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From Third World to Third in the World?

June 2008
From Third World to Third in the World?

By Rituparna Chatterjee

In the mood for samosas? You don’t have to drive all the way to an Indian grocery store any more. For the first time, Indian Americans are discovering that they don’t have to restrict themselves to desi stores for our unique grocery needs. American retail titan Costco now stocks such necessities from basmati rice to samosas to Tikka Masala and a host of curries. Stores like Kroger and Trader Joe’s too carry frozen Indian foods like masala burgers and microwaveable entrées.

From grocery shelves to the premium list of Forbes magazine’s richest billionaires, India is everywhere. Four Indians — steel tycoon Lakshmi Mittal, Reliance Industries chairman Mukesh Ambani, his estranged younger brother and chairman of Reliance Communications Anil Ambani and realty baron Kushal Pal Singh — made it to the top 10 of the Forbes list of the world’s richest people.

With a gross domestic product (GDP) growth rate of 9.4 percent in 2007, a visibly booming economy and footprints all over the global business map, India sure has arrived. In fact, investment banking firm Goldman Sachs has predicted that India will become the third largest economy in the world by about 2032. Hard to believe this is the same country that up until over a decade ago was a global icon of poverty and impoverished living conditions.

The drivers of India’s economic about-face

How did this surprisingly rapid transformation of India from a typical Third World country into an economic powerhouse come about? There are as many answers as there are pundits. “Liberalizing the economy — that allowed India’s famous IT boom to take place — was definitely the key driver of India’s economic growth,” says Gurcharan Das, a leading business consultant and author of international bestseller India Unbound.

Anuradha Bhasin is Managing Editor of Margin: The Journal of Applied Economic Research, the quarterly journal of India’s National Council of Applied Economic Research (NCAER), and Consultant to the National Institute of Public Finance and Policy in New Delhi. She traces the country’s growth to the progressive technology and telecommunication initiatives undertaken in the 1980s by India’s late Prime Minister Rajiv Gandhi. “Also, restrictions on industrial investment were lifted, allowing industries more autonomy to grow,” she adds. Bhasin’s view on the timeline of India’s growth is shared by Ashok Desai, economist and consultant editor to Businessworld, a leading Indian business magazine, but his perspective is different. “The break in the growth rate came in 1980. It was kicked off by the improvement in India’s balance of payments,” says Desai.

Atlanta-based business strategist and management consultant Mohan Kapur opines that India is cashing in on the initiatives of its first Prime Minister, Jawaharlal Nehru. “Despite his socialist leanings, Nehru invested heavily in science and technology and higher educational institutions such as IITs (Indian Institute of Technology). These institutes produced some of the best brains in the world,” he says. Historian and author of the best-selling book India After Gandhi, Ramachandra Guha brings in yet another interesting viewpoint. “We tend to forget that such an economic surge was possible only because India was a united market and a united country. Hence, had it not been for our very first nation builders — Nehru, B.R. Ambedkar, Vallabhbhai Patel, etc. — who laid the foundations for a unified country, India would not have been able to grow,” he says.

But the real question is how much has India really changed, and where is it headed? Khabar takes a holistic look at India’s journey, from liberalization — arguably the biggest milestone on its road to growth — to the current scenario, with its multitude of challenges, and assesses the possibility of India Inc.’s potential rise to economic superstardom.

From pre-liberal to liberal

India’s GDP grew by as little as 3.5 percent from 1950 to 1980. Although former Prime Minister Rajiv Gandhi’s reforms did induce a point of inflexion, the heavy borrowings had created an enormous fiscal deficit. Adding to India’s woes, the Soviet Union, its biggest trading partner, collapsed, and the Gulf War erupted, shooting up oil prices. This resulted in India’s becoming virtually bankrupt, with zero foreign reserves and a foreign debt close to US $ 69 billion. “In 1991, India was on the verge of a national collapse. It didn’t even have foreign reserves to pay interest on loans,” says Kapur. The current Indian Prime Minister, Dr. Manmohan Singh, who was then India’s Finance Minister, was ushered in to tackle the crisis. He recovered confiscated gold worth over $200 million and used it as collateral for a credit of about $405 million, jointly from the Bank of England and the Bank of Japan. “This loan helped India cross over the crisis,” says Kapur.

Simultaneously, Singh and Prime Minister Narasimha Rao initiated India’s economic liberalization in 1991-92. To begin with, they did away with “Licence Raj”, the heavily bureaucratic system of licensing and regulation that cripples many business initiatives, and opened up India to foreign direct investment. The various governments that have since followed have more or less stayed on the path of liberalization.

Equally important has been India’s cultural liberalization. Around the same time that India’s economy was going liberal, the country’s airwaves were being freed up as well. For the first time, Indians were watching television channels other than government-controlled Doordarshan. Zee, Star and a bunch of other channels revolutionised the Indian entertainment scenario. Television viewers in the country were also getting a taste of global entertainment and information. India’s unique “Hinglish” culture was born out of these exposures to global culture. Another probable consequence is the confidence that seems to characterize India’s youth today.

A shining economy

Much has been said and written about the changes that liberalization has brought to India. According to Desai, the biggest difference is labor shortage. “Employees now chase workers instead of the other way around. It means the dissolution of occupational ghettos,” he says. The other observable change is the blurring of socio-economic distinctions. Prosperity has made it possible for the urban middle class to afford easily gadgets and appliances that were once beyond its reach.

The statistics portray a telling picture: India’s per capita income growth rate shot up from about 3.5 percent in 1992-93, just after liberalization, to 7.2 percent in 2007-08 (see graph titled “Growth in per capita income”). In the 12-year-period from 1980 to 1992, the growth of per capita consumption was roughly at an average of 2.2 percent annually. Thanks to liberalization, the figure cheered up to 2.6 percent in the next 11 years. Simultaneously, per capita consumption growth rate rose from 3 percent in 1999-2000, to an impressive 5.3 percent in 2007-08. (Source: Organisation for Economic Co-operation and Development (OECD) Economic Surveys: India 2007.)

The Indian middle class accounts for most of the growth in consumption. At a size of over 300 million, the Indian middle class is almost the size of population of the United States. When such a colossal crowd acts, naturally the world can’t help but take notice. U.S. President George Bush recently blamed India’s (and China’s) extravagant consumption for soaring global food prices.

Be it spending on pet food or fancy cars or scandalously lavish weddings complete with European ice sculptures — in sweltering Indian summer — or on imported exotic fresh flowers, the Indian middle class is on one crazy spending spree. As their purses get heavier with rising incomes, the purse strings are quickly slipping off and bourgeois Indians are throwing money on whatever catches their fancy for the moment. Today’s Indian is a brand-conscious consumer running after the best names in every arena from Gucci to BMW to designer chocolates. International Indian travellers spent over $7.5 billion last year, reported India’s leading national newspaper, The Times of India. Confectionery, perfumes, cosmetics, fashion accessories, cigarettes and liquor topped their splurging list. Today, a Bangalore-based techie is as much of a global consumer as a Wall Street number-cruncher. If the McKinsey Global Institute’s report titled “The ‘Bird of Gold’: The Rise of India’s Consumer Market” is to be believed, then this is only the beginning of India’s consumption graph. The report predicts that India will become the world’s fifth-largest consumer market by 2025.

It is hard to believe that until a few years ago, this same stratum of society led a modest lifestyle, saving every extra penny for the future. It has now traded its old spartan lifestyle for the joys of materialism. Hence, today’s Indian is less Indian and more global and perhaps more materialistic than the Indian of the 1980s. Indians nostalgic for the old ways of life might lament the loss of ethnic culture resulting from the economic boom. But they or anybody else can’t do much about it except complain wistfully. After all, every new generation brings with it a depletion of old values and the birth of new ones. In the long run, the new international Indian will help fuel both India’s global image and consumption, a major driver of the country’s economy.

Equally important have been corporate India’s aggressive global business moves that have strengthened India Inc.’s credibility as an economic powerhouse. Take one of India’s largest companies, the Tata Group, for example. The group’s automotive division, Tata Motors, was first listed on the New York Stock Exchange four years ago. It took the world by storm this January when it launched Tata Nano, the world’s cheapest car. Tata further accelerated its automotive ambitions by acquiring Ford’s British luxury car brands Jaguar and Land Rover for $2.3 billion in March this year. Tata already owns Tetley Tea and steelmaker Corus in the United Kingdom. The Tata Group, along with Reliance Industries, also made it to Business Week magazine’s list of the world’s 50 most innovative companies. While Tata is sixth on the list, ahead of Sony, IBM, BMW and Walt Disney, Reliance is 19th, ranking well above the Goldman Sachs Group, Boeing, Vodafone and the Virgin Group.

A multitude of problems

If India Inc.’s cup of luminous achievements runneth over, so does its multitude of problems. A distressing health scenario (see Bhasin’s sidebar “India’s health: what ails it”), agricultural woes, infrastructure issues and the growing gap between the rich and the poor are just a few of the challenges. If not resolved soon, the problems could not only dent India’s growth but also threaten the end of its economic surge.

To begin with, consider India’s 34 percent poverty level in 2004-05. It translates to a purchasing power parity (PPP) of a pitiful $1.28 per person per day in rural India and $1.89 in urban India (Source: OECD). (For detailed parameters, see table titled “Alternative measures of well-being”.) As Guha correctly points out, “India is one of the most unequal economies in the world.” While a major chunk of the population lives on less than $2 a day, Mukesh Ambani, the richest Indian, is waiting for work on his $1-billion mansion on Mumbai’s elite Altamount Road to finish. When completed, the 60-storey house with only 27 liveable floors will be run by a 600-member domestic staff. What’s more, last year, Ambani gifted his wife Nita a Rs. 2.45-billion (almost $60 million) Airbus jet on her birthday. A month later, he bought himself a super-swanky $73-million Boeing Business Jet 2 (BBJ2). Such is the wide gap between the rich and the poor in India.

How real is our growth?

It is bitterly ironic that a country with the potential of becoming the third-largest economy in the future currently holds a disgraceful 128th rank in the Human Development Index (HDI) of the United Nations Development Programme (UNDP). The index strives for a broader and more realistic definition of well-being than merely the GDP. It focuses on more relevant factors such as life expectancy, adult literacy, enrolment in primary, secondary and tertiary education and GDP per capita measured in US dollars at purchasing power parity.

It is amazing how underdeveloped countries like strife-torn El Salvador and Bolivia, often called South America’s poorest country, are way ahead of India on the HDI. Shamefully, despite its impressive list of billionaires, India arguably has the largest number of malnourished children in the world. About 47 percent of Indian children aged below five are underweight. Even in Ethiopia, with its barrage of problems and an HDI rank of 129, the percentage of underweight children younger than five years is 15. Countries like Sri Lanka, Kazakhstan and Mongolia, which haven’t had legendary GDP growth rates or software booms, have tackled their human development issues much better and have risen up the ranks. “Even nations much poorer than us in Asia, Africa and Latin America have done a lot better than we have,” wrote P. Sainath in his column “India 2007: high growth, low development” in The Hindu, one of India’s leading newspapers. Sainath is the author of the internationally acclaimed book Everybody Loves a Good Drought and is the Rural Affairs Editor at The Hindu. He won the Ramon Magsaysay Award last year for his breakthrough reporting on India’s poorest districts.

What’s alarming is that India’s current position on the HDI scale is two ranks lower than its position at 126 last year. The dismal situation makes one wonder whether India is really evolving from Third World to third in the world and if its seemingly over-hyped “growth” is truly significant.

The killing fields

More than half a century has elapsed since filmmaker Bimal Roy made his soulful classic, Do Bigha Zameen, about the woes of poor Indian farmers. Yet, the story continues to hold true even today. Agriculture and farmers seem to have been completely left out of India’s economic growth. This, despite the fact that agriculture employed a whopping 65.42 percent of the Indian population until just 25 years ago. Yet, throughout India’s history, farmers have had to fight ceaselessly just to continue farming.

Plough deeper and you will realise that most poor Indian farmers own small plots of land and few resources. They are at the mercy of the whimsical Indian monsoons for irrigation and are, more often than not, miserably in debt to the local moneylender. Betrayed by both the weather and the government and exploited by moneylenders, farmers have had only one way out — suicide.

There were 17,060 farmers’ suicides across India in 2006 (Source: National Crime Records Bureau). “On an average, there has been one farmers’ suicide every 30 minutes since 2002,” calculates Sainath in his article “17,060 farm suicides in one year” in The Hindu.

The government’s recent waiver of farmers’ bank loans is largely irrelevant since most farmers borrow money from moneylenders, unable to meet the criteria for bank loans. Several farmers end up losing their land because they are unable to pay their loans. Ownership of agricultural land has sunk from 51.6 percent in 1992 to 45.6 percent in 2005. Agricultural employment sunk to 52.06 percent of the population in 2004-05. And going by the depressing state of agriculture in India, that figure will only continue to sink lower. No wonder farmers and agricultural laborers are migrating to greener fields such as construction and haulage, or, left with no alternatives, have resorted to suicide.

Creaking infrastructure

Constant delays, congested airports, power cuts, bad roads, choking traffic, clogged sewers, water shortages, flooded cities, deficient healthcare, lack of sanitation, endless pollution ? India’s infrastructure cesspool is muckier than the Yamuna and as colossal and unwieldy as the country itself. Consider India’s massive electricity shortage. Its total generating capacity has fallen from a compound annual growth rate of 8.8 percent in 1980-85 to a shocking 4.2 percent in 1999-2004.

Thanks to its growth, India’s already ailing infrastructure has been stressed even further. For instance, passenger traffic at Mumbai airport shot up by 16.25 percent to a staggering 25.8 million passengers this year. And Hyderabad’s old airport was handling about seven million passengers a year, double its intended capacity (Source: Financial Times). The lack of regulation worsens things. In March this year, a dog strayed onto the runway at Bengaluru airport. It unwittingly damaged a small 29-seater Kingfisher aircraft that was about to take off and injured two people. These are a few of a million examples that expose the just-about-to-collapse state of Indian infrastructure.

A country where constructing one airport (Bengaluru International Airport) takes eight years, when it was scheduled to take three, is definitely headed for trouble. The Financial Times hit the nail on the head when it described India’s infrastructure situation as “Too much red tape, too little strategy”. Even when the Indian government invests in infrastructure, it struggles to keep it in sync with global standards. India might have more roads than most developing countries but most of these are unpaved village roads that are often unmotorable.

For instance, take the 10-year-old National Highway Development Project (NHDP). It attempts to connect the country through an exhaustive network of roads. The 6,000-km-long system connecting India’s top four metros has a density of 1.8 km per 1,000 sq km. “This density is only 60 percent of that in Turkey and Mexico, and moreover, Indian roads are not built to motorway standards,” confirms the OECD report. (See table titled “An international comparison of road infrastructure” to see how Indian roads compare globally.)

Mission education

Like a child needs nutritious food for growth, a growing economy needs skilled labor to fuel its growth. India’ growth might be stunted by yet another issue — its poor educational performance. National literacy is 65 percent, but at least eight states account for a shameful 70 percent illiteracy rate. As Gurcharan Das points out, a major chunk of India remains “under liberalized.” What’s more hopeless is India’s sluggish literacy growth rate of 1.5 percent per year (Source: National Sample Survey Organisation). Compare that to its bullish GDP growth rate. “It masks a huge lacuna in education,” says Bhasin.

A half of the students in India attend government institutions. Yet, the government has neglected education for long. As a result, India lacks enough schools, decent teachers and the basic infrastructure needed for these institutions. Then, there are complex issues like adult and female illiteracy that still need to be resolved.

Although late, the Indian government’s reforms have arrived on the heels of the announcement of goal of achieving complete literacy by 2015. Initiatives like Sarva Shiksha Abhiyan (SSA) aim at building infrastructure — from trained teachers to school buildings to books — for children aged six to 14 years. The fact that the SSA covers even toilets and drinking water issues shows how wide awake the government finally is. Initiatives like the National Programme for Education of Girls at Elementary Education (NPEGEL) and Kasturba Gandhi Balika Vidyalaya (KGBV) address the critical issue of female education. Whether these wonderful schemes are effectively implemented or not remains the vital question.

Final verdict

Of course there are myriad other challenges that you can take for granted in India. A miasma of government corruption, a snail-paced justice system and inflation are just a few of them. Then, there are more disturbing incidents of social injustice that are reported sporadically in the Indian media. Let’s take the example of the Tata Group once again. Hundreds of tribals protested in Orissa’s Kalinganagar against the new Tata Steel plant that would be built on their land. The famous Narmada Bachao Andolan is another example where “shining” India has seized the land of locals and tribals for its own advancement. Such incidents are often responsible for the growing number of communal outbreaks all over the country. These, along with the oft-reported Naxalite insurgencies in India’s poorest areas, reflect the boiling discontent of the poor. “How much can a country bear!” exclaims Guha.

Additionally, there is India’s dismal law and order situation. Japan recently abandoned the new IIT Bihar project due to the state’s scandalous inefficiency in dealing with crime.

The one thing that India does seem to have in plenty is inept, uninspiring politicians who have no qualms about ripping the country for their own selfish needs. A recent example was the rioting unleashed against north Indians in Mumbai, India’s financial capital, allegedly by politicians looking to get political mileage out of the situation.

Despite it all, analysts are gung-ho about India’s economic growth. The Economic Intelligence Unit predicts that India’s economic boom will slow down, but nevertheless continue at a steady pace of about 7.7 percent between 2007 and 2012. The OECD report is optimistic as well, as long as the government speeds up reforms to achieve inclusive growth.

From Bhasin and Desai to Indian Finance Minister P. Chidambaram, all are equally bullish on India’s economic prospects. Potholes on the road to being an economic superpower notwithstanding, the juggernaut has indeed begun to roll. According to Das, “You have unbottled a genie. Politicians can no longer destroy our economic growth.”

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