India's China Syndrome

CAMBRIDGE: India may the most important unheralded story of the world economy in coming years. Though India's one billion people constitute nothing less than one-sixth of humanity, and notwithstanding the fact that India is the world's largest democracy, India remains off the radar screen for most observers of the world economy. This may change soon, for India is on the move. If it remains on course with economic reforms, India will be one of the fastest growing economies in the world in the next few years, and will become one of the premier locations for foreign investment. India's global political influence is likely to rise in conjunction with economic success, benefiting both the cause of democracy as well as the global economy.

India's low profile is easy to understand. Upon independence half a century ago, India's first Prime Minister, Jawaharlal Nehru, set India on a course of protectionism and socialism – two of the most self-defeating economic strategies of modern times. To a country that had struggled for decades against British imperialism, however, neither capitalism nor openness to foreign investors seemed a prudent course. While India made important advances – in science, agricultural technology, and democratic institutions – the economy remained below its potential for decades. Only when India chose a course of market reforms in the mid-1980s did the outlook improve. With a decisive turn towards open trade and market liberalization in 1991, India finally broke free of the shackles of a failed economic strategy.

During the 1990s, India found its footing as a market economy integrating with the world. Because of its poverty, its complexity, and its vastness (even national elections have to be held over the course of several weeks, to accommodate hundreds of millions of voters), the uptake of market reforms has been gradual, but also remarkably resilient to shocks. The old centralized political structure built around Nehru's Congress Party collapsed in the mid-1990s, giving way to a succession of weak multi-party governments. But the remarkable underlying truth is that each new government endorsed the direction of globalization and market reforms, so much so that the basic reform direction is now a national consensus of virtually every major party.

Today's government won a strong mandate in last autumn's elections, giving it several years to deepen and widen reform. With this political mandate, India stands the chance of a dramatic breakthrough to rapid growth. Several things are now working in India's direction:

1. rapid population growth is finally slowing (though not yet by enough). A growing proportion of the population will now be of working age, and a smaller population will be children. This should boost India's per capita income;

2. old social barriers to education for girls and lower castes are giving way, under democratic pressures, to strong calls for universal education. This could provide the most dramatic social boost to rapid economic growth and improved well being;

3. decades of investment in science and technology are now paying off in creating a powerful technological base for a modern Indian economy. Though much of rural India remains impoverished, new dynamic urban-based centers of information technology are springing up around the country. Indian cities such as Bangalore, Chennai (formerly Madras), Mumbai (formerly Bombay) and Hyderabad are becoming locations for software and hardware exports, the cutting edge of India's modern economy. India's exports of computer software and hardware have soared from a few hundred million dollars some years back to around $5 billion today, with a forecasted growth to $30 billion or more by 2005.

As China boomed in the 1980s, India could boom in the first decade of this new century. If the national consensus around reforms is sustained and enlarged, two great goals could be met. India could enjoy a decade of "income doubling," in which per capita gross domestic product actually doubles by the year 2010. This would require an annual growth of per capita income of around 7%, something that is achievable given India's economic conditions. Second, India could create a system of universal literacy and education for the first time in its history, another dramatic social improvement that is realistically within reach.

These goals require hard work on the part of government and society. Most importantly, all major political groups have to get behind the concept of universal education, a commitment that has, in practice, been missing for decades. Next, the Government must lead a massive effort of reform. For example, despite nationalist rhetoric by state enterprises and associated trade unions, the government should decide that the vast telecommunications network should be privatized, including to foreign investors. It's only in this way that India can hope to create a network of fiber optics and telephone lines to catapult the country into a modern information economy.

Other economic measures will also be politically tough, like reigning in subsidies for power that undermine the budget and make it difficult to get new investors into rural areas. (Farmers have been promised cheap electricity for years – so cheap that private-sector power supplies are loath to make new investments.) Several other areas of reform – in finance, labor markets, foreign investment, tax reform – await action. Another goal should be to increase the government's spending on research and development, especially in areas of health, agriculture, environment and information technology.

Despite long-standing political obstacles to some of these reforms, this may be the best and most likely moment for a political breakthrough. India is feeling confident about itself, especially in view of its growing role in the world of high technology and a decade of successful reforms. The new government has an electoral mandate. Favorable demographic realities are in the mind of policy makers. If India cannot make a breakthrough now, when could it? We should pay rapt attention as the new Government unveils its new budget and new development policies in coming weeks. It may contain positive news for India, and for the world.

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