The current issue of the Economist features India as the cover story.
The euphoria is widely shared. Nearly six decades after independence, India at last seems ready to take the place in the world that its huge population should command.
Indian business has much to celebrate. But, says Simon Long, it still faces huge obstacles if it is to lift India out of poverty
NOT once in a decade. Not once in a millennium, says Manish Sabharwal, boss of TeamLease, India’s biggest temporary-employment agency, of the opportunity India enjoys in 2006. â€œIt’s once in the lifetime of a country. The euphoria is widely shared. Nearly six decades after independence, India at last seems ready to take the place in the world that its huge population should command.
For years it languished under a mixed economy that seemed to blend the worst of socialist planning with the least productive forms of private-sector competition. In 1991, faced with an external-payments crisis, Manmohan Singh, then the finance minister, now the prime minister, began to open up the economy. But even in the intervening years India’s economic growth, averaging about 6% a year, has paled beside its neighbour China’s. India, says Nandan Nilekani, boss of Infosys, one of India’s IT powerhouses, â€œhas always been seen as a country of promise and potential, but it has not deliveredâ€. Now, he adds, even long-term sceptics are being converted: â€œThe worm has turned.â€ For business, India is seen as the next big thing: China 15 years ago, as the saying goes. No big international company can do without an India strategy. Some multinationals eye the country and see a vast domestic market about to take off. But even those who doubt that are impressed by its wealth of highly skilled, low-cost professionals. Some Indian firms, meanwhile, have become world-beatersï¿½”not just the well-known stars in its IT and other service industries, but manufacturers too, of products ranging from motorcycles to footballs, from medicines to steel.
These heady times were reflected in the stockmarket (see chart 1)ï¿½”until it crashed with a thud in May. In the three years up to April, it had outperformed the overall emerging-market index by 45%. The successes of Indian companies helped, but the main reason was investors’ readiness to pay more for their shares relative to their profits. The spectacular rise had left the market vulnerable to a mood change in global markets.
All the same, signs of a boom are everywhere. Some 5m new mobile-phone connections are added each month. To meet the soaring demand, Nokia, the Finnish handset giant, last year built a huge factory near Chennai in just five months. Almost every city is seeing frenetic construction. Some 450 shopping malls are being built. In Hyderabad, a gleaming new convention centre shot up in 15 months. According to Siddharth Yog, of Xander Real Estate Partners, a private-equity investor, perhaps one-third of India’s 60m-80m square feet (5.6m-7.4m sq m) of â€œgrade Aâ€ office space has gone up in the past 18 months alone.
Flights are full, and prices of hotel rooms ruinous. Judging by the lodging allowances set by America’s State Department, a room in India’s information-technology capital Bangalore now costs $299 a night, as much as anywhere in the world. Industry’s costs, too, are soaring: Lakshmi Narayanan, boss of Cognizant, an IT-services firm, says the price of land next to one of his facilities in Chennai, needed for expansion, has risen by 180% in 12 months.
Internationally, India is on a high. President George Bush has made improving relations with India one of America’s central foreign-policy objectives. To that end, he agreed in March to a highly controversial deal permitting American assistance to India’s nuclear programme, even though that country has never signed the Nuclear Non-Proliferation Treaty and has exploded the bomb. At the World Economic Forum in Davos, Switzerland, in January, the Confederation of Indian Industry, a private-sector lobby group, led a highly successful national branding campaign. Its slogan told no more than the truth: â€œIndia everywhereâ€.
Struggling for air in so much froth, sober analysts will instinctively reach for a pin. Certainly, some of the present exuberance is irrational, and some Indian marketsï¿½”property as well as sharesï¿½”may pop. And yet the business optimism is largely justified: over the next decade, both India’s domestic market and its firms’ weight in the world economy will grow rapidly.
But how rapidly? Is India now on a path where economic growth of 8% a yearï¿½”seen for the past two yearsï¿½”is sustainable, or even, as many would argue, easily surpassed, with 10% within reach? Or is the present boom simply a cyclical upturn around a trend that remains at about 6% a year? Either way, business is bound to flourish.
The higher rates of growth are essential, however, if India is to find jobs for the 70m or so young people who will join the labour force in the next five years; if the 260m who live on less than $1 a day are to be lifted out of poverty; if the benefits of India’s business success are to be shared by the 70% who live in the countryside; and if India, in 15 years’ time, is to become something like China today, in its living standards if not in its authoritarianism.
Opening the cage
This survey will argue that Indian business can play a big part in delivering faster growth, but only if the government helps. The successes of the past 15 years have been, in a sense, the easy part. Many of the bars that caged the Indian tiger have been removed, leaving the beast free to roam and roar. In particular, India has been able to exploit its great comparative advantage in an era of broadband communications and globalisation: its wealth of technically adept, English-speaking talent. Now, however, further reforms are needed.
First is more liberalisation, continuing the good work of the past 15 years, opening India’s markets even wider to competition and reducing the role of the state in the economy. Second is the improvement of India’s woeful infrastructure, the biggest bottleneck in the race for growth. Third is a change in India’s labour laws, which act as a serious obstacle to labour-intensive manufacturing. Fourth is education, which is not only failing to prepare the rural poor for work off the land, but is also no longer equipping enough talented young graduates with the skills that have fuelled the services boom. Across industry, the same lament is heard: it is hard to find qualified people, and hard to retain them.
Unlike in 1991, there is no crisis to help enforce change. That, in a way, may make it more difficult to introduce, because vested conservative interests will be tougher to override. But without it, there will be no burgeoning of the job-creating factories that India needs, making clothes, handicrafts, shoes, processed food and so on. To provide work for those leaving the farm, India needs to replicate in basic industry what it has achieved in software.
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