India’s Development: 10 Things for India to Do to Achieve Greatness

4 December 2009. As this decade draws to a close, Indians are looking confidently to the future, fully expecting their country to take a seat at the table of great nations as the new multipolar world evolutions. Considerable challenges remain however.[br]

4 December 2009. As this decade draws to a close, Indians are looking confidently to the future, fully expecting their country to take a seat at the table of great nations as the new multipolar world evolutions. Considerable challenges remain however.[br]

4 December 2009. As this decade draws to a close, Indians are looking confidently to the future, fully expecting their country to take a seat at the table of great nations as the new multipolar world evolutions. Considerable challenges remain however.[br]

India has come a long way. It has started the process of opening up its once moribound economy, thanks in part to the efforts of Manmohan Singh when he was a Finance Minister in a previous administration. Economic reforms led to a wave of investment and development. Economic growth peaked in 2006/2007 at 9.7%, a figure that put it only behind China in the big country stakes.

Although the Financial Crisis did take a toll, growth of 6.7% in the most recent fiscal year is still robust. This is thanks in part to an economy that is largely powered by domestic consumption. According to a 2008 Survery by the McKinsey Global Institute, domestic consumption accounts for 57% of the Indian economy. This is the highest figure in Asia, more even than Japan at 55%, Singapore at 40% and way more than China at 37%. This is not surprising when we remember that China has focused on exports and infrastructure development, as has most of Asia since Japan showed the way to growth by exporting its way out of the post World War II ashes.

Indeed, not many countries have higher domestic consumption figures that India. There are the uber-consumerist markets of US, UK and South Africa (67% – 68%), Brazil somewhat suprisingly sits at 65%, and France is just above it at 58%. Even might Germany relies more on exporting, coming in at 54% for consumer spending.[br]

Even more staggering is the potential for real growth in consumer spending – and by real, we mean debt-free, necessities and small luxuries spending.

India’s per capita income is $1,070 – this is one of the lowest in the world, at 142th position. As of 2005, 86% of the population lives on less than $2.50 a day, while 42% lives under the poverty line, which is set at $1.25. The World Bank estimates a third of the world’s hungry live in India – since 1 Billion people are now classified as hungry, that is 330 million with basic challenges. Something that is seen as a throw-away item in the west, a bicycle, is in India a luxury that 40% of the population currently has.

As you can see, even small improvements in spending power of these millions will lead to massive cumulative growth in consumption. Add in the fact that the Indian Middle Class, which is today estimated to be only 5% of the population, will grow to make up 40% of the population by 2050, and you can see what this real growth is all about.

But hang on a minute. Before you get too excited and spill your lassi all over your pakoras, please remember that there are major major challenges that India needs to overcome in order to achieve its full potential.

And who better to tell us all about it than the inventors of the BRIC (Brazil Russia India China) acronym, Goldman Sachs? Now, before you roll your eyes about yet another Goldman story, I am not going to talk about gun toting Goldman execs preparing for the revolution, how Goldman-style greed is now out of fashion, the need to fix Goldman and all the other banks. I will not mention their campaign contributions or record bonuses. All of that is being ably handled by my colleagues Dr David Caploe and Keith Timimi.

Instead I will remind you that in order to become the most hated company in the world, you need to be smart as well as greedy and ruthless. We at EconomyWatch.com therefore always pay attention to what GS have to say.

Goldmans have written about the 10 Things that India Needs to Do to Achieve its Potential. This economic paper looks at the great opportunity we have outlined, the major challenges that India faces, and what is needed to overcome them.

1. Improve Governance

This is a fancy Goldmanite way of saying that the bureaucracy sucks, needless red tape and duplication of authority among different departments, agencies and states needs to be sorted out – and perhaps most importantly, the bribes & kick-backs, and the retribution dished out for not giving bribes & kick-backs, needs to be eradicated or at least brought under control.

2. Raise the Education Level

Although literacy rates have improved, the majority of our young have little or no education. The report cites Pratham and Teach First as examples of schemes to expand. No arguments – if anything, I would focus even more on this, since building and running schools in itself provides more education and infrastructure, as well as acting as a community center that can lead to other economic benefits.

3. Increase the Quality and Quantity of Universities

Again, no arguments here. We need more universities, and a plan on how to develop them and improve their standards. We have a whole cohort of NRI (Non-Resident Indians) who are top academics in the US, UK and elsewhere. There should be some form of ‘national service’ scheme to help them come and spend at least a few years, or a few weeks in the year, to help in standards raising.

Think too about the opportunity that India has. As the only English-speaking country in the BRIC, it can become an academic center that attracts students from around the world, who want to be a part of the new global order.

4. Control Inflation

With food inflation now reaching a record level of 17.47%, this is clearly a big headache. Goldman’s rather glibly state that

[quote]We think a formal adoption of Inflation Targeting would be a very sensible move to help India persuade its huge population of the (permanent) benefits of price stability. [/quote]

Easy right? Easy in your MBA class chaps, maybe not so in the real world, since increasing interest rates to rein in prices will reduce economic growth rates, which will reduce job creation, and with hundreds of millions of people living in poverty, there are hundreds of millions of jobs needed.

GDP growth in the last quarter came in at 7.9%, which is pretty much back at pre-crisis levels. This might tempt the RBI to re-focus on inflation fighting, but remember that easy money has been a big part of the pick up in world growth, so those gains can be very easily snuffed out.

Since food is so central to overall consumption in India, increasing the supply of food is the other way to help bring down inflation, which leads us to point 8, improve agricultural productivity.

5. Introduce a Credible Fiscal Policy

India’s fiscal deficit and debt burden have been growing. In a separate report, Goldman predicted that if you combine federal and state deficits, you are looking at a figure of 10.3% of GDP, among the highest in the world. It expects that shortfall to remain for several years thanks to spending commitments. It therefore believes that a ‘more credible medium-term plan for fiscal policy’ is needed – in other words, that cuts in spending and/ or increases in government revenues are needed.

It also wants to see ‘rules’ for spending cycles.

Frankly, I don’t like this one a lot, it smacks a bit of IMF-style austerity measures to me. Getting more people out of poverty by growing jobs and therefore GDP surely must come first. Improving governance can help to reduce government ineffeciency and therefore the costs of some activities. Fiscal tightening should only come later. But I do grudgingly have to accept that a plan to reduce the deficit and ultimately run a surplus should be worked out, but more so for our sake.

6. Liberalise Financial Markets

Ok now it gets interesting. So we should liberalise financial markets so that you can get Indians to take on debt to buy houses and cars, use debt lines on credit cards, encourage us to refinance while the economy growths, take cash out, and keep increasing our debt? You would then like to bundle this debt in CDOs, and leverage up the asset bubble until there is a massive crash in the Indian market, at which point you get a government bailout?

Hey buddy, we have read Too Big to Fail and we are not going there! Keep your deregulated western markets, we will stick with a more conservative model thank you very much. Now I sound like David and Keith 🙂

7. Increase Trade with Neighbours

Ok I have calmed down now. This one we can all agree on. More trade with China, Pakistan, Bangladesh, less conflict – bring it on. And don’t forget Sri Lanka, Burma, Nepal, again less conflict and more commerce helps us all.

8. Increase Agricultural Productivity

Since the time of the Green Revolution, yields have not been rising – in fact there is a food crisis in India as yields are flat or dropping. Currently available technology and techniques, and Genetically Modified seeds, which needs less water and produce more food, are needed in order to increase food production.

This will help with inflation, lead to more government revenues and so reduce the deficit, and if there are surpluses can also be used in trade with neighbours.

9. Improve Infrastructure

Yes we all know that the roads and buildings are dilapidated, as are most of the airports and sea ports. We have the largest railway network in the world, but much of that needs work too. Although the mobile networks have been a blessing, the traditional telco and IT infrastructure are appalling, considering that India is the largest outsourcer of IT and customer support in the world.

It is getting better, but the scale of this task remains vast. However with so many people desparate for work, and with so much economic benefit to come from the improved efficiency in distributing people, goods and information, this is surely also key.

10. Improve Environmental Quality

Greater efficiency in energy production and a lowering of greenhouse gases would obviously improve the quality of life of Indians.

There is a gripe here though; rich countries have been plundering the earth’s resources for centuries, including of course India’s resources in colonial times. The Industrial Revolution happened carbon-tax free, so to speak. If there is to be a cost to carbon now, the developed world needs to subsidize the developing world, otherwise, frankly, I don’t think it will happen.

It is also worth pointing out that the controversial plan to generate nuclear energy is a big part of India securing both energy security and a clean energy source from a carbon perspective, although radioactive waste with a half life of thousands of years is a minor fly in the ointment.

 

 

 

 

So there you have it, India’s future according to Goldman’s.

I completely agree with the need to improve governance (deal with the bureaucracy and corruption),  boost agricultural productivity and improve the infrastructure.

The government needs to clean up its various messy parts, and it has a very important role to invest in technology and supply chain support for the agricultural sector, as well as joint-funding and co-ordination for large-scale infrastucture projects.

These measures will boost government revenues, which will help to bring down the deficit in time. This should be the approach, and not any draconian cuts in spending. Only medium to long term should we have more fiscal restraints.

Trade with neighbours, improved education at both ends of the scale and bring inflation under control are all no brainers.

I don’t believe improved environmental quality is critical now, the lead for this must come from elsewhere. We have over a billion people to feed and we must focus on this first.

And as for opening up financial markets to the likes of Goldmans; forget it, that was one of the reasons that we didn’t have such a bad Financial Crisis.

But they are just my views. What do you think?

Dwayne Ramakrishnan

EconomyWatch.com

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