Thursday, January 18, 2007

India - Building a Nation or Building an Economy?

As the decade of 1980 was about to dusk the world was in middle of a turmoil. USSR was collapsing, Germans were ready to tear down anything and everything that stood againts their unity, USA was in political triumph as they saw almost two decades of cold-war diplomacy bear the fruits, Canada was struggling with the Quebec Sovereignty Movement, and Mexico's Carlos Salinas de Gortari was planning denationalization of state enterprises and deregulation of the economy. India, at the time, was silently stuggling trying to end the License Raj and transitioning into a market-oriented economy. Rajiv Gandhi was planning a new India with his lieutenants (economic advisors) like Manmohan Singh, Montek Singh Ahluwalia, and LK Jha.

India was in as much of a political transition than an economic one. Considering that throughout the decade it was ruled by the Gandhi family, the previous statement sounds like an anomaly. But the fact of matter is Indira Gandhi in the 1980s was different from Indira Gandhi on 1970s. The 60s and 70s were all about a socialist India, an India that was pro-poor, feared business monopolies, was uninterested in big corporations, followed a statist model of development, and was committed to distributive justice with the motto of Gareebi Hatao (Eradicate Poverty). On the other hand Indira Gandhi in the 1980s was all about Growth First; she was pro big-business, against labor, and restructured state's role in economy building, which was to support the private enterprise in achieving economic growth and supporting it with policy and procedures. She was first and formost commited to economic growth and socialism was least on her mind.

In about 20 years since Indira Gandhi got on the track of liberalizing India economically, the politics of the country took a U-turn. The India of 'common-people' was changing to the India of 'corporations'; slogans like Jai-Jawan Jai Kisan (Long Live the Youth/Soldier, Long Live the Farmer) were being replaced by Indian Shining. Or so it seemed until the electorate rejected the latter and sent the ruling party back to opposition benches. There was a message in this rejection - do not to forget the common man and concentrate on issues other than 'India, Inc'. This was one of the most surprising election results of 2004, if not the most surprising worldwide (George W. Bush's re-election comes close). So, what happened and what's the big surprise?

Announcing the Arrival
In 1991 India adopted significantly important economic policy reforms. These included devaluation of Rupee (Indian currency), removal of import quotas, lower tarrifs, better external financial transactions, domestic industrial policy reforms (delicensing, removal of monopoly constraints, tax concessions, etc.), and abolishment of petroleum and fertilizer subsidies for farmers to control government expenditure. These were some of the measure takes to generate faster industrial growth, to make Indian industry more robust and competitive. It was an effort to merge Indian economy with the world economy. The collapse of Soviet Union eliminated a big trading partner for India (almost $6 billion annual trade) and the balance-of-payment crisis, and very shallow reserves were threatening India. Struck with these hard realities a lot of the reform decisions were made overnight as Executive Decision rather than by an act/vote of the Parliament, which would have delayed the process. The overall pattern of that period was parleys between Govt. of India and the different chambers of commerce, confederation of industries or the big business houses. Not surprsingly, the common man was missing from the equation. With almost one-third of the world's poor, the down trodden and the financial weaker classes, the labor, farmers, etc. were not represented. Neither was there the time nor the need. Afterall, they'd be the beneficiaries in the end and with the expansion of the industry employment would be generated, and wealth would be created and redistributed. This was an inconsequential matter at that time. Some would have thought about it but the excitement of playing on the world stage stymied its importance and others simply had lot on the table to take care of.

15 years have passed by since India declared its arrival in world's fair. The new avatar of Indians is not new anymore. Investors around the world now recognize names like Reliance, Infosys, and Ranbaxy, and companies worldwide now either fear or aspire to be taken-over by Mittal, Wipro, Tata. This list of names is growing every quarter and, if pundits are to be believed, is expected to grow for another 3-4 decades. They say, "The age of India is here" and they are not wrong. This is what any one will feel like in India. The enthusiasm, exhuberance, and confidence of young people is inspiring and contagious. The nation is young, energetic and optimistic.

All that Glitters.....
15 years have passed by and for a big chunk of Indian population very little has changed. And for some it has changed to the worst. There have been instances where farmers have committed suicides in Andhra Pradesh due to poverty. Others have been migrating to cities in search of jobs risking their lives engaging in trades that are unhealthy and living in slums. Overall, India is suffering the pains and is in a transition of unprecedented scale. The gap between the rich and poor is increasing at an alarming rate. Inflation is high the growth is unevenly distributed. There's the state of Gujarat with 8.11% economic growth in 1990-2004 on one hand and Assam on another, which has barely managed 3.00% in the same period. And, let's not forget states like Bihar where investment has been such a low priority for successive governments that there isn't even an investment council in the state.

But this is all hidden and overlooked. Why not, afterall India as a nation now has enjoyed 6% growth between 1991 and 2001 and averaged 8.1% in 2004-2006. India is now compared to China and some have even gone as far saying, "21st century belongs to India". India the Next Superpower has become what used to be Jai Jawan Jai Kisan. And this is not entirely baseless.

Since 1991, the Indian IT industry has shown a growth of 20% with some subsectors showing a growth of almost as much as 60%. India produces 350,000 engineers every year, which is the largest by a single country in the world. This also means that overnight, every year, those many people join the middle class and most of them join the IT industry. To contrast it here are few other figures:

  • Employment had increased only by 1.6% between 1993-94 to 1999-2000
  • There were still 260 million poor people in India in 1999-2000
But, to make the situation a little worrisome, here are two other statistics:

  • Foodgrain production has stagnated and the output in 2005-2006 was lower than the peak reached in the last ten years.
  • Growth in India over the last 3 years has been consumption driven, which is basically financed by loans from the banking system.
What does this mean? Well, two things; first that we as a country have peaked as an Agrigarian economy and will soon start a downfall, and second that Indian economy is in a little trouble unless its nature changes from consumption to investment. Let's face the reality, foodgrains is what built the civilizations over thousands of years. India has been a and can continue to be the grainery of the world.

Sustained Universal Growth
If India has to develop and eradicate poverty it has to start focusing on sustained universal growth. The two key words here are sustained and universal. In India the focus is so much on IT that who don't belong to it don't seem to belong anywhere. India today substaintially exports only IT. A few million people no matter how well paid cann't run an economy. India has to have people from other trades exposed to opportunities/markets outside; labor-intensive industries like manufacturing and farming.
The share of employment generated by Manufacturing has remained unchanged in the last 20 years
One of the ways to make that happen is to encourage exports of food grains, handicrafts, cash crops, textiles, etc. Get these sectors the same policies as IT has. Get those engaged in these trades to earn the foreign exchange like IT does. Once this happens the over wealth distribution in the country will become more even and make the domestic market even bigger. Unlike China, whose economy depends on exports India's economy today is domestic. If, however, non-IT sectors in India get export oriented like China, the domestic market will sustain itself and be universal. Get those Starbucks and Whole Foods of Americas to procure and process their coffee and organic food product from India. If not that, get the organic manure from countless Indians farms to the Farmland, USA and target the Chinese market for grain and vegetable export. The whole idea is to develop infrastructure and get the investment from foreign companies for it. And develop it for people in rural India as well. 100 miles of 6 lane freeway around the city won't lead people to countryside where 700 million Indians still reside - the real and needy India is still outside in the country side.


Anonymous said...

This is an interesting post. I was reading the interview of Mukesh D. Ambani today and read the following bits:

"28% of our GDP comes from agriculture, but 60% of the people depend on it. So, if we want to make a difference to this 60%, we will have to bring agriculture to its true potential."

Further, he also talked about the arbritage in the agri business sector and said:
"Let me give you some numbers. Take potatoes, the most common food across the world. From Bill Gates to my driver, everybody eats potatoes. Now, plot the prices. Farmers in Uttar Pradesh and Bihar get about Rs 4-5 a kilo; in the Middle East, the wholesale price is about Rs 25-30 a kilo. In the US, Sam's Club, it is Rs 90 a kilo. In Europe, it is Rs 110 a kilo. The arbitrage is 1:20. If we get our produce right, and if the US market is opened up, you will be surprised how quickly we reach $20 billion.

The food market is much bigger than the software services market. And the money goes straight into the hands of millions of farmers. The spinoffs are enormous -- jobs, houses, durables, a whole new consumption boom will start in rural areas.

You can read the full interview at:

Nitin Mulimani said...

Why do the WTO talks always fail? :) Subsidies by the developed countries to it farmers (vote-banks).