India future 35

INDIA’S FUTURE
Or prosperity will spread in India
but happiness will not, until we fix governance

 Where are we coming from?
 Where are we today?
 Where are we going in the
future?

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

28 years of high growth
1.0
3.5
6.0
8.9
Average annual GDP growth
10
8
6
4
2
0
1900-1950 1950-1980 1980-2002 2002-2007
(%)

Population growth is slowing
1.0
2.2 2.1
1.8
2.5
2.0
1.5
1.0
0.5
Sources: 1900-1990: Angus Maddison (1995), Monitoring the World Economy, 1990-2000:Census of India (2001)
1.5
0
1901-1950 1951-1980 1981-1990 1991-2000 2001-2010
(%)

Literacy is rising
17
100
80
60
40
20
Source: Census of India (2001)
52
65
80
0
1950 1990 2000 2010 (proj)
(%)

When middle class is 50% then the politics will also change
65
220
400
300
200
100
Source: The Consuming Class, National Council of Applied Economic Research, 2002
368
8%
22% 32%
0
1980 2000 2010
(m)

Poverty is declining
46
26
16
1% of the people have
been crossing poverty
line each year for 25
years
Equals ~ 200m
50
40
30
20
10
0
1980 2000 2010
(%)

Per capita income gains
Source: World Bank
US$ ppp
1980
1,178
3,051 2005

India is now the 4th largest economy
It will overtake Japan
between 2012 and 2014
to become the 3rd largest

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
■ High tech, capital
intensive industry
East and S.E. Asia
■ Exports
■ Manufacturing
■ Investment
■ Low tech, labour
intensive industry

Implications of India model
‘Domestically led’ means:
■ Insulation from global downturns
■ Less volatility
■ We will come out of the global crisis
faster

Implication of India model
‘Services led’ raises
uncomfortable questions:
■ Have we skipped the industrial
revolution?
■ How do we take people from farms to
cities?
■ Will SEZ’s be our tipping point?

Implication of India model – Consumption led
41%
59%
45%
India
China
U.S.
Brazil
33%
People Friendly:
Consumption as % of GDP
People Friendly, Less inequality:
Gini Index
42% 64%
58%
India
China
Europe
Will India become the next big consuming economy after the U.S.?

Reasons for success
India’s success is market-led
whereas China’s 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)

■ 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
But we also have
Poor governance!

Governance Failures
 Not the minister caught with a bribe
 1 out of 4 school teachers absent in
government schools
 2 out of 5 doctors absent in primary health
centers
 Delhi’s water
 Land titles
 Etc

Ironically, we used to have world class institutions from
1950-1980, but our problem was growth.
Now we have growth, but our institutions are failing
■ Bureaucracy
■ Judiciary
■ Police

The economy
grows at night
when the
government is
asleep

Key reforms
■ Opened economy to trade and investment
■ Dismantled controls
■ Lowered tariffs
■ Dropped tax rates
■ Broke public sector monopolies

Understanding India’s economic success
 Remarkable --every government has reformed (slowly)
since 1991
 Even slow reforms add up
 65 countries have done the same reforms – why did India
become the second fastest in the world?
 Unappreciated fact – rule of law

“By 2010 India will have world’s 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

Understanding India’s economic success
■ Mental revolution among the young
■ ‘I want to be Bilgay’
■ Raju’s secret of success
■ Banianisation of society
■ 180 TV channels; 65 news channels
■ The rise of Hinglish

Where are we today?
 Growth fell to 6.7% in 08-09; 7% in 09-10
 Pain has been less than in China
 Competitive companies have recovered faster.
 Risk of protectionism has receded
 Recovery has been ahead of the world

Where are we going?
■ Base case post recovery is 7.5 % – 8.5 % GDP growth
■ Democracy will not permit more than 8% unless you have a Thatcher
■ 1.5% population growth
■ Demographic dividend – growth will continue beyond China’s

Per capita income
2,100 3,050
5,800
16,800
37,000
On a ppp basis
2000 2005 2020 2040 2066
($000)
40
30
20
10
0

Convergence in the 21st century
■ Why convergence is intuitive?
■ Convergence didn’t 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

India will gradually turn middle-class
West of the
Kanpur-
Chennai line
East of the
Kanpur-
Chennai line
50% 50%
8%
22%
32%
1980 2000 2010 2020 2040
Kanpur-
Chennai

What could stop the show?
- Infrastructure
- Improving via public-private parterships
- Fiscal Deficit
- Governance
None of these stopped the show in the past 25 years
- Nuclear War?

Education System
Is reasonably good for the top 20%
But it is abysmal for the rest
■ 1 in 4 teachers is absent in government
primary schools
■ Hence, 54% of children in urban India are in
private schools
Solution: Education Vouchers

Caste system
■ Origin of India’s caste system
■ Classical four castes vs 3000 jatis
■ Hostage to competitive politics
■ Source of competitive advantage
■ Affirmative action

Role of Religion
India’s pluralism, diversity
and tolerance
Hinduism
■ Spiritual entrepreneurialism: Gurus
■ No hierarchy:
Every Brahmin thinks he is the Pope
■ 300 million gods:
Lack of theological narcissism
85% ■ Nasadiya Temper
Hindu
2%
12%
Muslim
Sikh
1%
Christian

Elephant and not Tiger
■ India got democracy before capitalism and this has made
all the difference
■ It is slower than China but its path is surer
■ However, an elephant at 8% growth is a formidable beast
■ We have waited 3000 years for this moment
■ India is more likely to preserve its way of life

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India future 35

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