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India should not waste this last chance

August 14, 2007 19:32 IST
A Young Giant Awakes' proclaims Time magazine in the August 13 issue, as India begins to deliver on its promise, 'unleashing a torrent of growth and wealth creation that is transforming the lives of millions.'

It is an exhilarating 60th birthday for India. As it is, Shashtyabdapurti is a rather special birthday in the Indian tradition and India@60 has many reasons to celebrate the auspicious occasion.

A resurgent India is redefining herself on the world stage and former President A P J Abdul Kalam's Vision 2020 is captivating young minds in a country with the youngest population in the world. An India that was known just a few decades ago as a nation of snake charmers and beggars is now famous for its software engineers, Bollywood stars, and steel magnates.

The numbers speak for themselves. India grew at the much derided Hindu rate of growth of 3 per cent to 4 per cent in the first thirty years of independence. After liberalisation, the growth rate has accelerated to 6 to 7 per cent in the 1990s, and India is now sprinting at a growth rate of over 9 per cent per year. Meanwhile, poverty levels have been coming down dramatically as well, from 55 per cent in the mid-70s to around 26 per cent in recent years.

In the midst of the celebrations, India also faces the sobering realities of what still remains to be achieved. And there are storm clouds on the horizon that India can ill afford to ignore.

India is still a country where one-third of its population gets by on less than $1 a day. According to the Government of India's National Family Health Survey, just 67.6 per cent of the population is literate, with the female literacy rate much lower than that level. Other statistics from this report are even more troublesome. Close to 75 per cent of rural India does not live in a pucca house, does not have access to piped water, and does not even have access to a toilet facility.

As a matter of fact, 55 per cent of India does not have access to a toilet facility according to Government of India statistics! Little wonder then that morning commuters on Mumbai's suburban trains still have to avert their eyes as large numbers of slum residents use the railway tracks as communal bathrooms.

The abysmal condition of India's infrastructure and public transport is quite well-known and is clearly a huge impediment to the growth prospects of India. Physical infrastructure including airports, seaports, and roadways is in shambles. Moreover, corruption and political gridlock make it well nigh impossible for India to emulate China's rapid move toward rebuilding its infrastructure to first-world standards.

In spite of the rapid growth in the Indian economy, the rate of job creation is still abysmally low. The bulk of the growth has come about from the services sector which can employ a few million while the manufacturing sector provides employment to another 7 to 8 million. This pales in comparison with China which has created over 100 million jobs in the manufacturing sector.

The Indian economy is an anomaly compared to most of its fast-growing Asian neighbours. Unlike the fast growing East Asian economies, India has not created job opportunities for those working in agriculture to move into jobs in manufacturing at a rapid pace.

The Indian education system has developed in a rather skewed manner too, having some of the best institutions for higher education such as the IITs and IIMs while at the same time paying scant attention to primary education. To make matters worse, Indian politicians are catering to vote banks in trying to enforce admission quotas in institutions which are meant to be centers of excellence.

The IT and BPO sectors are facing labour shortages since there is a shortage of high calibre institutions such as the IITs, IIMs and NITs, and higher education continues to be 'one of the last bastions of the licence-permit raj,' as University of Chicago Professor Raghuram Rajan describes it. Here too, there is talk from the government benches of enforcing caste-based quotas on private sector hiring.

Meanwhile, Indian workers will get the world's highest-percentage salary increases in the 12 per cent range in 2007, according to ECA International, due to a severe manpower shortage combined with strong economic growth. With salaries growing astronomically and approaching levels comparable to developed economies and high attrition rates, Indian companies run the risk of becoming uncompetitive or unprofitable, or both, in short order.

Even more worrisome, the Indian rupee has strengthened by almost 12 per cent in the last month alone compared to an appreciation of just 5-6 per cent for the Chinese yuan. The impact of a stronger rupee can only worsen the impact of wage inflation in India's IT and BPO sectors.

Professor Rajan and his co-authors have written a research paper which points out another potent risk that India faces. The uniformly slow-growing India of the past is giving way to a very diverse India where the southern and western states are racing ahead of states like Bihar and Uttar Pradesh. If the backward states with rapidly growing and uneducated populations are not able to emulate and catch up to the frontrunners, there is a real risk of immense political strains between the haves and the have-nots.

Quo vadis, India?

The future may not be as rosy as the cheerleading cohort may think, and yet it need not be as bleak as the pessimists fear. First and foremost, India's stable democracy, rule of law, and skilled English speaking workforce will continue to provide a key competitive advantage in the global marketplace.

Pandit Nehru's vision in setting up world-class educational institutions such as the IITs and IIMs is paying off in terms of a management and leadership cadre which has made Indian private sector companies second to none in global competiveness.

Also working in India's favour is a demographic dividend based on its younger population and a dependency ratio that is expected to decline sharply over the coming decades. This should help India continued high growth rates due to higher savings and investment rates.

Even in the critical area of upgrading India's infrastructure, there are many examples of the old adage that where there is a will there is way. The remarkable success of the Delhi Metro is proof that India can build world-class infrastructure projects in spite of being a nation where public works are often models of dysfunction.

A focus on poverty reduction and ensuring that the laggard regions catch up with the leaders will keep the anti-free market forces from the left end of the political spectrum at bay. Likewise, the risk of social strife damaging India's march toward Vision 2020 and developed nation status should compel the advantaged classes and regions to control right-wing and religious forces.

As Dr Vijay Kelkar said in his lecture titled 'India's economic future'... 'If India plays the right moves from 2005 to 2025, we will achieve prosperity by harnessing the demographic transition. There is an opportunity, in this window, for our tryst with destiny... spectacular economic growth, the elimination of poverty, and India as a world power in all respects. But this is our last chance.'

One can only hope that India will not waste this last chance.

Ram Kelkar is a Chicago-based investment professional.

Ram Kelkar