The Hindu : Is India really shining?

Online edition of India's National Newspaper
Wednesday, Dec 03, 2003

Opinion

Opinion - Leader Page Articles

Is India really shining?

By Mohan Guruswamy, Abhishek Kaul & Vishal Handa

India seems to be entering the post-industrial phase without having industrialised.

RECENT REPORTS from varied sources such as the Reserve Bank of India, the International Monetary Fund and several merchant banks that the Indian economy is poised for a 7 per cent growth has given rise to a self-laudatory mood in certain quarters. Spin-doctors are stoking up a mood that the facts do not support. According to them, India is shining. Furthermore a recent article, "Can India Overtake China", in the prestigious U.S. journal Foreign Policy co-authored by Yasheng Huang and Tarun Khanna has put an additional gloss on it. Both come with impressive credentials. Mr. Yasheng Huang is an associate professor at MIT's Sloan School of Management and Mr. Khanna is a professor at the Harvard Business School. But it is Mr. Yasheng Huang who by virtue of being an ethnic Chinese gives the article its special credibility. The article could not have been timed better for the spin-doctors for it comes at a time when India's anticipated economic growth would come closest to that of China in more than a decade.

But we must not forget that 7 per cent comes after a year of 4.6 per cent, preceded by performances of 5.7 per cent and 3.9 per cent, which still shows the average growth rate to be in a low trajectory. But even if we accept that India is indeed shining, how good is that shine? Is it a burnish that reveals the quality of the metal beneath or is it a thin coat of varnish that just puts a superficial gloss? To understand that we must go into how good the years after the so-called reforms have been. Very simply the decade after the launch of the so-called reforms has not been very much better that the decade before it. GNP growth for the post-reform period (1992-01) crept up by a mere 0.2 per cent to 5.9 per cent. With a performance like that it would be extremely difficult to make a case that the economic reforms or liberalisation, call it what you wish, have made much of an impact on the nation as a whole.

Of course some have benefited. As Sushma Swaraj famously told the Lok Sabha recently, there are no queues for telephone and gas connections. But India's teledensity, a mere 3.2 per 100, and with just 58 million of the 180 million households with gas connections suggesting that most households with an income less than Rs.80, 000 per annum are without cheap and subsidised energy, hardly indicates any great spread of happiness. Nevertheless, no queues for telephones, gas, and even for Maruti cars and Bajaj two-wheelers is still good news. But certainly not enough to warrant an outpouring of self-congratulation, for it is indices for infant mortality (69 per 1000), life expectancy (63 years), literacy (65per cent), as well as energy sufficiency (527 billion Kwh) and consumption (a mere 379 Kwh per capita) that make the reality.

A comparison of the first ten years of the economic performances of India and China after reforms (1992-2001 for India and 1979-88 for China) is instructive. China entered the first decade of the reforms as a fast developing and modernising country with an average decadal growth rate of 5.52 per cent. But more important than this was the performance (1980) of reducing infant mortality to 42 per 1000; elevating life expectancy to 67 years; raising adult literacy to 66 per cent. India by contrast had a better growth rate of 5.7 per cent in the 1980s but came burdened with an infant mortality of 119 per 1000; life expectancy of 59.2 years; and adult literacy of 48.41 per cent. Many reasons have been advanced for China's stupendous performance. Few are as valid as what Amartya Sen wrote: "China's relative advantage over India is a product of its pre reform (pre 1979) groundwork rather than its post reform redirection."

Yet another comparison would be even more instructive. In 1978, at the inception of its reforms, China's per capita GDP (in constant 1995 U.S.$) was $148, whereas that of India in the same year was $236. Seven years after it began its reforms, in 1986, China caught up with India in per capita GDP terms ($278 vs. $273) and a decade after reforms in 1988 was comfortably ahead of India with a per capita GDP of $342 compared with India's $312. In the first post-reform decade, the Chinese economy grew at 10.1 per cent while the Indian economy grew at 5.7 per cent in the corresponding decade. Quite clearly that was India's lost decade.

But what did we achieve in the first decade of our reforms? In 1992, the first year of its reforms, India's per capita GDP was $331. This grew to $477 in 2001. In the same period the Chinese per capita GDP surged from $426 to $878 in 2001. In the 1990s China grew at the rate of 9.7 per cent while India grew at 5.9 per cent. Quite clearly far from beginning to catch up, we fell well behind.

It is true both countries have transformed themselves after they embarked on the path of economic reforms. But the transformations were entirely different. In 1980 the sectoral break-up of China's economy was as follows: agriculture 30 per cent, industry 49 per cent, and services 21per cent. In 1990 that changed to agriculture 27 per cent, industry 42 per cent, and services 31 per cent. In 2000 that picture transformed further. Agriculture fell to 16 per cent; industry grew further to 51 per cent while services steadied at 33 per cent. Note the growth in the share of industry now. This was primarily made possible by overseas investment, which amounted to $293 billion during the decade, which also created millions of new jobs. Apart from the millions of new jobs created, the role of FDI in making China a major world-manufacturing centre is seen in the share of FDI enterprises in total exports. This rose from under 2 per cent in 1978 to 45.5 per cent in 1999. Today China accounts for 3.79 per cent of world trade while India's share is just 0.93 per cent. Consequently, China foreign reserves have burgeoned to $383 billion while India's is $92 billion.

The Indian picture makes for a study in contrasts. The share of agriculture fell somewhat from 31 per cent in 1990 to 28 per cent in 2000. The share of industry too fell from 28 per cent to 26 per cent. Services grew from 41 per cent to 46 per cent. Software exports apart, the biggest contributing factor to the growth of India's services sector has been the growth of public administration, which has been bounding at an average rate of 32.5 per cent each year from 1993-94 onwards. In 2001 Central, State and local government salaries together topped Rs.167, 715 crores. This kind of spending was not what Keynes had in mind when he advocated public spending to stimulate the economy!

Quite clearly China is an industrialising country whereas India seems to be entering the post-industrial phase without having industrialised. The challenge ahead of us is not catching with China's growth rate, which inevitably must slow down. When nations compete, growth rates matter little if one is already well ahead. Can we do what China did to us in 1986? Can we come abreast with it? To do that in 2020 we need to grow at 11.6 per cent and to do that long after most of us are gone in 2050, India must grow at 8.9 per cent every year. Catching up with growth rates is not good enough. If that were the game we are already doing much better than the U.S., Europe and Japan! So if the RBI or the Finance Ministry or even the IMF says that we will do 7 per cent, that is very good. But that is just one swallow and that does not necessarily mean that summer follows.

(The writers are at the Centre for Policy Alternatives, New Delhi, an independent think tank. Those interested in reading the full version of this article may send mail to cpasind@yahoo.co.in)

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