The self-assured elephant
Article from TÜV SÜD Journal 3/2010
 | India's economy is making quite an impression on people as it continues to generate steady growth. The odds are good that the subcontinent will evolve into a global economic force. But the path leading to the top will be quite slippery. |
If China is a dragon, then India is an elephant: difficult to see at first, leisurely, seemingly a bit too plodding – but still imposing and virtually unstoppable once it is in motion. Elephants are self-confident creatures. »What is good for India is good for the world,« Manmohan Singh, India's prime minister since 2004, noted shortly before he met with Chancellor Angela Merkel in October 2007 during an official visit to Germany. Can someone be more self-assured? You definitely can: »A few countries have offered to provide help to us. We will let them know if we need it,« the premier told an astonished world after a gigantic tsunami wiped out parts of Southern India in December 2004. India does not want to be a developing country, and it has no interest in becoming dependent on foreign aid. On top of that, the country generated real growth of up to 6.5 percent during financial-crisis year 2009/10, according to calculations done by Reserve Bank of India (RBI), the Confederation of Indian Industry (CII) and the Asian Development Bank (ADB). In preceding years, the growth rates reached nearly 10 percent.
Indian consumers in a shopping mood
The recovery is being fueled in part by consumer confidence. India's middle and upper classes are in such high spending spirits that the Nielsen Consumer Confidence Index conducted in October 2009 ranked the subcontinent first among all 52 countries surveyed around the world. The Centre for Monitoring Indian Economy (CMIE) projects that consumer spending will climb by 4.7 percent in real terms during the current period. »If you want to make profits,« India's minister of home affairs, Palaniappan Chidambaram, once said, »then come to us.« Entrepreneurs like Lakshmi Mittal or the brothers Mukesh and Anil Ambani are some of the people who have made these profits. With their global steel companies and conglomerates, they each have earned a place among the top ten on the »Forbes« billionaires' list. Seven other Indian multibillionaires are listed among the 100 richest people in the world. What developing country can make that same claim?
It is a fact that, combined with hard economic-political data, says something about how rapidly economic and political weight is being shifted around the world. International economic experts think the subcontinent is ready to make the leap to the very top: by the middle part of this century, India could join the United States, China, the EU and Japan as the world's leading economic powers. Today, international companies are already investing about €30 billion a year in India. Jaguar and Rover, the former automotive crown jewels of the British Empire, now belong to the Indian automaker Tata Motors. The world's largest oil refinery is located in the northwestern region of the country. »People in India are proud of their accomplishments. This is the source of their tremendous self-confidence,« says Dr. Wolfgang-Peter Zingel of the Southern Asian Institute at the University of Heidelberg.
No question, these achievements were a long time in the making. The foundation of the current boom was laid at an early stage. Back in 1944, major Indian industrialists issued a series of recommendations for the post-war era that endorsed the concept of a »mixed economy.« Jawaharla Nehru, who served as India's first prime minister from 1947 to 1964, believed that only rich countries could afford this competition. India, on the other hand, had to carefully manage its scarce resources, Nehru maintained. The key elements: taxpayers provided the capital for heavy industry, and the private sector focused on the consumer-goods industry that promised fast profits. A symbiotic relationship between the public and private sectors arose, one in which overly tough competition was kept in check by a licensing system.
Delayed move toward a free-market economy
The government bureaucracy, a holdover from the colonial government that was transferred to Indian hands, took on this job, a task that also gave it additional power. »This created the critical conditions: India was determined to gain its true independence and wanted to keep foreigners out of its economy,« Zingel says. The development gave birth to a stable system that ensured slow, but steady growth. The Indian economist Raj Krishna coined the popular expression of the »Hindu rate of growth« of 3.5 percent annually. At a population growth rate of 2 percent, this meant a rise of about 1.5 percent in the country's per-capita income each year. Such figures are a thing of the past now – at the very latest since the country worked up the courage in 1991 to begin its delayed transition to a free-market economy and invited foreign investment once again. Despite all of the euphoria, a dose of realism is required as well: »Up to now, India has been unable to tap its growth potential. The biggest problem is its lack of infrastructure,« says Katrin Pasvantis, the India representative of Germany Trade & Invest. The Indian government is certainly investing huge sums in the country's infrastructure. But this money is hardly enough to eliminate the dramatic deficiencies in the areas of transport, energy, water supply and wastewater disposal. »India's focus on the service sector is also the country's strength and weakness,« Pasvantis adds. The country is making the transition from an agriculture-based society to a service economy and is running the risk of leaving behind large portions of the country and its billion-member population, she says. »The millions of college graduates are dwarfed by the huge number of illiterates. The industrial basis is indeed broad, but relatively undeveloped and cannot absorb the masses.«
Despite all of the self-confidence: More than 25 percent of India's population lives below the poverty level, which the World Bank has set at $1 per day. With an annual per-capita income of $3,100 (2009), the country is below Mongolia and Iraq. Corruption flourishes: In its latest report on corruption, the non-governmental organization Transparency International ranks India 84. In addition, public-sector debt is nearly 60 percent of gross domestic product, and 52 percent of employees work in the primary sector, agriculture. In short: »The gaps between rich and poor, metropolitan areas and rural regions, high tech and low tech are wide and have prevented India from achieving its full potential,« Pasvantis says. »The biggest structural problems must be solved: the lack of infrastructure, low levels of education, poverty and limited access to health care.«
In the process, India has disproven one of the textbook principles of the maturing process of »peripheral economies« or developing nations. Of course, India was a developing country and, according to the textbooks, would have had to go through the logical sequence of »capitalization of farming – mass production of consumer goods – solid industrial economy – prospering service sector.« However, the driving force of India's economy was and is software production and applications. India is the world's leading nation here. After the »Software Technology Park« was set up in Bangalore, Indian software production churned out annual growth rates of 50 percent. Projections show that its value creation will soon exceed $100 billion a year – with more than half being generated by exports. »High tech first!« appears to be the industry's rallying cry. The Indian biotechnology sector is now striving to become world class after it was liberalized and foreign investments up to 74 percent were allowed without any authorization being required. At the same time, it seems almost certain that the Indians will also assume a leading global role during a potential industrial-technical revolution triggered by nanotechnology. And an enormous growth market for outsourcing services is emerging as well: So-called virtual assistants organize administrative procedures in Lombardy, compose correspondence for British attorneys or write speeches for U.S. senators.
India grows, China contracts
In purely demographic terms, India will assume the leading position in the world by the middle part of this century: Half of the country's population of 1.12 billion has not even reached the age of 24. Only 5 percent of the population is older than 65. In 40 years, India will be the world's biggest country with 1.6 billion people.
At this point, the »elephant« will have lumbered past the »dragon.« And it is easy to see why: China's population is shrinking as a result of its one-child policy. Until it reaches this point, India will have to tackle several problems. »These will include reducing the government's high budget deficit, freeing industry from antiquated labor-law regulations, selling public sector assets and investing the proceeds into infrastructure projects,« writes Teresita Schaffer, Director of the South Asia Program at the Center for Strategic and International Studies in Washington. Such steps are difficult to take even under the best of circumstances, Schaffer notes. »But they are complicated even further by the complex political relationships that exist within the coalition government,« she adds. Nonetheless, India's political system is one of its critical business-location strengths: »The country has a relatively well-functioning democracy, the rule of law and a free press,« says Dr. Wolfgang-Peter Zingel of the University of Heidelberg. Such strengths, however, cannot cause the problems associated with India's boom to vanish from the agenda over night. Indeed, India is a country of contradictions – globally coveted high tech, on the one hand, and a virtually unstoppable spiral of poverty on the other. A rich country with poor people. Can a nation with 28 states, six religions, 18 official languages and 1,600 dialects be a world power? »It is still too early to call India a world power,« Teresita Schaffer says. »But its wide military influence in southern Asia as well as its booming economy and global ambitions could make the country a major force on the global political stage.«