BRICs Series – 1 : The Indian Economy – Issues, Impact & Potential

In 2001, Goldman Sachs famously came up with the term BRICs (representing Brazil, Russia, India & China), and estimated that by the year 2050, the combined economies of the BRIC countries could eclipse the combined economies of the current richest countries of the world. Since then, India has been mentioned as an upcoming emerging economic giant, and rightfully so. It has lived up to its hype the past 10 years. Its economy is booming with an annual growth of 8-9% in the past few years….and is expected to grow at an average of 8.7% in the next 5 years. The consumer optimism in high, the stock market is at an all-time high, the auto industry is having record sales…sounds like a paradise….right? WRONG. Not everything is rosy…and there are various important issues that people don’t see, or choose not to see…..which could impact not only the future of India, but could shape the global economic landscape in the next 50 years.

Indian Economy at a glance:
The Indian economy is structured such that the Services Sector accounts for 63%, Agricultural sector 17.5%, and the Industrial sector 19.5% of the GDP. It’s a two-tier economy – cutting edge, globally competitive knowledge driven services sector that employs the brightest of the middle-class on one hand, largely rain-fed agricultural sector that employs majority of the vast and poorly educated labor force on the other. Inflation has been really high lately, averaging 10% in recent years, peaking at 16.2% in early 2010. The budget deficit is at 7%, expected to come down to around 5% in the next few years.

The Indian Labor Force Structure: The formal sector accounts for only 11% (38million) of the total Indian labor force. And 2/3rd of that works for the government. Whereas the informal sector is huge – 89% (360 million). But most of the informal sector labor force is in the low-productivity agricultural sector. Only 30 million are employed in the small and micro-industry.

The services sector has been the main driver of the economic growth and is the largest and best performing component of the economy. Information Technology contribution to the GDP has gone up from 1.2% in 1998, to 5.2% in 2007…and the computer software and services exports are poised to be worth $80 billion in 2011. The IT-enabled services and business process outsourcing (call centers, accounting support, administration and content development), has expanded at a rate of 50% since 1993. The boom of the service industry wasn’t planned, but it was by luck…due to the global IT boom….especially in the United States. The IT sector was a completely new sector in India, hence it was unregulated by the government….a blessing. And to the government’s credit, it did not suppress this sector, and on the contrary, it gave tax incentives, relaxed labor rules, created special zones of power supplies for this sector.

On the other hand, the performance of agricultural sector has been dismal. It employs 60% of the country’s workforce, but accounts for less than 1/5th of GDP. Since the year 2000, the average growth has been at 2%, half of what is required to sustain a GDP growth of 9% or higher. Spike in the food prices in 2008 highlighted the need for India to invest more in the sector to assure its food security.
The industrial sector accounts for 20% of the GDP. In the 1980s, this sector grew by 7.1% per year, and since 2003, due to strong consumer demands and exports, the production grew at 11.6%. Manufacturing production is 75% of the industrial output, but still a very small sector. The government target for manufacturing sector is to make it account for 25% of the GDP, and to achieve this, the sector must grow by 15-17% per year.

Lets list some of the strengths and weaknesses of India….before going into what India needs to do to be an economic superpower.

Strengths:

  • Booming economy and IT sector – average GDP growth rate 8.7% per year.
  • Large internal market.
  • Demographics – large young English-speaking population.
  • Growing middle-class.
  • Democracy – freedom of speech, press and religion, fair elections, smooth transition of governments.
  • Strong entrepreneurial tendencies

Weaknesses:

  • Flawed Democracy – inefficient government, high corruption rate.
  • Government over-regulation – labor, tax, access to financing regulations
  • High Inflation.
  • Poor quality of Education.
  • Political instability – coalition governments.
  • Poor infrastructure – huge bottleneck for economic growth.
  • Growing inequality.
  • Internal and External conflicts / threats – Maoist insurgency movement in central India, border disputes with China, and long-standing tensions with Pakistan.

Here are the 6 things that i think India needs to do for it to reach its goal of becoming an economic giant by the year 2050:

1) Improve Governance – India’s colonial style bureaucratic form of government, with its populist policies and high degree of corruption, is the biggest hurdle for India. By using the power of civil society, and with the tools of democracy at its disposal, India needs to change the political culture of “accepting things the way it is”, for holding the politicians accountable for their actions.

2) Reform Education – The highly skilled workers that are responsible for the IT boom can mask the real issues in education in India. The education system in India is of poor quality, and a drastic, immediate reform is required. India has 22% of the global population, and 46% of world’s illiterates. Since the 70s, the government has focused on the quantity of schools, and ignored the quality. With 10 million people entering the workforce each year, the demand for qualified workers will be huge…and so, heavy investment in primary and secondary education should be India’s highest priority.

3) Invest in Infrastructure – under-investment in infrastructure has been a bottleneck for the Indian economy. Slow turnaround time at the ports, poor quality of roads and railways, inefficient and inadequate electricity, are just some of the issues. It is estimated that India needs to invest $500 billion on infrastructure in the next 5 years.

4) Reform Agricultural Sector – As mentioned earlier, 60% of labor force is in the extremely inefficient indian agricultural sector. Less than 40% of the cultivated land is irrigated, and hence, this sector is heavily dependant on the monsoon season. Food inflation is currently at 18.3% and has been a huge burden on the economy. So a complete reform and heavy investment to upgrade and improve the agricultural productivity is a must for India.

5) Improve Labor Flexibility – One of the main challenges in India is expanding the still small manufacturing sector. And due to labor laws in this sector, it has become extremely difficult to move the huge labor force from the extremely inefficient agricultural sector, to the industrial / manufacturing sector. Hence, the labor force is moving to the services sector instead. Growth of the labor intensive manufacturing sector in India will be crucial for a long sustainable economic growth.

6) Further Integrate into the World Economy – Apart from the inefficient government bureaucracy and the inadequate supply of infrastructure, the restrictive labor regulations, tax regulations and difficult access to finance have added to the problems in doing business in the country. The government needs to further liberalize and de-regulate the economy to encourage foreign investment, and to further integrate into the global economy.

India’s demographic advantage (huge young population) can pay huge dividends if used correctly; but if the population is not educated and jobs are not created, this young population can become a big liability. Some economist have said that the Indian economic boom in the last decade has defied all traditional economic models and created a new model for economic success – a “service-sector led economy” model. But i dis-agree. The service sector boom is not sustainable long-term, and India definitely needs to ramp up its other 2 sectors (agriculture and industry). The recent economic success has masked the regional divides and the overall problems in India (most of the economic boom has been in the western and southern regions). India has a golden opportunity to ride this golden goose (the IT sector), and transform itself into an economic superpower. But there is no doubt, government policies and reforms in the next decade, will decide whether India lives up to its hype and potential, or whether it turns out to be a huge disappointment.

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About pritamkabe

Originally from Bombay, India. Relocated to the United States in 1997 for attending graduate school at The University of Texas. Completed my Masters in Electrical Engineering in 1999 and then worked in the Hi-Tech industry for the next 11 years in Austin, Texas. I have a passion for travelling, meeting new people, and experiencing new cultures...and i've been very fortunate to have gotten the opportunity to travel quite a bit. Sports and food are my other big passions in life. Some life-changing experiences in my life a years ago changed my perspective of life, after which, just have an engineering job was not meaningful to me anymore. Hence i quit my engineering career, and I'm now motivated to give back to society and make a positive impact in some way. To get started on that journey, i went back in graduate school, and recently graduated as a "Mid-Career Fellow in Foreign Service", from the Edmund A. Walsh School of Foreign Service, at Georgetown University, Washington DC. Currently in New Delhi, India, on a research fellowship, to learn about the educational issues in India, and brainstorm my ideas about technological interventions for resolving those issues.
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