In­dia’s Chi­nese dream

Financial Mirror (Cyprus) - - FRONT PAGE -

In re­cent years, China and In­dia have both emerged as global eco­nomic su­per­pow­ers, with China lead­ing the way. But, with Chi­nese growth slow­ing and the need for struc­tural change be­com­ing in­creas­ingly acute, will the eco­nomic-re­form ef­forts of In­dia’s new prime min­is­ter, Naren­dra Modi, en­able the coun­try to catch up?

Since the 1980s, China has ex­pe­ri­enced un­prece­dented eco­nomic growth, fu­eled by abun­dant low-cost labour, high sav­ing and in­vest­ment rates, sub­stan­tial mar­ket re­forms, out­ward-ori­ented poli­cies, and pru­dent macroe­co­nomic man­age­ment. Its lead­ers now hope to achieve high-in­come sta­tus by de­vel­op­ing more tech­no­log­i­cally so­phis­ti­cated in­dus­tries.In­dia’s eco­nomic per­for­mance has been less re­mark­able. Eco­nomic growth be­gan to ac­cel­er­ate dra­mat­i­cally in the early 1990s, ow­ing to trade lib­er­al­i­sa­tion and other eco­nomic re­forms. Then re­forms stalled, the fis­cal and cur­rentac­count deficits soared, and an­nual GDP growth fell to 4-5%.

As a re­sult, China has pulled ahead, with per capita in­come last year stand­ing at $11,850 – more than dou­ble In­dia’s $5,350. The ques­tion now is whether Modi’s push for faster growth can nar­row the in­come gap in the com­ing decades.

The most im­por­tant fac­tor work­ing in In­dia’s favour is its “de­mo­graphic div­i­dend.” In China, pop­u­la­tion ag­ing and low fer­til­ity rates are al­ready caus­ing the prime work­ing-age pop­u­la­tion, peo­ple aged 15-59, to de­cline. From 2015-2040, this group is ex­pected to shrink by more than 115 mln. Mean­while, In­dia’s prime work­ing-age pop­u­la­tion will in­crease by 190 mln.

But favourable de­mo­graph­ics alone will not bring about the kind of growth that has made China the world’s sec­ond-largest econ­omy. In­dia’s lead­ers must de­velop a com­pre­hen­sive plan to elim­i­nate bar­ri­ers to eco­nomic com­pet­i­tive­ness, ex­pand em­ploy­ment op­por­tu­ni­ties in man­u­fac­tur­ing, and im­prove work­ers’ ed­u­ca­tion and skills.

As it stands, In­dia ranks 60th in the world for eco­nomic com­pet­i­tive­ness – much lower than China, which, at 29th, is clos­ing in on high-in­come coun­tries like South Korea (25th) and France (23rd). The rea­sons for this are not dif­fi­cult to dis­cern: In­dia per­forms poorly on the fun­da­men­tal driv­ers of long-term eco­nomic pros­per­ity.

In­deed, de­spite steady im­prove­ments, pub­lic health and ed­u­ca­tion lev­els re­main low (102nd world­wide). More­over, the lack of ad­e­quate trans­port, com­mu­ni­ca­tion, and en­ergy in­fra­struc­ture (85th) is un­der­min­ing In­dia’s pro­duc­tiv­ity growth. And In­dia lags be­hind China in the ef­fi­ciency of its prod­uct and labour mar­kets (rank­ing 85th and 99th, re­spec­tively). Only by ad­dress­ing these short­com­ings can In­dia at­tract suf­fi­cient in­vest­ment and boost eco­nomic growth.

At the same time, In­dia should ex­pand la­bor-in­ten­sive man­u­fac­tur­ing, thereby cre­at­ing em­ploy­ment op­por­tu­ni­ties for its grow­ing pool of work­ers. Given that man­u­fac­tur­ing con­trib­utes only 15% of In­dia’s to­tal out­put, com­pared to 31% in China, there is con­sid­er­able room for growth.

In a sense, In­dia has the ad­van­tage of be­ing able to learn from China. China trans­formed its agrar­ian econ­omy by build­ing a strong, labour-in­ten­sive in­dus­trial base, shift­ing work­ers from agri­cul­ture to man­u­fac­tur­ing and con­struc­tion, and im­prov­ing pro­duc­tiv­ity across all sec­tors. To­day, the agri­cul­tural sec­tor ac­counts for only one-third of to­tal em­ploy­ment in China, com­pared to one-half in In­dia.

In­dia’s struc­tural trans­for­ma­tion and sus­tain­able growth will hinge on its ef­forts to build a flex­i­ble la­bor mar­ket, cen­tred on the eas­ing of out­dated and com­pli­cated em­ploy­ment laws. The le­gal pro­tec­tions of work­ers in In­dia’s for­mal sec­tor ex­ceed those of most de­vel­oped coun­tries, as well as China, with man­dated re­quire­ments ris­ing as the num­ber of em­ploy­ees in­creases. As Jagdish Bhag­wati and Arvind Pana­gariya have pointed out, ex­ces­sive labour-mar­ket reg­u­la­tions de­ter In­dian en­trepreneurs from em­ploy­ing un­skilled work­ers and de­vel­op­ing labour-in­ten­sive man­u­fac­tur­ing, im­ply­ing that the In­dian govern­ment should re­dou­ble its re­form ef­forts in this area.

Equally im­por­tant, In­dian work­ers – es­pe­cially young peo­ple – need op­por­tu­ni­ties to up­grade their skills con­tin­u­ously. The McKin­sey Global In­sti­tute es­ti­mates that, of the po­ten­tial global over­sup­ply of 90 mln low-skilled work­ers in 2020, 27 mln will be in In­dia. Mean­while, the coun­try will face a short­age of 13 mln medium-skilled work­ers.

De­spite In­dia’s ed­u­ca­tional ex­pan­sion, es­pe­cially at the se­condary and ter­tiary lev­els, its sys­tem of higher ed­u­ca­tion, in­clud­ing tech­ni­cal and vo­ca­tional ed­u­ca­tion and train­ing, re­mains in­ad­e­quate. Though In­dia’s pub­lic vo­ca­tional ed­u­ca­tion and train­ing sys­tems are well in­sti­tu­tion­alised, they lack the scale, cur­ricu­lum, fi­nanc­ing, and in­cen­tives needed to pre­pare young work­ers to meet the de­mands of rapid glob­al­i­sa­tion and tech­no­log­i­cal ad­vance­ment.

The good news is that Modi seems com­mit­ted to boost­ing In­dia’s com­pet­i­tive­ness by im­prov­ing its busi­ness cli­mate. For ex­am­ple, he has al­ready an­nounced mea­sures to pro­mote for­eign di­rect in­vest­ment in in­sur­ance, de­fense, and telecom­mu­ni­ca­tions, in­clud­ing higher in­fra­struc­ture spend­ing and new tax in­cen­tives for sav­ings and in­vest­ment. In­dia’s govern­ment will also sus­tain its pre­de­ces­sors’ ef­forts to strengthen vo­ca­tional ed­u­ca­tion and skills train­ing.

What Modi’s plan lacks is a strong fo­cus on ex­pand­ing In­dia’s labour-in­ten­sive in­dus­tries. That, to­gether with the planned re­forms, would en­able In­dia to seize the op­por­tu­ni­ties that arise with fa­vor­able de­mo­graph­ics and achieve Chi­ne­ses­tyle growth.

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