Economic Highlights

New Delhi, 3 May 2007

Rise Of Indian Economy

Entering Trillion Dollar Club

By Dr. Vinod Mehta

Last week India joined what is known as the “trillion dollar economy club” as its “eleventh member”, as per the calculation of a Swiss firm, Credit Suisse financial services conglomerate.  The other “members” of the “club” are the USA, Japan, Germany, China, the UK, France, Italy, Spain, Canada and Brazil. The push came when rupee appreciated vis-à-vis US dollar; the GDP of Rs. 41,00,000 crore when translated into US dollar at the current rate of exchange gives the figure of 1.01 trillion dollars.

This is not surprising considering nine per cent growth rate, booming stock market and positive economic sentiments.  In fact economists, financial and investment experts from the developed countries, who have been closely assessing the economic developments in India, are upbeat about the Indian economy. 

Three months ago Gerard Walsh, Regional Director for Asia at the Economist Intelligence Unit in London, had said that India was already on the threshold of  a dollar one trillion economy.  According to a report prepared by investment bank Goldman Sachs, if this high growth rate continues, India's economy may then surpass the US and be second only to China's by mid-century. The report also says that India's programme of reforms has brought increased competition and efficiency.

Professor John Williamson of the Institute for International Economics in Washington observed in his keynote address on “The Rise of the Indian Economy” during a two-day seminar on "Teaching About India," held in March 2006, in USA: “I see little reason so far to think that the Indian growth rate is currently above 6-7 per cent on a trend basis, but that's a lot higher than most countries have achieved for long periods of time. It is high enough to take India into the first world in the course of some of our lifetimes. I do not see this as a threat to the United States in any event. For all the jobs that are being outsourced to India, there's some outsourcing in the opposite direction, opportunities that are only going to increase as India grows richer. So the outlook is basically optimistic.”

Various studies conducted across the globe envisage India and China to rule the world in the 21st century.  According to some experts, the share of the US in world GDP is expected to fall from 21 per cent to 18 per cent and that of India to rise from 6 per cent to 11 per cent in 2025, and hence the latter will emerge as the third pole in the global economy after the US and China.

Again economic experts have projected that by 2035 the Indian economy will be about 60 per cent the size of the US economy. “The transformation into a tri-polar economy will be complete by 2035, with the Indian economy only a little smaller than the US economy but larger than that of Western Europe. By 2035, India is likely to be a larger growth driver than the six largest countries in the EU, though its impact will be a little over half that of the US.”

But there is also a flip side to this current success story and if not handled properly could take back India once again to low growth rate of four per cent (the so called Hindu rate of growth) and perhaps to social upheaval. There are contradictions galore behind this success story.  As a write up in Christian Science Monitor noted: India has had nearly 60 years free of famine, growing enough food for its 1.1 billion people. Yet nearly 40 per cent of its vegetables rot in warehouses before reaching market. The country has a space programme, yet 30 per cent of the population lives on less than $1 a day; 78 per cent on less than $2. No wonder this years budgetary proposals have rightly emphasized inclusive growth.

The economic growth has so far benefited the rich and the middle class.  There are specific economic programmes for the poor people.  But a vast majority of the people who fall between the middle class and the poor people and can be said to belong to informal sector have not benefited to any significant extent.  These are the people all over India working as migrant workers in big cities and towns with their families back in villages.

When the economy grew by 6 percent from 1995 to 2005, the growth passed them over. During this time, poverty in India fell by only 0.8 percent, according to a study by the National Sample Survey Organization. These are the people who are not even allowed to open a bank account because they cannot furnish permanent residential proof in the city where they are working; these are the people who do not have access to insurance, to housing etc.  And we are talking of financial sector reforms!

Children of rich and middle class have access to good education because their parents can afford it; these children are equipped better to take advantage of job opportunities in the economy than the children studying in government and municipal schools.  The education standards are so poor in state-run schools that the children coming out of these schools find themselves unemployable.  How many of the children from these schools have become IT professionals, bankers, investment advisers or managers or lawyers?  The education in government and municipal schools needs to be brought on par with education in private schools so that the products of these schools can also take advantage of the economic opportunities being thrown up by high economic growth.

So far the IT sector has been the major contributor to India’s success story in terms of employment generation.  The jobs in this sector will continue to grow and it is feared that India may face shortage of trained manpower, but the problem is that one cannot just transfer farm hands and people working in the informal sector to IT sector.  Only the manufacturing sector has the ability to absorb these people to start with.  It is only now that the manufacturing sector has started growing.  Efforts are needed to facilitate the movement of these sections of people to the organized manufacturing sector.

The other contradiction is country's poor infrastructure which is already struggling to keep up with growth; power cuts are common as there isn't enough electricity to meet current demand, ports are overflowing, many roads are pot-holed and crumbling.  It has been noticed that India's roads and power grids are ill-equipped to handle the strain of a manufacturing economy. 

China has already completed half of an 80,000 km national dual carriage highway network. India has at present only about 5,000 km of comparable standard highways. Chinese ports and airports have much greater capacity and are more efficient than India’s. In fact India has under-invested in infrastructure and is now facing obstacles to broadening and deepening its growth process as a result. India   You wish to make Mumbai a world financial hub but how will the financial institutions function in Mumbai with everyday power cuts?

Finally the agricultural sector calls for special attention.  More than 58 per cent of country's population depends on agriculture, a sector producing only 22 per cent of GDP. However, the full potential of Indian agriculture as a profitable activity hasn't been realized yet. Agriculture upliftment will not only benefit farmers and a large section of the rural poor, but also will give fillip to overall growth of the economy through the backward and forward linkages of agriculture with the rest of the economy.

Time is running out and India has to move fast to tackle the obvious contradictions to remain “member” of the “trillion dollar club.”---INFA

 (Copyright, India News and Feature Alliance)