Todays Toronto Star:
http://www.thestar.com/Business/article/185412

India's rough passage to prosperity


Prime Minister Manmohan Singh must quickly rebuild India's crumbling infrastructure or risk an economic flame-out

Feb 25, 2007 04:30 AM
David Olive

A close look at India's dazzling and widely celebrated economic success of late reveals two Indias.

There is the India that is casting off decades of post-independence socialism and a stubborn inferiority complex, now challenging China and Japan for global economic leadership by the mid-century, and making its mark with extraordinary GDP growth and daring foreign takeovers ranging from the world's biggest steel makers to the five-star Pierre Hotel in Manhattan.

And there is the more familiar India, whose burgeoning middle-class population of about 300 million is matched by a similar number of impoverished citizens earning less than $1 (U.S.) a day – the world's largest poor population, in fact. A nation whose infrastructure of basic services – education, health care, electricity, navigable roads – remains shockingly primitive.

The new India is described by popular Indian actor Amitabh Bachchan. "A pulsating, dynamic new India is emerging," the Bollywood star says in a TV ad for The Times of India. "An India whose faith in success is far greater than its fear of failure. An India that no longer boycotts foreign-made goods, but buys out the companies that make them instead."

But the India of stereotype remains, the one described by Toronto Star foreign correspondent Gordon Sinclair in the 1940s of widespread destitution, and not only in the nation's 680,000 rural villages, where many homes are made with buffalo dung, tuberculosis is widespread, and the literacy rate is estimated at 33 per cent. (China's literacy rate is 90 per cent). In Bangalore, India's glittering information-technology capital, which has realistic aspirations to become a developing-world Silicon Valley, running water is available in most homes for just three hours a day. Even in India's big cities, electricity is only intermittently available.

The economic potential of the world's second-largest country is undeniable. The Indian economy is super-charged, with annual gross domestic product growth of 8 per cent or more in each of the past three years. Not a few forecasters expect India's growth rate to surpass that of red-hot China this year. And using the United Nations GDP measure of purchasing power parity, which takes into account the local standard of living, India is destined soon to overtake Japan, as well, to become the world's third-largest economy, trailing only the U.S. and China.

At home, the boosterish Times of India's "India Poised" posters are seen everywhere in the big cities. And abroad, India is promoting itself as a low-cost source of highly skilled labour, dispatching industrial-development ambassadors to sell the "New India" to bankers in Frankfurt, potential joint-venture corporate partners in London, and merger and acquisitions dealmakers in New York.

Those envoys tell an accurate story of how economic reforms dating from 1991 have liberated India from the so-called "License Raj" of the post-colonial era, in which the country discouraged direct foreign investment under a centralized command economy. In the four decades following independence from Britain in 1947, local enterprises were designated as national champions in various sectors, protected from both domestic competition and foreign interlopers.

Yet Delhi is in denial in imagining that India's torrid growth can continue unabated without drastic reforms. It's a topic not even raised within the current national coalition government of mainstream and Communist members, for fear of bringing the government down.

The thinking among the more sanguine Indian policy makers is that the nation, with one of the youngest populations in the world, will cash in on a "demographic dividend." India's working population will continue to grow for decades, while that of China is forecast to decline. The result, in Delhi's view, will be relief from the current skills shortage, steadily rising GDP and tax revenues to pay for long-delayed infrastructure improvements, and a shift by the rural population – currently 60 per cent of Indians – from low-productivity work in farming to high-paying, skills-based jobs in urban centres.

That scenario has a legion of disbelievers outside India. With characteristic condescension, The Economist asserted in a recent cover story that warns of India's current flirtation with a "hard landing" after years of allowing its economy to overheat, that "perhaps the only thing really growing faster in India than China is hype."

That's a bit over-the-top for a nation that has endured decades of timidity and introspection following a long era of colonial exploitation. The local exuberance earlier this month was understandable over an Indian company's triumph in a bidding war for Corus Group PLC – an agglomeration of steel mills that includes the old British Steel, a relic of the empire whose chronic woes earned it a starring role in The Full Monty.

The danger is a current disregard in Delhi over alarming signs of a potential economic flame-out, and longer term, of the urgent need for upgrading of schools, hospitals, roads and other crucial infrastructure, so that the anticipated exodus from rural areas will be one of educated students suited to well-paying jobs, and not a tide of unskilled refugees that would trigger an unemployment crisis.

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The current signals of an overheating economy include inflation running at 8 per cent, a four-fold increase in local stock-market values, a more than doubling of house prices in big cities, and an unprecedented borrowing binge by consumers and businesses alike – all the signs of a classic boom-bust scenario. India's central bank, the Reserve Bank of India, has been reluctant to remove the punch bowl from this party by raising interest rates. But India's debt-to-GDP ratio of 80 per cent, more than three times' that of China, and the highest among emerging-world economies, straitjackets Delhi in even its cursory efforts to invest in rural education, local clinics, power plants, modern highways and other infrastructure bottlenecks to sustained growth. About 90 per cent of the Indian workforce toils in the underground economy. Delhi's access to funds is unusually limited. In a nation of 1 billion people, only 35 million Indians pay income tax. (You read that right: 35 million people, not 35 per cent of Indians.)

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Even Cassandras aren't predicting an Argentina-style currency crisis or economic implosion for India. The country owes most of its mounting debt to itself; its external debt is low. India is blessed with $180 billion (U.S.) in foreign-currency reserves to ride out any currency crisis. And Delhi has pledged to increase investments in infrastructure to 8 per cent of GDP over the next five years, up from 4 per cent currently, which would approximate the infrastructure spending that China has been making for years.

Yet India seeks to do the latter with public-private partnerships – that is, with a major infusion of foreign direct investment. That will be a challenge. While eager to partner with Indian firms in retail, IT and telecom ventures, foreigners are wary of Indian infrastructure projects. As the late Enron Corp. discovered with an ill-fated late-1990s Indian power-plant project, theft of electricity from local lines was rampant, and thousands of customers who balked at paying their utility bills were backed by the local state government. Many state governments are controlled by the Communist Party, which also props up the national coalition government of reform-minded Prime Minister Manmohan Singh. Singh finds his hands tied when, for instance, dealing with prospective foreign investors' concerns about archaic labour laws that prohibit companies from laying off more than 100 employees without government permission.

Many Indian economists cite the sustained growth of Asian economies like Singapore, South Korea and Taiwan as a model, neglecting the fact those nations invested much more heavily in infrastructure than India has. And high-profile media reports of a recent Goldman Sachs forecast that India can sustain 8 per cent growth until 2020 usually left out the Goldman Sachs caveat that this economic miracle won't continue unless massive investments are made in infrastructure.

India, which has had previous brushes with "economic miracles" only to see them fade, is indeed poised once again. But for what, exactly, will depend on the political will of its leaders.

The real "License Raj" is Canada. You need a license to pursue any & every profession. You can't even get married without a license!

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