Posted by: changholt | August 14, 2012

India’s Next Challenge – Sustaining Its Growth

Twenty years ago, India was in the throes of a balance-of-payments crisis that forced it to airlift 47 tons of gold to London to pledge with the Bank of England as collateral for an emergency $400 million loan.

Since that national humiliation, nearly 200 million people have climbed out of extreme poverty and India’s share of global output has more than doubled. Per capita gross domestic product, measured in dollars at purchasing power parity, has risen more than fivefold.

The architect of India’s renaissance is the current prime minister, Manmohan Singh, who took over as finance minister in June 1991 and lit the fuse for growth by dismantling the “License Raj” system that had India tied up in red tape.

As prime minister, however, Mr. Singh has disappointed those who seek change. He has failed to overcome opposition to market opening in sectors like retailing and financial services; infrastructure, the sinew of any economy, is woeful; and a long-awaited goods and service tax has not been introduced.

Given these shortcomings and New Delhi’s perennial struggle to cap inflation and the budget deficit, it speaks volumes for the underlying vibrancy of the economy that many forecasters remain confident about India’s chances in coming years.

“I am very, very hopeful of the next five to seven years,” said S. Narayan, who was economic adviser to Atal Bihari Vajpayee, the former prime minister. “I think we can sustain this growth.”

The International Monetary Fund said India had the potential to grow between 8 percent and 8.5 percent a year over the medium term. Economists at Citigroup were even more bullish: They projected 8.8 percent annual growth in gross domestic product between 2010 and 2015, just above the rate of 8.7 percent estimated for China.

“I think 8 percent is the new normal,” said Sanjaya Baru, editor of the Business Standard newspaper and Mr. Singh’s former press adviser.

In his annual budget presented Monday, Finance Minister Pranab Mukherjee forecast 9 percent growth in the fiscal year starting in April, up from an expected 8.6 percent this year.

The optimism is anchored by India’s favorable age profile. With a young population, private saving grew from 24 percent of G.D.P. in 2000 to 35 percent in 2009, fueling a spurt in investment-led growth. The working-age ratio will keep rising rapidly until 2021 before leveling off perhaps a decade later.

“The demographic dividend is projected to peak over the next two decades, adding about 2 percentage points to annual per capita income growth over the period,” Shekhar Aiyar and Ashoka Mody, I.M.F. economists, said in a recent working paper.

And as incomes rise, some households that now consume all they produce will be able to start saving for the first time. As a result, the I.M.F. expects India’s gross savings to reach 41.7 percent of G.D.P. by 2015, propelling investment to 44 percent of G.D.P. from less than 38 percent today.

It sounds too good to be true, and for Razeen Sally, director of the European Center for International Political Economy, a research organization in Brussels, it is. Mr. Sally bemoaned “exuberant optimism” and said India was more protected against imports and inward investment than China and other regional rivals. Its public finances, infrastructure and lower-education system are also much weaker, he argued.

“Absent further market reforms, India will not have what it desperately needs: east Asian-style, labor-intensive agricultural, services and industrial growth,” he wrote in a paper.

As expected, Mr. Mukherjee’s budget was light on deep-seated overhauls. Mr. Narayan, the former adviser, is not optimistic about the prospects for market-opening measures, for instance to lure more foreign direct investment.

But he and Mr. Baru, the newspaper editor, both said they were hopeful that Mr. Singh’s agreement to hold an inquiry into a telecommunications scandal would usher in better governance. The country’s auditor estimated that India lost as much as $39 billion when the telecommunications ministry gave out licenses at below-market prices in 2007-8.

The scandal is grist to the mill of those who argue that India’s economy thrives despite, not thanks to, the government. In China, many would say the opposite is true, even though official corruption is widespread.

In G.D.P. per capita, China and India were neck and neck at the start of the 1990s. Now the average Chinese is three times as rich. India’s share of world output has doubled since then, but China’s has quadrupled. China’s infant mortality rate is a third of that in India.

“China is a great success story and we need to do more to catch up,” Mr. Baru said. “Certainly, among policy makers there is an awareness that China’s economy is far stronger and its relations with the world are on a firmer footing.”

The overriding priority, he said, is to improve the quality of infrastructure — roads, railroads, power, education, health care and urban services.

Mr. Narayan, who is head of research at the Institute of South Asian Studies at the National University of Singapore, said he would like India to emulate China’s rapid construction of a high-speed cross-country rail network. A 1,300-kilometer, or 808-mile, $33 billion line linking Beijing and Shanghai, which is to open in June, was built in little more than three years.

The inconvenient truth, though, is that things can get done faster in a single-party state than in a boisterous democracy.

“At one level there’s envy at the progress China has achieved,” Mr. Narayan said. “There’s also a realization that kind of organized governance would be very difficult to manage in India with the kind of diversity that has been developed in the last 50 to 60 years.”

via India\’s Next Challenge – Sustaining Its Growth –

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