The Indian dream

By Ishrat Husain
Sunday, 12 Jul, 2009 | 01:09 AM PST

DURING a recent visit to Mumbai and New Delhi I attended two major conferences
on India’s economy. A report, commissioned by the Asian Development Bank,

India 2039: An affluent society in one generation, formed the basis of the Mumbai
discussion.

The focus of the report was on how India would be able to make the transition from
a low-income country to an affluent society within a generation if it was able to
maintain and accelerate an annual average growth rate of 9.5 per cent over the next
30 years.

According to the report’s projections the Indian economy would increase by a factor
of 19 to reach $20tr from the current $1tr with a per-capita income rising from
$1,000 to $16,000 by 2039.

India has consistently stepped up its growth path over the last six decades. In the
first 30 years of its independence it was stuck at the ‘Hindu rate of growth’ of 3.5 per
cent followed by an increase to 5.5 per cent in the next two decades. In the most
recent period, 2003-07, growth accelerated to 8.5 per cent a year. Given this track
record it was argued that the probability of achieving the 9.5 per cent target was
feasible.

The question that was debated most intensely was: what could be done to reach this
target? The report’s optimism is premised on three factors. First, India is set to reap
a demographic dividend as the ratio of the working-age population to the total
population is on the upswing. As the population becomes more urban, rich and
educated and more women join the labour force, participation rates are likely to rise.
Evidence of the rising participation of women in the labour force was apparent during
a visit to the CNBC studios in Mumbai. Out of 200 professionals working on the floor
more than 80 per cent were young women in their early or mid-20s.

Second, the emergence of a large and strong middle class will provide the source of
domestic demand, especially for consumer durables — cars, motorcycles, televisions,
air conditioners, mobile phones and refrigerators. The middle class will also demand
housing, shopping malls, infrastructure and services. Mortgage penetration in India is
only six per cent compared to 15 per cent in the US. And the middle class saves for
retirement, housing and children’s education providing the resources for fixed capital
formation, especially as the trend of two-income families catches on.

Third, savings and investment ratios in India have undergone a drastic upward
movement in recent years and are catching up with those of China. Up to the 1980s,
the domestic savings rate was below 20 per cent and, hence, the investment rate
was constrained. Between 1990 and 2002, the savings rate jumped to 25 per cent of
GDP and after 2002 escalated to 35 per cent. This was a remarkable turnaround in
less than two decades and provided ample space for domestically financed
investment which rose to 34 per cent of GDP.

This upward trend will be sustained if economic growth moves to a higher trajectory.
As foreign investment has also been pouring in it is quite conceivable to attain a 40
per cent investment rate. With an Incremental Capital Output ratio of four the
postulated growth rate can be realised.

However, the achievement of this goal set in the report is not easy or preordained.
Despite these positive factors there are

many other policy and institutional changes that have to be put in place during the
next 30 years if India is to move along the projected path.

First, the regional, income, spatial and caste disparities must be tackled forcefully.
Rapid economic growth of the kind envisaged is most likely to accentuate these
inequities. In a multi-ethnic, pluralistic society, the threshold for tolerating inequities
is quite low. Unless policy measures to promote social, economic, political and
financial inclusion are implemented the imperatives of a vibrant democracy and
electoral process can, in fact, derail the process of rapid growth.

National parties, in their efforts to preserve their political space in regions that are
lagging behind would take action to dilute or halt the spread of forces generating
growth impulses. Regional parties, to appease their constituencies, would stage a
revolt against those policies. Inclusive growth may result in a trade-off with rapid
growth.

Second, governance structure and processes in India are a big hindrance in the
implementation of policies and programmes and the delivery of services to citizens.
The devolution of administrative functions and associated financial resources to local
levels where most of the interaction takes place between citizens and government is
absolutely critical.

A change of attitude is required in its civil services. Technology and e-governance

Third, India’s human skills have to be harnessed and upgraded at an equally rapid
pace to keep up with the demands of the economy. Contrary to popular belief there
are only a few thousand graduates from world-class Indian institutions. The majority
do not have readily acceptable employable skills. Hundreds of thousands have to be
trained by their employers after being inducted. The literacy rate of 65 per cent
along with the mediocre quality of higher education can prove a drag on the
economy unless measures are taken to rectify both these weaknesses soon.

Lastly, it is widely recognised that unless India has peaceful, friendly and prosperous
neighbours its ambitions to become a global economic power could be thwarted. As
the biggest country in South Asia, it is in India’s self-interest to promote regional
stability, expand cooperation in trade, investment, access to technology etc. and to
remove irritants in relations with others, and be ready to resolve outstanding
disputes. The arrogant and patronising attitude towards its neighbouring countries
has to give way to more understanding and empathy.

India’s economic aspirations to become a rich country within a generation are

The writer is a former governor of the State Bank of Pakistan