As I write this article, India has recorded an abysmal gross domestic product (GDP) growth of 5.3% for the latest quarter at double-digit inflation and unemployment.
It is interesting to note that between 2004 and 2011 Indian GDP grew at an average of 8.3%, second only to China. The period 2006-2007 witnessed India’s GDP clocking an impressive 10.1%. This downfall in India’s GDP has meant none of the Wall Street banks carry an optimistic outlook about the country. Soon after the GDP numbers were released Goldman Sachs revised its outlook on Indian growth story from 7.2% to 6.6%, Merrill Lynch from 6.8% to 6.5%, Morgan Stanley from 7.5% to 6.8%.
Years of policy paralysis has culminated in reduced investment by businesses, which is below 30% of GDP, and an abrupt shelving of industrial projects due to lack of reforms on land acquisitions. In a shocking report from Center for Monitoring Indian Economy (CMIE), an independent economic think-tank, during 2011-’12 investments worth INR 5 trillion were shelved with investment projects to the tune of INR 1.7 trillion annulled and INR 3.3 trillion stalled. In aggregate over 500 investment projects were canceled in 2011-’12. Unsurprisingly, lack of land reforms is choking myriad productive investments in the economy. Some of the biggest projects hindered are the INR 450 billion Nuclear Power Corporation’s 6,000 MW Haripur plant, West Bengal.
The rise of a more local approach to Indian governance, once again after 1947, fragmented relative to that which had come before it, reflects India’s search for balance between its local and central authorities and the chronic tension which has always existed in the nearly 2300-year old history of the sub-continent between its various princely states after the establishment of the Indo-Aryan empire and Sanskritization.
In the past five years the pace of development in India’s impoverished and crime-ridden provinces of its North-East has been quite astonishing. Bihar, a state notorious for murders, looting, police atrocities, kidnapping, and crony capitalism is working hard to reclaim its past glory of Pataliputra (Patna), the ancient capital of the Indian empire.
During its ancient past, Bihar was a center of religious and intellectual exchange with Greece after Alexander the Great and China of Confucius. Buddhism flourished in ancient Bihar as scholars from around the world frequented the place to quench their thirst for knowledge and spirituality. The rise of states such as Bihar is significant for India’s long-term economic outlook because they are rich in mineral resources and possess substantial potential of transforming India.
The government of the Chief Minister of Bihar, Nitish Kumar, has invested substantially in infrastructure and education. It has been tough against the law-breakers and has achieved a great deal of progress on stemming corruption.
Taking a leaf out of Nitish Kumar’s book, the neighboring new state of Chhattisgarh, which shares close affinity with Bihar and Bhojpuri identity, has expedited key reforms on economics and politics. It is not surprising that Bihar’s GDP since 2005 has averaged an impressive 11%. On the other hand, Chhattisgarh has managed to achieve an average GDP growth of 11% since 2010.
Expectations of India’s 28 states from their governments are varied in nature, though local political parties are increasingly seeking more say in policy-making in India. States such as Gujarat have demanded greater industrialization and improvement of infrastructure. Gujarat, with 5% of India’s population accounts for 16% of India’s manufacturing output and nearly a quarter of India’s exports. In 2010, Gujarat’s capital Ahmadabad was rated as the third fastest growing city in the world by Forbes Magazine.
Business-friendly and low-corruption functioning of Gujarat has garnered significant global attention. The state has undergone impressive infrastructure development to considerably improve the quality of life of its citizens.
Gujarat differs from Maharashtra and the southern states of Karnataka and Andhra Pradesh in the quality of infrastructure and urbanization along with a state-level consensus of industrialization and political stability, to produce a more inclusive and consistent growth over extended periods of time. Maharashtra, Karnataka and Andhra Pradesh witness frequent political turnover and lack a shared state-level consensus. It is thus not a surprise that these states are struggling to manage crumbling infrastructure, chaotic cities, eroding political stability and investor confidence.
India’s top five economic Outliers and Laggards, Source: Times of India
It is time to make some tough choices. All the Asian miracles (China, Taiwan, South Korea, Japan, Singapore and Hong Kong) had a strong sense of national consensus on economic development.
Even as it stands among the world’s 5 largest economies on a purchasing power parity (PPP) basis, and despite registering rapid growth from the early 1990s, India is neither a services nor a manufacturing powerhouse. It is very essential that a national consensus be built to better channel domestic investment.
India is one of the key destinations for R&D and IT operations for numerous global IT companies. The IT sector put India on the global map during the early 1990s. Absence of reforms, however, in educational sector and the diluting quality of Indian education means that a vast swath of population fails to benefit from education either due to a lack of affordability or sub-par quality of curriculum.
So far only five Asian countries have managed to break the “Middle-Income Trap,” because global income distribution is econometrically skewed at best or suffers from kurtosis at worst. Middle Income Trap refers to that part of the growth process that occurs when a country’s per-capita income is in the range of $1,000 to $13,000.
Similar to the United Kingdom in Europe, in Asia, Japan, Taiwan, South Korea, Singapore and Hong Kong have thus far succeeded in breaking the middle income trap through continuous structural economic changes firmly centered on national consensus, commonly predicated in all these small countries on innovation, trade and finance.
India’s per capita income is about $3,700 in comparison to China’s $8,400, with both countries in the middle income trap. To make the strenuous climb from being a low-middle income country to upper middle-income country and then to a high-income country for the purpose of econometrically normalizing income distribution among the family of nations, it is imperative to build national consensus on how India is going to achieve this goal.
Owing to the deteriorating fiscal deficit and current account position, it is increasingly visible now that the ruling government cannot extend generous subsidies and handouts to the middle-class and the lower middle-class segments of the Indian population.
India, having sunk money into domestic weapons research and development, should begin to buy from the United States, paying America in Indian rupees, including for technology transfer from United States to India, to build a relationship in the defense industry similar to that of the United States with Europe. United States can help India in South Asia stand-down its arms-buildup while enabling India to defend its borders to avert an arms race with China.
The lack of urbanization in India can hold considerable advantages for the future by promoting reverse migration from urban congestion to rural India for the purpose of harmonizing population densities and balancing the contributions of the three economic sectors: agriculture and industry ought to continue to be prominent and more sustainable, and services supportive of both.