|Why India's economy lags behind
By Ramtanu Maitra
on-going six-day trip to China by the Indian Prime
Minister Atal Bihari Vajpayee that ends on Friday
contains many elements, but one of the major objectives
will be to improve India-China economic relations.
In tow with Vajpayee are business leaders from
100 of the biggest Indian companies, including one of
India's top five, software developer Infosys
Technologies Ltd. The biggest tractor maker, Mahindra
and Mahindra; the largest drug manufacturer, Ranbaxy
Laboratories Ltd and the top cement manufacturer, Grasim
Industries Ltd, are accompanying the premier. These
industries represent the areas in which India enjoys an
edge over its Chinese counterparts, and New Delhi
expects to pull off business deals of benefit to India.
Comparing the Indian
economy with the Chinese economy has become almost a
pastime for many analysts. A majority of these economic
analysts have come to the conclusion that as of the year
2003, China is well ahead of India. As The Economist of
London titled its recent cover story on the subject:
"India V China: A Tiger, Falling Behind a Dragon."
China's relative success over India in
attracting foreign direct investment (FDI) was what
tipped the balance for The Economist, although the
article points out that China's figures are "inflated by
'round-tripping' of domestic investment through Hong
Kong". At the same time, The Economist notes, some
Indian economists claim that India's FDI figures are
understated, because "they exclude foreigners'
reinvested profits, the proceeds of foreign stock market
listings, intra-company loans, trade credits, financial
leases, and so on".
The second criterion cited
by The Economist is the respective growth rates of the
two countries. Decidedly, China's growth rates are much
higher than India's. But the article points to some
Indian businessmen and policy makers who angrily claim
that China, being under a dictatorial government, cooks
its books and presents a much rosier picture of its
economy than reality warrants. India, with a democratic
system, cannot resort to such official chicanery.
The Economist concludes that India's economic
backwardness has little to do with democracy as such,
but has a lot to do with corruption, fiscal
mismanagement, a lack of international ambition and a
history of over-protection at home. On the surface, the
argument is cogent, but it is also true that corruption
in China is similarly high and often, if not always,
fiscal mismanagement is another face of corruption.
Significantly, however, The Economist report did
not look at the respective country's investments in the
physical sectors - such as manpower development, health,
power, water management, railroads, roads and highways,
communication etc - and hence remains highly superficial
and gossipy. A comparison of investments by China and
India in their respective physical economic sectors over
the past two decades would have made it very clear why
China is surging ahead, and India is not. It must,
however, be said that India's growth rate in recent
years, for which the Vajpayee government hardly deserves
any credit, though highly inadequate, was better than
most distressed economies of the world.
In the 1990s,
following the opening up of the Indian economy with the
intent of inviting foreign direct investment, foreign
investors were given an open invitation. As a result,
investment was concentrated in consumer durable sectors
where it is quick-yielding and withdrawal is very easy.
This exemplifies the fly-by-night nature of many foreign
As was pointed out by Indian Planning
Commission member Dr S P Gupta at a memorial lecture two
years ago, India now must encourage foreign investment
with a priority in infrastructure. There investment is
of a long-term nature and the amount of investment
needed is very high. The Indian private sector finds it
very difficult to enter such heavy investment areas.
Similar views were expressed by a senior World
Bank economist recently. "Since 1991, India has had a
policy of attracting private investment into
infrastructure," said India country director Edwin Lim,
speaking at a conference in New Delhi. "While some
progress has been made, India's demands for
infrastructure services are still not being met. If the
private sector is to play a big role in meeting India's
infrastructure demands, then India needs sectoral
policies and a regulatory framework that are conducive
to private investment."
Since India opened up to
foreign investment in the early 1990s, there has been
some economic expansion. But there has been little
parallel investment by successive governments in the
power industry or other critical infrastructure such as
railways, airlines, highways and telecommunications.
A World Bank
report issued almost three years ago said, "The shortage
of power is estimated at about 10 percent of total
electrical energy and roughly 20 percent of peak
capacity requirement." Fifty years after independence,
many rural areas are still without electricity. Even
measured against neighboring countries, India's per
capita electricity consumption is very low - 270
kilowatt hours/year as compared to 300 for Pakistan and
480 for China.
Perhaps no single issue excites
Indian industrialists more than the subject of erratic
power supply. Indian small and medium-sized enterprises
(SMEs), the backbone of India's manufacturing and
industrial employment, are now reeling under pressure
from imports. "We do not want protection," says Y P
Suri, secretary of the Federation of Associations of
Small Industries of India, an apex body representing
SMEs. "All we want is support in terms of
From padlocks to electrical
appliances, Chinese goods have made a mass entry into
Indian markets. Chinese electrical goods flooding the
Delhi market have forced over 250 units in the capital
to close shop. "How can you compare us with China?" asks
Suri. "Can the Indian government guarantee us the same
kind of power supply that Chinese SMEs get?"
With more than 3.3 million small-scale units
spread across the country and with over 18 million
people employed in them, SMEs are India's second largest
employer - after agriculture. But, according to the
Ministry of Small Scale Industries, more than 300,000
SMEs have been sick since March 2000.
power shortage in India is for all to see, including
those foreigners who travel only by air, India's
railroads have been in a mess for decades now. At least
14 million people ride each day on the world's second
largest railway system, which stretches 66,800 miles,
zig-zagging up and down and across India.
"Freight traffic volume has gone up by 620
percent and passenger traffic by 514 percent since 1951,
while input into increasing capacity has grown by only
200 percent," said M K Mishra, a former member of the
Indian Railway board. The higher load has increased
pressure on railway staff and affected safety on a
state-run network inherited from the country's British
colonial masters at independence in 1947. Railroad
accidents have become a daily affair and, like terrorist
killings in the state of Jammu and Kashmir, the deaths
in railroad accidents do not raise any hue and cry from
the people. No rail minister opts to resign any more.
The death toll in train accidents has gone up
significantly because, experts say, the outdated
equipment combined with sub-standard parts on rail
coaches make the railways more vulnerable to such
accidents. At the same time, rail budgets have been
decreasing. And the priority for every railway minister
is adding a new train that connects his or her own
constituency to Delhi or Mumbai or some other metro.
Ever since the Narasimha Rao government in 1991
embarked on its "liberalization" policy, the power
sector has been systematically starved of funds. Not
only has the private sector failed to contribute to
production capacity in any significant way, but
investment in transmission and maintenance of existing
plants has seen catastrophic declines. As a result, even
when new plants are commissioned, the problem of poor
transmission networks remains.
One area where the
neglect of infrastructure over the decades is most
apparent is in the nation's roads network. Only 2
percent of Indian roads are four-lane, 34 percent are
two-lane, and 64 percent are single-lane. Much of the
problem is due to the fact that India has been spending
less and less on road infrastructure. India's first
five-year plan (1951-56) spent 1.4 percent of its total
outlay on roads. The share gradually declined, to a mere
0.6 percent in the eighth five-year plan (1992-97). Even
after 50 years of independence, nearly 50 percent of
Indian villages are yet to be connected by all-weather
The Rakesh Mohan Committee estimated in
2001 that the economic cost of bad roads ranges from Rs
200 billion (US$4.3 billion) to Rs 300 billion annually.
External assistance is being obtained for the
improvement of national highways through international
agencies such as the World Bank, the Asian Development
Bank and the Overseas Economic Cooperation of Japan.
This is one area the Vajpayee administration has paid
attention to, and is investing in quite liberally.
A similar weakness is all too visible in the
Indian port system. Decrepit and bogged down by lack of
modernization, Indian ports are a nightmares to
importers. The old state-run Mumbai port is a classic
example: it suffers from inefficiency, poor draught, low
productivity, high costs and long vessel turnaround
times. Mumbai's inadequacies have benefited Colombo in
Sri Lanka, which is enjoying growing container volumes.
Efforts to develop India's ports have all too
often been stymied by the creaking bureaucracy. For
example, recent bureaucratic problems encountered in the
private tendering processes at Mundra in northwestern
India and in the conversion of two break bulk berths to
a new container terminal at Nava Mumbai under the
Jawaharlal Nehru Port Trust have slowed down the
development of ports in India.
In contrast to India's
neglect of the basic infrastructure, China is investing
its surplus in railroad, power, road and water
management in a concerted way. There is no question that
China still lacks adequate infrastructure, but it has
understood clearly the importance of modernizing its
basic infrastructure to generate employment and adequate
utilization of its vast population.
policy makers, and some economists, on the other hand,
give the impression that India's strategy to accelerate
growth is to leapfrog past technologies through its
information technology (IT) acumen. India's services
sector has seen a steady increase in growth rates, share
of GDP and contribution to GDP growth. More than half of
India's GDP growth in the 1990s came from the growth of
the services sector.
It is one thing to applaud
the contribution of IT - with its minimal requirement
for infrastructure - to the Indian economy at this time.
It is quite another matter, and potentially disastrous,
to pretend that boosting IT is a development strategy.
IT cannot move a slow-moving economy, burdened with a
massive shortfall of infrastructural development, a huge
number of illiterates, crippling poverty and very high
unemployment and under-employment. As the International
Finance Corporation's 2001 report, "Leapfrogging India's
Information Technology Industry and the Internet," put
it, "while the technology offers considerable promise
for India, it will have to be combined with more
widespread reforms if the promise is to be realized."
The real bad news lies elsewhere. India's
agricultural sector, which continues to employ about 60
percent of the country's workforce, has seen a real
decline in terms of its contribution to GDP growth and
its share of GDP. India's industrial sector has not been
able to replicate the growth magic of the services
sector either. While industry's share of GDP has
increased over the years, its growth rate dropped in the
1990s and its contribution to GDP growth has more or
less remained constant over the years. Data show that
six major industry groups - food products, cotton
textiles, textile products, wood, paper and basic metal
and alloy industries - have experienced a sharp slowdown
over the past four years.
Overall, as industrial
development was divorced from efficiency and
productivity, India's ability to compete globally has
been seriously compromised. By contrast, during the same
period, Chinese manufacturers became increasingly
competitive. Infrastructure has made all the difference.
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