The New Emerging India

by Gurcharan Das
Melbourne
April 1st, 2008

Even though the world has just discovered it, the India growth story is not new
It has been going on for 25 years

What is the India story?

Rising GDP growth

(%) 10 8 8.0 6.0 3.5

Average annual GDP growth

6
4 2 0 1900-1950 1950-1980 1980-2002 2002-2006

1.0

Population growth is slowing

(%)
2.5 2.2 2.1 1.8 1.5 1.5 1.0 1.0

2.0

0.5
0

1901-1950

1951-1980

1981-1990

1991-2000

2001-2010

Sources: 1900-1990: Angus Maddison (1995), Monitoring the World Economy, 1990-2000:Census of India (2001)

Literacy is rising
(%) 100 80 80 60 40 52 65

17 20
0 1950 1990 2000 2010 (proj)

Source: Census of India (2001)

Middle class is exploding

(m)
8% 400 368 300 200 100 0 65 1980 2000 2010 (proj) 220

22%

32%

Source: The Consuming Class, National Council of Applied Economic Research, 2002

Poverty is declining
(%) 50 40 46

30
20 10 0 1980 2000

1% of the people have been crossing poverty line each year for 25 years
26
16

Equals ~ 200m

2010 (proj)

Per capita income gains

US$ ppp

1,178 1980 3,051 2005

Source: World Bank

India is now the 4th largest economy

It will overtake Japan between 2012 and 2014 to become the 3rd largest

The India model is unique

Drivers of growth India

Domestic

East and S.E. Asia

Exports

Drivers of growth India

Domestic Services

East and S.E. Asia

Exports Manufacturing

Drivers of growth India

Domestic Services Consumption

East and S.E. Asia

Exports Manufacturing Investment

Drivers of growth India

Domestic Services Consumption

East and S.E. Asia

Exports Manufacturing Investment

High tech, capital intensive industry

Low tech, labour intensive industry

Implications of India model Domestic led

Insulation from global downturns Less volatility

Implication of India model Services led

Have we skipped the industrial revolution? How do we take people from farms to cities?

Implication of India model Consumption led

Less inequality: GINI index People friendly: Consumption as % of GDP 33%
India

42%

64%

India China Europe

59%

41%
45%

China U.S. Brazil

58%

The world needs another big consuming economy after the U.S.

Reasons for success

Indias success is market-led whereas Chinas is state induced

The entrepreneur is at the centre of the Indian model

Rise of globally competitive Indian companies

India has a vibrant private space

100 Indian Companies have market cap of US$ 1bn 1,000 Indian Companies have received foreign institutional investment 125 Fortune 500 companies have R&D bases in India 390 Fortune 500 companies have outsourced software development to India 2% bad loans in Indian banks (v~20% in China)

80% credit goes to private sector (v~10% in China)

Public space is a problem We have

Dynamic democracy with honest elections Free, lively media and press Poor governance

Earlier we had world class institutions, but they are now failing
Bureaucracy Judiciary

Police

Economy grows at night when government is asleep

What explains Indias economic success? Even slow reforms add up

State getting out of the way Every government has reformed since 1991

Key reforms
Opened economy to trade and investment Dismantled controls

Lowered tariffs
Dropped tax rates

Broke public sector monopolies

What explains Indias economic success? Even slow reforms add up

State getting out of the way Young minds are liberated

Mental revolution
I want to be Bilgay Rajus secret of success

Banianisation of society
100 cable channels for $3

Hinglish

What explains Indias economic success? Even slow reforms add up

State getting out of the way Young minds are liberated India has found its competitive advantage in the knowledge economy

Looking forward
7%-8% economic growth Democracy will not permit more than 8%

1.5% population growth

Per capita income

($000) 40 30 20 10 2,100 0 3,050 5,800 16,800

On a ppp basis
37,000

2000

2005

2020

2040

2066

Convergence in the 21st century

Why convergence is intuitive? Convergence didnt happen in the 20th century because the world was closed Returning to a world of equality prior to 1750 When China and India accounted for 45% of world GDP

Why will growth continue?

Demographic dividend

Indias demographic advantage means that its high growth will continue longer term while China will slow

India will gradually turn middle-class

West of the KanpurChennai line East of the KanpurChennai line

50% 32% 22%

50%

Kanpur-

Chennai

8% 1980 2000 2010 2020 2040

By 2010 India will have worlds largest number of English speakers When 300 million Indians speak a word in a certain way, that will be the way to speak it.
Professor David Crystal
Cambridge Encyclopedia of the English Language

What could stop the show? Infrastructure

Public private partnerships Bad governance

Education System Is reasonably good for the top 20%

Highly competitive business and engineering institutions

Is abysmal for the rest

1 in 4 teachers is absent in government primary schools 54% of children in urban India in private school

Caste system
Origin of Indias caste system Classical four castes Today it is alive in the villages but dying in the cities Source of competitive advantage Affirmative action in public sector, but not in the private sector

Role of Religion
Indias pluralism, diversity and tolerance
2% 1% 12%

Hinduism
Spiritual entrepreneurialism: Gurus

No hierarchy: Every Brahmin thinks he is the Pope

300 million gods: Lack of theological narcissism

85%

Hindu

Muslim

Sikh

Christian

Elephant and not Tiger

India got democracy before capitalism and this has made all the difference It will be slower than China but its path will be surer Elephant at 8% is formidable India more likely to preserve its way of life

The Wise Elephant