Wednesday, September 14, 2011

Indian summer set to outshine world powers

PRIME Minister Manmohan Singh noted recently that on present trends India will become the world's third-largest economy by 2025.

Most global corporations have a presence there, with substantial expansion plans, and many Indian corporations are expanding abroad through investment, mergers and acquisitions. India's growing economic weight is being translated into political clout.

India's GDP has quadrupled since economic reforms in 1991 and per capita income has doubled. With GDP growing at 8-9 per cent annually and population at 1.7 per cent, real GDP/capita will double every decade. The doubling of the middle class will have profound political consequences, determining the fate of governments and domestic and foreign policy parameters.

The economic and foreign policy implications for Australia are largely positive.
Like China, India was able to ride out the global financial crisis with the help of substantial currency reserves, limited leverage and low debt levels.

Economic performance changed dramatically when both countries abandoned socialist dogmas, liberalised and deregulated economies by adopting market principles, and embraced the international economy. China did this earlier and its growth has been the longer, and its share of world trade is bigger.

India's reforms followed 12 years later, and its deepening engagement with the world economy still lags behind China by a decade. But, for all of China's vaunted advantages, India's performance is comparable. Accordingly, assuming the same trajectory, India's growth over the next decade will have the same stunning impact as China's in reshaping economic and geopolitical maps.

Another time I will note the qualifications and hence the need for cautious optimism rather than triumphalism, but let me note six drivers of the destiny of nations that will work to India's advantage over China. They are demography, domestic demand, the private sector, democracy, rule of law and civil society.

While China's population profile matches the greying phenomenon of most Western countries, half of India's population is under 25. This will give India a tremendous advantage, with a far bigger cohort of workers and consumers who will also anchor the economic prospects of many Western countries.

Compared with China, India's economic performance is rooted in indigenous funds and enterprise, and is therefore likely to prove more resilient and self-sustaining. India's success is built primarily on domestic rather than export markets, domestic savings rather than foreign investment, hi-tech services more than low-skilled industry, and rising productivity more than increased labour, land and capital inputs.

Most importantly, at the heart of the Indian success is the private entrepreneur, not the state. Domestic entrepreneurs have been pushing at the bureaucratic and political gatekeepers in New Delhi to step aside and let a thousand flowers of commerce bloom. Decades of communist rule have left a legacy of constraints on China's domestic entrepreneurs and checked their ability to compete with state enterprises.

India's private sector is far more efficient in the utilisation of capital. Hence the belief that India's economy grows mainly at night, when the government is sleeping. The Indian entrepreneur is backed by a thriving stockmarket, a disciplined financial sector, and more efficient and transparent capital markets and legal system.

While markets ensure efficiency, democracy ensures that reforms have a human face. India's two main parties differ on the pace, sequencing and social safety nets, but agree on the goal of rapid and sustained growth by unleashing the productive genius and energy of the Indian businessman through reforming the tax structure and lowering tax and tariff schedules, dismantling state controls and monopolies, promoting and investing in infrastructure, softening labour market rigidities, curtailing subsidies, and generally adopting business-friendly policies.

The existence and growing role and impact of an active civil society, which has just flexed its muscle and forced the government to confront the menace of corruption, also puts limits on its ability to ignore citizens and damage consumers.

As India changes its attitude towards its sprawling diaspora, it may further reinforce the country's comparative advantages in professional, managerial and entrepreneurial skills. China's diaspora has helped to make it the world's factory. India could become the world's technology lab with the help of overseas Indians.

A word of warning. Some of India's longstanding advantages over China are eroding or becoming less relevant. As part of their longer-term strategic vision, Chinese leaders have been promoting English language and IT skills, backed by the necessary telecommunications and power infrastructure.

There are vigorous shoots of civil society in China from the bottom up alongside the continuing control of the single political party at the peak national level. The police can be as brutal and corrupt in one country as in the other.

Most critically, while China is closing the education gap with the West, India is falling further behind. India has one university in the world's top 500 compared with mainland China's 23.

More positively, robust and sustained growth in China and India is likely to be mutually reinforcing. Both are sizeable enough that the rise of a large and affluent middle class in the two would provide almost unlimited growth potential for the rest of the world.

By Ramesh Thakur professor of international relations at the Australian National University and adjunct professor in the Institute of Ethics, Governance and Law at Griffith University

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