|Is India a Brazil or a South Korea?|
|Monday, 25 July 2011 00:00|
No power can stop an idea whose time has come, Manmohan Singh said 20 years ago, as he unleashed India onto the global stage. There have been the expected ups and downs, but India’s rise has been a compelling story—we’re in a down right now, and still looking at a GDP growth of upwards of 7.5%.
The economy is a lot bigger as evidenced from the fact that in constant prices, GDP is up 8.2 times between 1991-92 and 2010-11; naturally enough, sales of consumer goods are up dramatically—annual car sales are up 13.3 times and two-wheelers 7.3 times, while the number of telephone connections is up 172 times, from around 5 mn then to about 862 mn today … Call it irrational exuberance if you will, but earlier this month, the market capitalisation of pizza company Domino’s India operations nearly equalled that of its global parent even though sales were around a tenth, a sign of what the Indian market thought of the future versus what the US market thought.
The economy is a lot more open and while the export-to-GDP ratio is up from 7% to 14%, the import-to-GDP ratio is up from 8% to 23% and peak import duties are down from 160% to 10%. If despite this, investment levels are up hugely, from 26% of GDP to around 36%, it tells you that India is dramatically more competitive than it ever was before.
That’s why, while foreign direct investment is up from a negligible $129 mn in 1991-92 to $33 bn in 2009-10, outward investment by Indian firms also rose from nothing in 1991-92 to $16.7 bn in 2010-11 (it’s an even higher $44 bn if you include the value of guarantees issued by Indian firms on behalf of the overseas firms they bought). The number of Indian firms in the Fortune 500 is up from one in 1991 to 8, the Boston Consulting Group has 20 Indian firms in its list of new global challengers ...
Of course, as applies to everything about India, there are as many negatives as there are positives. There are the obviously low literacy rates and even these are exaggerated—a study by NGO Pratham found that just half the kids in 5th standard in rural India could read a 2nd standard text. Another study, by India’s largest temping firm TeamLease, finds that just a small fraction of those coming out of colleges is, in fact, employable. Though it was dismissed as a typo, there’s more than a grain of truth to the finance minister’s budget speech which, a few years ago, said the government would aim to provide rural amenities to urban India—the Isher Ahluwalia committee found that 4,861 out of 5,161 cities/towns in India don’t even have a partial sewerage network (hence The Economist’s dig that in coming years more Indians will be connected to a biometric ID system than to sewers). Add to this various human development indicators and the picture gets even more depressing—there’s progress of course, but even poorer countries have done better.
The answer to why India is moving ahead despite all the negatives is that, for each problem, Indians have worked out a jugaad, a temporary solution. Government policy limits the growth of universities and colleges, so most of the big tech firms like Wipro and Infosys run large parallel quasi-universities where they retool those they hire from the B- and C- and D-grade colleges. The government doesn’t allow for-profit schools, so private schools give out management and other contracts to affiliated concerns that are valued high enough for the school to run on a no-profit basis; labour laws make it difficult to shut down large units, so firms divide themselves up into lots of tiny units. The new Right to Education Act, which mandates that even private schools have to reserve a fourth of seats for SC/ST/OBC students, will deal a killer blow, but it remains to be seen how private schools find a way around this.
Jugaad works, but only up to a point. So the number of patents India gets is up—from 379 in 1991 to 3,173 in 2008—but this is a fraction of what China gets each year, a result of the fact that India is the only country in the World Bank’s Knowledge Assessment Methodology Index whose score has fallen against even itself in the last few decades. That’s why India isn’t celebrating the conclusion of 20 years of reforms—she’s made great strides, but it could just as well go the other way.
It’s called the middle-income trap, and the latest ADB report has a good description of it—if Asia grows well, its GDP will be $148 tn in 2050 but if it falls in the middle-income trap, this will be just $61 tn! A lovely graph shows how Brazil and South Korea had roughly the same income from the mid-1970s to the mid-1980s, but while Brazil floundered, South Korea took off.
The way it works is simple. As a country begins to do well the way India is right now, wage levels begin to rise (at around 9.5% per year in rural India over the past two decades) and the currency begins to appreciate. Both make its products less competitive. Obviously, we need wage rates to rise if people are to move out of poverty, but if this wage rate hike is not accompanied by greater productivity, you pretty much get priced out of the market—that’s why India’s textile industry has been comprehensively beaten by that from other countries. Some studies suggest India’s productivity is rising, but the large unorganised sector (think of several tiny textile units instead of one large one) keeps the pace down—an ongoing study by Icrier finds that while productivity rose 0.8% a year in the organised textile sector between 1980 and 2004, it fell 4.5% in the unorganised sector, leading to an overall fall in textile industry productivity. House painters in Delhi (I got my house painted a few weeks ago) charge around R450 per day—that’s around $3.30 an hour on a PPP basis as compared to $8 in the US. Without even a fraction of the US productivity, that’s asking for trouble.
Without a huge jump in education levels, actually skilling levels at this point in India’s development stage, India’s headed straight for the middle-income trap. The government has ambitious policies to help avoid it—one such is the two-year-old National Skills Development Corporation that hopes to skill/upskill 500 mn Indians by 2022. It has equally important policies, the education and labour policies topping the list, that are aimed at making sure India hits the trap. Which way will India head? As a wit put it, the plans are man’s, the odds are God’s.