Alok Ray
| Many studies, including the much-hyped BRIC report by Goldman Sachs, project, largely on the basis of an improved demographic profile, that India will be the country with the third largest GDP in the next 50 years. But, clearly, the report presupposes a reoriented Indian state that puts development at the forefront of its agenda, says Alok Ray. |
INDIA and China are two of the fastest growing economies today. India has come out of the shackles of the "Hindu growth rate" of 3.5 per cent. In addition, the external perception about India's growth potential is at an all-time high. Is this just media hype or is there a solid foundation underlying this changing perception?
No doubt, India continues to be mixture of contradictions, a curious combination of change and tradition. As someone said, whatever statement one makes about India is true, at least in some part of India.
A correspondent from The Economist magazine came to India a couple of years ago. His objective was to take stock of the changes in India after the economic reforms started. He went to Bangalore, India's "Silicon Valley" and spent some time in the gleaming, glass-walled office of a software company to get a feel of the "new India". Then he looked through the window and saw a construction site.
Hundreds of sari-clad women workers were carrying a mixture of cement and sand on buckets placed on their heads. He realised that nothing much has changed outside the software enclaves. Then he took a closer look. He found that these women were all wearing hard-hats on their heads. For sure, this was a change! Employers and workers have become aware of the international safety standards.
Looking closer still, he discovered that the hard-hats, unlike those used in the West, had a flat top, specially designed to hold the buckets in place. He recognised innovation adapted to Indian reality. This anecdote shows that if you have eyes, you can perceive significant changes occurring beneath the apparently placid exterior.
Many recent research studies on India are trying to do precisely this. As a sample, consider the much-hyped BRIC (Brazil, Russia, India, China) Report by Goldman Sachs. It projects that, in dollar terms, India will be the country with the third largest GDP in the world, at official exchange rate, in the next 50 years.
In other words, India will surpass such countries as Japan, Germany and the UK in terms of size of GDP. What is the basis of this projection? Two important changes are emphasised.
First, the percentage of people in the working age group would be higher in India than in most of the developed countries over the next 30-50 years. This is because India's population growth has come down significantly in recent years whereas it used to be much higher in earlier periods.
At this point of time, the bulge in the population (due to higher rate of population growth earlier) is concentrated below the working age (15-60 years) group. Over the coming decades this bulge will move but all these people will be in the working-age bracket, contributing to GDP.
In the developed countries the population growth rate is usually much lower. However, a spike in population growth occurred as a result of the "baby boom" right after the Second World War. This would imply that a large percentage of the population in those countries will now be beyond the working age.
Further, rising longevity means that these retired people would live longer. All these would lead to a higher fraction of population (not contributing to current output) living on the output produced by the current workers. Even China may face a labour shortage in the next decades because of the belated effect of the strict one-child norm imposed much earlier. So, India may be more favourably placed in terms of its age composition of the population.
The second favourable factor is the rising value of Indian rupee, which the BRIC Report believes will continue. Thus, a given Indian GDP in rupees would mean an ever-increasing GDP when measured in US dollar, if the rupee continues its upward journey vis-à-vis US dollar.
Standing today with $110 billion worth of foreign exchange reserves and a rupee steadily appreciating against the dollar, this cannot be dismissed as a pipe-dream. Note that we are not talking of GDP in terms of the so-called PPP (purchasing power parity) exchange rate.
According to the PPP exchange rate, the value of rupee today is several times the official exchange rate. It is mainly because services (like haircuts and taxi rides) are particularly cheap in India. Suppose the official exchange rate is Rs 45 to a dollar but the same basket of goods and services costs $1 in the US and Rs 9 in India.
In such a case, the use of the PPP measure would immediately increase India's dollar GDP five fold.
Having the third highest GDP (after China and US) in terms of the official exchange rate is clearly a much bigger achievement.
There are, however, a few ifs and buts. First, India's third position in the world would be in terms of total GDP. In per capita income, India would still be much below the developed countries. According to a BRIC report, in 2050, India's per capita dollar income would be only half of what US per capita income is today.
This is despite the projection that from 2020 onwards, the growth in per capita income in India would be the highest compared to all other BRIC nations and G-6 developed countries. It has an important implication. Even when India would be the country with the third largest GDP, its relatively low per capita income would imply a significantly different demand pattern, compared to countries such as the US. People wanting to do business in India must keep that in mind. An average Indian, even in 2050, would not be having two cars in his garage and would not be buying a new car every 2-3 years.
Second, the BRIC report implicitly assumes that the working age population would be productively employed. That may not automatically happen.
It would need acquiring and upgrading of skills in a fast-changing competitive world. Can we be so sure of this when even now nearly half the population cannot complete primary education?
Clearly, the Report presupposes (though it does not say so) a reoriented Indian state, which has to devote a lot more energy and resources (financial and administrative) to providing basic education and health care to its teeming millions.
Mass education and awareness of rights at the grassroots level hold the key here. Only then would the electorate be able to force the political leaders to move away from caste- and religion-based politics and place economic development at the forefront of their agenda. A recent London School of Economics research study projects that even an 8 per cent growth rate till 2026 would not be able to avoid a rise in unemployment in India.
Though both India and China are currently considered as the two big growth stories in the world, some detect a significant difference in their growth patterns. In China, the near-double-digit growth has so far mainly been fuelled by high investment expenditure. In India, it is more consumption driven.
In fact, the lifestyle of the rising generation may well be geared to more ostentatious living, thanks to advertising and easier availability of consumer credit. As a result, the savings ratio in India may go down, instead of up, in the future. If that is true, then (much like the US) India's high growth would need to be sustained by foreign savings or foreign capital inflows.
This may happen provided there is a significant improvement in India's physical (power, transport, communication) and social infrastructure (education, health, sanitation, legal and general administration). Again, that cannot be taken for granted. As a New York Times article puts it, India, unlike China, has the hardware of democracy — free elections. But it still lacks the software — decent, responsive, transparent local government.
There is a saying in investment circles that you should invest in an emerging economy when the first international airport is built and you should exit when the second airport comes up. That signals over-investment. China may soon reach the second airport stage. In that event, India would make an even bigger potential growth story in the years to come.
(The author is a Professor of Economics, Indian Institute of Management Calcutta. His e-mail: alokr@iimcal.ac.in)
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