| Published on 01-08-2007 In Business |
| Viewed 2237 times |
| Booming India key to global economic growth |
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Written by
Joydeep Gupta |
Sixty years after independence, India has entered a virtuous circle of long-term economic growth, strong fundamentals and a booming young population - forcing the world to sit up and take notice.
After decades of being shackled by the so-called 'Hindu rate of growth' - well below five percent - the Indian economy has soared at an average rate of over seven percent every year in the last decade and at around nine percent in the last three years. The chairman of the Indian Prime Minister's Economic Advisory Council, C. Rangarajan, expects "the economy to grow at around nine percent in 2007-08 as well, while inflation is expected to be around four percent".
And as more and more people shift from agriculture to manufacturing and move from villages to towns, economists expect the rate of growth to go up by a couple of percentage points more over the next decade.
This growth is fuelled by several factors.
India receives more inward remittances than any other country in the world by the 20 million-odd Indians living abroad; and the boom in information technology (IT) and IT-enabled services (ITES) has seen India become the back office of the world for vital functions that range from school homework guidance to booking airline tickets.
The Indian IT-ITES industry notched up $39.6 billion in revenues in 2006-07, up 30.7 percent from the previous year.
There is an air of justified optimism about India's long-term economic prospects today. There are at least three reasons for this. First, savings and investment rates are rising and are presently at around 32 to 34 percent of India's gross domestic product. Economic analysts believe they may rise to somewhere between 37 and 40 percent of the gross domestic product (GDP) by 2013.
Second, India is now in a demographic situation where a significant part of its 1.1 billion plus population is a youthful asset. In this respect, ancient India is today the youngest country in the world, with a higher percentage of the population below the age of 25 than any other big nation.
This means India is one of the few countries that will not have to worry about a labour shortage for decades to come. This will also have the automatic effect of pushing up the growth and savings rates - and of servicing the global economy for many years to come.
Third, despite the presence of the full range of political philosophies from left to right in the Indian democracy, there is now a broad national consensus in favour of economic liberalisation, though there may be disagreement over details. The fiscal and economic policies of the country have followed a consistent line since 1991, though there have been five different governments during this period.
India is now focussing on investing more and more in infrastructure - both urban and rural - and in social sectors, especially education and health care. The current growth of India's infrastructure - through investments both public and private, domestic and foreign - constitutes one of the largest set of projects ever undertaken anywhere in the world.
In some infrastructure sectors, spectacular results are already visible.
The telecom user-base crossed the 212 million mark in April 2007, making India one of the largest telecom markets in the world. Ernst and Young's recent report on the rise of telecom in Asia projects that India's telecom sector will see investments of up to $25 billion over the next five years.
The institutional architecture for sustaining high levels of investment in infrastructure has been put in place - through public-private partnerships, systematic bidding systems, viability gap funding and other financing mechanisms and standardised approval procedures. These are already bringing results and to some extent, the increased investment in infrastructure has been a driver of growth as well as demand - the virtuous circle again.
Over the next few years, more than $300 billion may be invested in infrastructure alone.
Indian firms have responded robustly to take advantage of this environment. Fuelled by double-digit growth from the manufacturing sector, India's industrial production grew 12.9 percent in March 2007, resulting in an annual industrial growth of 11.3 percent for 2006-07 - crossing the double-digit mark for the first time since 1995-96. Standard and Poor's has now included eight Indian companies in its 'Global Challengers List'.
An important strength of the Indian economy today is that the country no longer faces any insurmountable external constraint on growth. The global environment, both political and economic, is largely benign from India's point of view.
Both manufacturing and services sectors are showing dynamism. The growth of these sectors involves large flows of foreign direct investment (FDI). In 2006-07, FDI in India has exceeded foreign institutional investment for the first time. This shows the confidence that global majors now have that projects undertaken will be implemented and will yield long-term benefits.
Today, there are very few sectors that have any investment constraints. A liberal and transparent FDI policy for industrial, services and infrastructure sectors is now in place. Rangarajan expects "FDI worth $15 billion in 2007-8, up from $8.4 billion the previous year".
The share of trade in India's GDP compares favourably with a number of industrial economies, including the United States and Japan. India's approach to foreign trade has never been mercantilist. Exports have risen to finance higher imports. In the last three years, the country has taken a series of unilateral steps to integrate the economy with the global economy. The peak rate of import duty has now been reduced to ten percent.
India has also undertaken region-specific trade liberalisation. It has entered into free trade agreements with many nations, including the Association of South-East Asian Nations (ASEAN). The agreement with the US on civilian nuclear energy will open up immense possibilities for growth of nuclear energy in the country.
Sixty years after India's independence, the state of the Indian economy provides many good reasons to look back with satisfaction, and to look forward with confidence. |
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