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The 'miracle' lives on despite big problems
By Shashi Tharoor |
June 18, 2012, Monday
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Print Edition
Print Edition
TO hear some people tell it, the bloom is off the Indian economic rose. Hailed until recently as the next big success story, the country has lately been assailed by bad news.
Tales abound of investor flight; mounting inflation, as food and fuel prices rise; and political infighting, which has delayed a new policy to permit foreign direct investment in India's retail-trade sector. Some have even declared that the "India story" is over.
But today's pessimism is as exaggerated as yesterday's optimism was overblown. Even as the world has faced an unprecedented global economic crisis and recession, with most countries suffering negative growth rates in at least one quarter in the last four years, India remains the world's second-fastest-growing major economy, after China.
Many reasons have been cited for this success. India's banks and financial institutions were not tempted to buy mortgage-backed securities and engage in the fancy derivatives trading that ruined several Western financial institutions.
Service exports
And, though India's merchandise exports registered declines of about 30 percent, services exports continued to do well. Moreover, remittances from overseas Indians remain robust, rising from US$46.4 billion in 2008-2009 to US$57.8 billion in 2010-2011, with the bulk coming from the blue-collar Indian expatriate community in the Gulf.
Finally, the external sector accounts for only about 20 percent of India's GDP. Most of the economy is a domestic affair: Indians producing goods and services for other Indians to consume in India. The Indian private sector is efficient and entrepreneurial, and is compensating for the state's inadequacies. (An old joke suggests that the Indian economy grows at night, when the government is asleep.)
India is good at channeling domestic savings into productive investments, which is why it has relied so much less on foreign direct investment, and is even exporting capital to OECD countries, where it is well able to control and manage assets in sophisticated financial markets.
Indeed, India, home of Asia's oldest stock market and a thriving democracy, has the basic systems that it needs to operate a 21st century economy in an open and globalizing world.
There are other reasons for confidence that India will weather the storm. Not only does India have considerable resources of its own to put towards investment; as the persistence of global recession drives down returns in the West, foreign investors will look anew at India.
Still, many are inclined to compare India unfavorably with China, so a few macroeconomic numbers are worth considering. Half of India's growth has come from private consumption, and less than 10 percent from external demand; by contrast, 65 percent of China's real GDP growth comes from exports, and only 25 percent from private consumption. China is thus far more vulnerable to external shocks. Moreover, India has the highest household savings rate in Asia, at 32 percent of disposable income. Households account for 65 percent of India's national annual savings, compared to under 40 percent in China.
McKinsey & Co estimates that the Indian middle class will grow to 525 million by 2025, 1.5 times the projected size of the US middle class. According to last year's census, the country's 247 million households, two-thirds of them rural, reported a rise in the literacy rate to 74 percent, from 65 percent in 2001. In just the last two years, 51,000 schools were opened and 680,000 teachers appointed.
An impressive 63 percent of Indians now have phones, up from just 9 percent a decade ago; 100 million new phone connections were established last year, including 40 million in rural areas; and India now has 943.5 million telephone connections. Nearly 60 percent of Indians have a bank account (indeed, more than 50 million new bank accounts have been opened in the last three years, mainly in rural India).
These trends all augur well for India's economic future. And they aren't slowing: India is looking for US$1 trillion in infrastructure development over the next five years, most of it in the form of public-private partnerships. This offers hugely exciting opportunities to investors.
The real picture of dogged progress is far removed from the perception of a government beset by inaction and policy paralysis. As Prime Minister Manmohan Singh modestly put it: "I will be the first to say we need to do better. But let no one doubt that we have achieved much."
Tales abound of investor flight; mounting inflation, as food and fuel prices rise; and political infighting, which has delayed a new policy to permit foreign direct investment in India's retail-trade sector. Some have even declared that the "India story" is over.
But today's pessimism is as exaggerated as yesterday's optimism was overblown. Even as the world has faced an unprecedented global economic crisis and recession, with most countries suffering negative growth rates in at least one quarter in the last four years, India remains the world's second-fastest-growing major economy, after China.
Many reasons have been cited for this success. India's banks and financial institutions were not tempted to buy mortgage-backed securities and engage in the fancy derivatives trading that ruined several Western financial institutions.
Service exports
And, though India's merchandise exports registered declines of about 30 percent, services exports continued to do well. Moreover, remittances from overseas Indians remain robust, rising from US$46.4 billion in 2008-2009 to US$57.8 billion in 2010-2011, with the bulk coming from the blue-collar Indian expatriate community in the Gulf.
Finally, the external sector accounts for only about 20 percent of India's GDP. Most of the economy is a domestic affair: Indians producing goods and services for other Indians to consume in India. The Indian private sector is efficient and entrepreneurial, and is compensating for the state's inadequacies. (An old joke suggests that the Indian economy grows at night, when the government is asleep.)
India is good at channeling domestic savings into productive investments, which is why it has relied so much less on foreign direct investment, and is even exporting capital to OECD countries, where it is well able to control and manage assets in sophisticated financial markets.
Indeed, India, home of Asia's oldest stock market and a thriving democracy, has the basic systems that it needs to operate a 21st century economy in an open and globalizing world.
There are other reasons for confidence that India will weather the storm. Not only does India have considerable resources of its own to put towards investment; as the persistence of global recession drives down returns in the West, foreign investors will look anew at India.
Still, many are inclined to compare India unfavorably with China, so a few macroeconomic numbers are worth considering. Half of India's growth has come from private consumption, and less than 10 percent from external demand; by contrast, 65 percent of China's real GDP growth comes from exports, and only 25 percent from private consumption. China is thus far more vulnerable to external shocks. Moreover, India has the highest household savings rate in Asia, at 32 percent of disposable income. Households account for 65 percent of India's national annual savings, compared to under 40 percent in China.
McKinsey & Co estimates that the Indian middle class will grow to 525 million by 2025, 1.5 times the projected size of the US middle class. According to last year's census, the country's 247 million households, two-thirds of them rural, reported a rise in the literacy rate to 74 percent, from 65 percent in 2001. In just the last two years, 51,000 schools were opened and 680,000 teachers appointed.
An impressive 63 percent of Indians now have phones, up from just 9 percent a decade ago; 100 million new phone connections were established last year, including 40 million in rural areas; and India now has 943.5 million telephone connections. Nearly 60 percent of Indians have a bank account (indeed, more than 50 million new bank accounts have been opened in the last three years, mainly in rural India).
These trends all augur well for India's economic future. And they aren't slowing: India is looking for US$1 trillion in infrastructure development over the next five years, most of it in the form of public-private partnerships. This offers hugely exciting opportunities to investors.
The real picture of dogged progress is far removed from the perception of a government beset by inaction and policy paralysis. As Prime Minister Manmohan Singh modestly put it: "I will be the first to say we need to do better. But let no one doubt that we have achieved much."
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