinathan Bimalsony, India

Having travelled extensively abroad, I must say that the infrastructure in India is non-existent. We may call ourselves a world power, but until a few selfish pockets are not taken care of and the infrastructure is not built up well enough, we can never truly reach an international standard of development. China should be a role model for us, and those selfish pockets should be brough to justice.
Gujral Advani, India

I do not agree that a whole section is totally bypassed by the booming economy. Growth at the lowest strata of the Indian population is happening albeit at a slower pace. It is important to keep in mind that the government do not revert back to socialist economic policies under the pretence of "redistributing the spoils". I believe it is time to allow full private investement in higher education (colleges/universities) sector to make sure that the lowest strata of the Indian population is involved in the economic boom. India has 29000 medical seats for a billion plus population and compared to that the US has about 24000 residency spots for 300 million people. These situations need to be remedied by direct domestic and foreign direct investment.
Amar Dave, Portsmouth, Dominica

Underlying the problems mentioned by Kaushik Basu are two issues that must be addressed, namely,the education system needs to be improved across the country and the democratic system of government needs to be strengthened to be responsive to the needs of Indian villagers. It requires a combination of 'top down' and 'bottom up' approaches. The economic achievements need to be in step with progress on these fronts. The omens are good!
Sanjay Sen, UK

The Indians should look at their culture and religion as a valuable asset. They will need " enlightened leaders " at all levels.
Balvant Bhagat, Zimbabwe

One cannot but agree with Kaushik Basu that fruits of economic growth should be made available to all people and all regions. This is only way to get public support and participation in present economic policies.
Madan Kumar, Belgium

I think that we need to cut down bureaucratic inefficiency and controlling corruption.But corruption is now in the root of india.In this political era where we have a coalition government its very difficult to fully wash it out because government can't take a hard steps against anything.But we can do atleast a little better.Its not too hard and need sacrifice for the country not only for money.
puneet kumar jaiswal, india/ukraine

One cannot but agree with Mr. Kaushik Basu that fruits of economic growth should be made available to all people and all regions. This is only way to get public support and participation in present economic policies.
Madan Kumar, Belgium

i really happy that the economy of the country is developing every year. on the other hand the bridge between haves and havenot is also increasing, its high time for the government to take measures for the cause of these people, one of the way to get enough funds is by collecting takes from people who are filthy rich and who do get away paying very less or minimal tax. i am sure that once the taxes are collected correctly and used for a specific cause, we could find loads of answers for the questions which have been left un answered for a very long time.
RAVI , united kingdom

India has one major advantage over China, its demographics. While China is already aging fast, India is quite young in comparison and its population growth rate still being very high as compared to China, its chances of keeping its population young are great. That would keep fueling the Indian economy for decades to come, while China would slow down.
Ahmad R. Shahid, Pakistan / UK

"Redistributing the spoils of high growth to those bypassed by the market" is also the slogan of India's politicians - especially those out of power. But how do you do it? Go back to the old days of crony capitalism and bureaucratic socialism which gave rise to the " inefficiency and corruption" which Mr. Basu complains about? Indeed, regions which improved education, especially technical and scientific, have done well. Besides, the more enterprising regions have dropped the old ways of 'petty corruption' and adopted the 'Western' model of 'high-level only' corruption,which spares the middle-classes and makes the businessmen, foreign and local, at home.
Thiruvengadam Ramakrishnan, USA

Having lived in India for four years as an IT executive in the recent past, I can only say that while India's econiomic growth is evident, the quality of life in India is deplorable. India's cities are oppressive, the chaos, impossible traffic,the grime, the garbage and the general lack of civic concern for the fellow citizen all contribute to making India a very hard place to live in. The materialism is so stark with everyone wanting to grab with both hands - and feet. There seem to be a feeding frenzy. The "Incredible India" advertisements are completely deceiving. India - a land of sprituality, of kindness, of order or consideration is just an illusion.
Roger Mudd, USA

An interesting, informative, thought provoking piece. I'm left with nothing but to agree with Mr. Basu for his analysis. We're told in every article published, public speech of 'India shinning', 'India Poised'. Consider this, more than 270 million people of this country still live on less than $1 per day, more than 100000 villages don't have access to clean drinking water, electricity, "reforms have bypassed millions", as the author points. India, Poised for what, I wonder? Our ground level issues are ever left unaddressed. Poverty is rampant; I can safely say not more 30-40% of India is benefiting from this 'shining' scrum.
Syed Ahmed, Bangalore, India

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