India's growing pains

The Guardian's Randeep Ramesh writes in the latest New Statesman that "the puzzle is that India is economically confident, yet sunk in interminable poverty": Growing pains

For India's newspapers and television, the country's story is of a resurgent nation of 1.1 billion people taking its rightful place in the new world order. Daily headlines in the capital, New Delhi, highlight the runaway stock market, Bollywood's soft superpower and India's 36 dollar billionaires - more than in any other Asian nation.

...There is little doubt that India is experiencing a rapid and sustained rise in living standards for the first time in centuries. Growth has averaged 8 per cent since 2003, second only to China. According to the investment bank Goldman Sachs, India's young population gives it the potential to grow faster than China in the long term.

For many Indians this is exhilarating stuff: in the 1970s the country threw out Coca-Cola and IBM and sealed itself off from the outside world. Heady stuff, but ultimately economic folly. Growth slowed to 1 per cent a year - at that rate it would have taken 70 years to double incomes. Tentative reforms began in the 1980s, but it took a balance-of-payments crisis in 1991 for the government to usher in unexpectedly brave changes. Today, India's outward-looking, hypercompetitive policies as well as the trend towards smaller families mean incomes will double in a decade.

Yet it will remain a poor country. Last month, government figures showed that malnutrition is endemic, with about 46 per cent of children aged three or younger underweight and almost 80 per cent anaemic. Less than 50 per cent of women can read or write their name. Only a third of homes have a toilet. The country is probably the world's largest Dickensian paradox - having both the best and the worst of times.

The puzzle is that India is economically confident, yet sunk in interminable poverty. This is because most Indians live in a vast rural, feudal darkness and only a lucky few are part of the shining new future. Services, essentially white-collar work, makes up more than half of national income. But this does not mean that tens of millions of Indians sit behind terminals talking to someone in New York or London. Information technology, the poster-boy industry of India's economy, employs just 1.5 million people - a mere drop in the labour pool of 470 million.

Even worse, only 35 million people in India have any sense of job security and 20 million of those work for the government. The rest of the working population - some 435 million people - are part of "the unorganised sector": toiling on the land, or driving a taxi, or running a chai stall, or working as menial household labour.

In India, growth has been largely jobless. Historically, dynamic economies have relied on industry to fuel growth. In China, this led to millions of people leaving the land to work in factories. But during the 1990s, industry actually shrank as a proportion of the Indian economy. There is rural migration, too, where the sons of tillers leave to eke out a precarious existence as security guards and drivers in the big cities.

The problem is reaching crisis point. Each year another ten million people enter the job market. To soak up the labour, India will have to build up its manufacturing sector quickly. This might sound like a return to the past - India's first prime minister, Jawaharlal Nehru, wanted his country to rush towards industrialisation.

But Nehru pursued a strategy that would build up the country's technological capacity, not employ people. He set about institutionalising innovation and spent money on a network of world-class science universities rather than universal primary education. Nehru built huge dams. He took pains to create an atomic industry and cultivate brilliant scientists.

In a sense, he laid the foundations for an idiot savant economy that can do the impossible but fumbles the mundane. India turns out more scientists than far wealthier China, but cannot get all its children to school. While the country's business houses prowl the world picking off weaker western companies, they cannot acquire land at home because villagers protest violently against forcible takeovers.

This disparity in productivity is India's greatest asset and liability. Workers in the private organised sector are ten times more productive than those in the "unorganised sector". The emphasis on capital-intensive growth has helped India achieve impressive results with fewer resources. It is estimated that in 2007, India will grow at 9 per cent - a fraction behind its larger northern neighbour. Remarkable, given that India is achieving this growth with just 50 per cent of China's investments and 10 per cent of China's foreign direct investment.

Hoping for a miracle

But the flipside is that while new management graduates in India are offered 10,000 rupees (£120) a day in salaries, cotton farmers struggle to make 10,000 rupees in a whole season. Crossing between these two worlds rarely happens because it requires workers with skills, education and opportunity. India will have to pour more money into health and education as well as create the kinds of industries that can offer the rural poor a chance out of poverty. It needs to change its labour laws - at the moment you need government permission to shut down a factory with 100 workers in it. Clearly this is a deterrent to setting up shop in India.

For the first 1,500 years of the past two millennia, India and China dominated the world economy. Then came the western industrial revolution, which propelled smaller and less populous nations to wealth and power. The Asian giants were overtaken first by Britain, then by the rest of Europe, and finally by the United States. But in the same way as commentators refer to the 1900s as the "American century", the 21st century is forecast to be Asian. If the scale and speed of growth can be maintained on both sides of the Himalayas, by 2050 Beijing and Delhi will be the capitals of the two richest nations on the planet.

It is worth being sceptical about such claims. Historically there is no precedent for such a transformation. Britain and America took a century each to achieve primacy and had far fewer people to deal with. India and China have a billion-plus people each. Both nations expect to maintain growth rates of near 10 per cent. "What these two countries propose," wrote Willem Buiter of the London School of Economics, "is growth on a scale that is more than 200 times larger than what the UK and US managed." Such events are not beyond the bounds of possibility, but they have never happened before

Comments

[GVV]

Why this paradox? As an insider I see the false belief among politicians,general public and the academicians that IT sector alone is the true symbol of development.
What kind of labour gets employment in the IT sector? Urban rich and the middle-class benefit out of IT boom; majority are working as IT "coolies".
To remove poverty, a return to Nehruvian industrialisation combined with Nurksian balanced growth strategy are urgently needed.Gandhian need and want minimisation are also essential.

[Troy Aikman]

Too late, it's just too late for India to get industrialized, your giant neighbor, China, is absorbing every single manufacturing job from the west. India just simply cannot compete with China, due to poor education and infrastructure

Too late, folks, too late

[Arthur Eckart]

The U.S., and other countries, are fortunate there are Indian immigrants (along with Chinese and other Asians):

http://en.wikipedia.org/wiki/Indian_American

"About 64% of Indian Americans have attained a Bachelor's degree or more.[5](compared to 28% nationally). Almost 40% of all Indians have a master’s doctorate or other professional degree...Indian Americans have the highest median income of any national origin group in the United States and Merrill Lynch recently revealed that there are nearly 200,000 Indian American millionaires... one-third of the engineers in Silicon Valley are of Indian descent, while 7% of valley high-tech firms are led by Indian CEOs. (Source: Silicon India Readership Survey) In 2002, there were over 223,000 Asian Indian-owned firms in the U.S., employing more than 610,000 workers, and generating more than $88 billion in revenue.[7]"

[Troy Aikman]

Arthur, your data are nothing but propaganda pushed by some Indian supremacists, remember the following widely cited data?

Indians are the richest immigrant class in the US, with nearly 200,000 millionaires.

38% of doctors in USA are Indians.

12% scientists in USA are Indians.

36% of NASA scientists are Indians.

34% of Microsoft employees are Indians.

28% of IBM employees are Indians.

17% of INTEL scientists are Indians.

13% of XEROX employees are Indians.

......

You can find this BS everywhere on the internet, often written by a "proud indian".. Here is one http://www.southasiabiz.com/2006/08/iproud_to_be_an_indian_15_amaz.html

It turns out these data are just bullshit. 36% of NASA scientists are Indian, are you freaking kidding me? Bill Gates personally rebuffed the 34% claim.

Stop the propaganda, and india is the biggest victim of brain drain, there is really nothing to be proud of sending your best to the west.

[GVV]

Troy Aikman 6.29 AM,

Poor infrastructure I agree, but not poor education.

10.49 AM,

We are not sending our best to the west...we spend huge amounts on their education here but they migrate and desert us due to globalisation trends and the benefits given to the non-resident Indians.I propose an NRI tax and boosting up of top-level salary in India side by side to control out migration.

[Troy Aikman]

GVV,

what's the literacy rate in India?
http://en.wikipedia.org/wiki/List_of_countries_by_literacy_rate

[Arthur Eckart]

Troy, presenting mixed data from a less credible source to prove other data are false doesn't make sense. U.S. census data, which is real data, show that 77% of Indians who worked at Silicon Valley's high-tech firms in 1990 had a Bachelor's degree or higher compared to 40% for Chinese and 18% for Whites. 55% of Indians had a master's degree or higher (see first link table 2.4). There are many "Silicon Valleys" throughout the U.S. and the percentages may be similar or higher today.

http://www.ppic.org/content/pubs/report/R_699ASR.pdf

http://www.census.gov/

[GVV]

Troy Aikman,

India is a federal country.Use disaggregated data on literacy.Some states like the south western state of Kerala has 100% literacy including female literacy comparable to developed western countries.

[TA]

First, according to the wikipedia page, Kerala has a literacy rate of 91%, not 100%.

http://en.wikipedia.org/wiki/Kerala

Second, what's your point? I am pretty sure there are have high literacy rate regions in Bangladesh as well. An overall literacy rate of 60% shows the sorry state of Indian education.

[Arthur Eckart]

I made an error above. 1990 Census data for Bachelor's degree or higher in Silicon Valley high tech jobs were 49% for White, 71% for Chinese, and 77% for Indians. Master's degree or higher were 18% for White, 40% for Chinese, and 55% for Indians.

[TA]

Arthur, I have no problem with your data on Silicon Valley, it's the Silicon Valley for Krishna's sake. It does not reflect the current state of Indian education, Indians in the SV are the cream of the crop of 1 billion people. Of course the majority of them have post-graduate degrees.

"one-third of the engineers in Silicon Valley are of Indian descent, while 7% of valley high-tech firms are led by Indian CEOs."

If this is indeed true, dont you think the number of Indian CEOs is improportionally small? Arthur, I work for a Fortune 500 high tech company and around 10% of the research scientists are of Indian origin. Not bad, but still far from Indian dominance or even 30%. Reading all those "proud Indian's" posts, I'm just fed up with this India shining, India rising, India is the next superpower BS.

Yes, I was fooled by those "facts" too

[GVV]

TA 1.16 AM,
I mainly meant urban literacy.Try:

http://www.dpepmis.org/webpages/ytabs/pop4.htm

[Arthur Eckart]

TD, clearly some of the statistics in Southasiabiz are ridiculous. However, the Wikipedia statistics could be true. Only 1% of the U.S. population is Indian-American. A few years ago, the quota of HB1 Visas (for high-skilled workers) was raised and there's a large quota for millionaires. So, it's possible 64% of Indian-Americans have a Bachelor's degree or higher and 40% have a master's degree or higher (i.e. over 21 years of age). Also, there may be 200,000 Indian-American millionaires, which is roughly 7% of the Indian-American population (of any age). Moreover, it could be true one-third of Silicon Valley engineers are Indian descent, although 7% of valley high-tech firms are led by Indian CEOs, since not all CEOs are engineers (many are accountants, economists, biologists, etc.) and most Indian-American high-tech workers may be engineers. Initially, most Cuban-Americans were affluent and recently many high-skilled and rich Venezuelens moved to the U.S. (because of Hugo Chavez). I suspect, Chinese, who moved to the U.S. in recent years, are also more highly educated or affluent than Americans in general, etc. U.S. high-tech jobs are created faster than Americans can acquire skills. So, high-skilled foreigners are needed. I agree, Indian education standards are lower, although India's few top schools are at the highest world quality. The link below from an expert believes it's more of a "brain circulation" than a "brain drain," since "there's a healthy flow of financial and intellectual capital between California, Taiwan, and India."

http://www.ppic.org/content/pubs/report/R_699ASR.pdf

[TA]

It's H1B visa, and if you followed the recent H1B visa scandal, you would know that a lot of those Indian H1B visa holders are not paid that handsomely

http://www.computerworld.com/action/article.do?command=viewArticleBasic&taxonomyName=compliance&articleId=9025861&taxonomyId=138&intsrc=kc_top

You can dig a lot of news about this H1b scam if you are willing to, it's quite disturbing. Those Indian outsourcers are abusing the H1B system by sending cheap programmers from India. They are neither high skilled nor well paid. Again, let's not spread the false "facts" about how rich, how well educated and how powerful those Indians are. They are simply not. I am not going to rebuff every claim by you. You cannot convince anyone by arguing "it's possible", "it might be true"... It might be true that I'm Bill Gates.

[andiron]

people do not lose big picture..
india is 1.1 bil,that is ~20% of the world pop lives in india so you expect some tiny number of folks to do well (silicon valley/IT etc)
india adds 1 australia every year..80 % lives on less than $2/day. If a true democracy amongst so called majority literate india existed, this state of affair would invite societal revolution long back. Try to engage in doing business in india, you will flee , my friend.
This garbage of globalization induced higher GDP idea was mooted by western industry (eg. the buffoons in goldman sachs after .com collapse) and then capitalism's drive to make better profit sped up ( and hence the current gilded age for the top 0.1% in western world while a churn amidst people due to housing bust in US now (but soon to spread to bloody bubble lands of UK/ireland/Spain etc)..the ultra loose monetary policy also went hand-in-hand along w/ globalization CRAP.
Early 20th century disruptions of this sort led to world wars. Indians should not be fooled by 3yrs of unusual growth due to rampant liquidity and credit bubble despite which we have grinding poverty amongst cell-phone toting unwashed masses of india..
What a joke
And the bigger joke is that buffoons of BEAR STEARNS wish to be bailed out by govt's tax money. What kinda of capitalism is this???

[Arthur Eckart]

TA, right, it's H1B Visa. I'm not surprised there's some misuse, which seems to be small, given demand for visas exceeds supply. What I meant was the Wikipedia statistics are more feasible than some of the Southasiabiz statistics. Of course, if you had the time, Census data may prove or disprove the statistics. Andiron, I wouldn't say people working in Wall Street investment banks, money center banks, brokerage houses, etc. (which make large profits) are buffoons. Many of them graduated from top schools, including Indian-Americans. If Third World countries want to overproduce by buying dollars and selling their currencies, then it's appropriate for the U.S. to increase its money supply to at least partially offset U.S. underproduction (i.e. close the output gap), which has caused those Third World countries to overproduce even more. It's not a U.S. economic problem.

[Arthur Eckart]

Also, I may add, mutual funds, pension funds, insurance firms, etc. have been propping-up U.S. financial markets (following New York institutions) to raise GDP, which was successful. While the U.S. stock market rose from mid-2006 to mid-2007, U.S. real GDP rose from less than 1% in Q1 2007 to about 3 1/2% in Q2 2007 (the stock market correction began right after second quarter GDP was announced, although inflation was much lower than expected, the U.S. trade deficit remained near the all-time high, and the U.S. budget deficit was estimated at only $150 billion in 2007). The New York Fed has mitigated some of the hedge fund losses by exchanging dollars for mortgage-backed securites, which increased demand deposits (through high-powered money or the money multiplier, since the effective Fed Funds Rate rose from 5 1/4% to 6% on a "credit crunch"). So, it seems, Goldman Sachs, Bear Stearns, etc. were somewhat rewarded, e.g. through Citigroup and Chase (i.e. money center banks). Obviously, the Fed and New York financial institutions are working together for the benefit of the country (similar to JP Morgan before the Fed) to maintain sustainable economic growth.

[Frank Weber]

The reality of India:
http://money.cnn.com/2007/02/08/news/international/pluggedin_murphy_india.fortune/index.htm

[Arthur Eckart]

Frank, most people don't realize the extent of poverty in China, India, and many other developing countries. India has produced a $2,500 car recently, the Tata Nano. Currently, only 7 out of 1,000 Indians own a car. Also:

"China has 23% of the world's people on 7% of the world's arable land. China is down to 1/4 of an acre of arable land per person. That is very close to the limit of how much land is needed to grow crops to feed a person. You can't get much less than that without starving. China must import a billion tons of food annually to feed its population. That's why China has a crisis driven policy to limit their population - a policy of "one is best, at most two, never a third" and "later, longer, fewer", promoting late marriages, long intervals between births, and two child families. With these measures, China's total fertility rate is 1.8, down from 4.8 in 1970. Even with the lower birthrate, as the large group of young people entering reproductive age, China will add another 1/2 billion people by 2020."

Pollution, urban sprawl, overgrazing of livestock, overcultivation, improper irrigation techniques, etc. have resulted in "one-sixth of China’s total arable lands are polluted by heavy metals, and more than 40 percent are degenerated due to erosion and desertification." Also, about 50% of China's labor force works in agriculture (compared to less than 3% in the U.S.).

[Arthur Eckart]

Below is a related article about China's food prices:

China Makes New Anti-Inflation Move
Monday January 14, 2008 1:28 am ET

BEIJING (AP) -- China's cabinet on Monday sharply increased penalties for price-fixing, expanding an anti-inflation campaign that has failed to cool a surge in politically sensitive food costs.

Food costs soared by 18.2 percent in November, pushing the overall monthly inflation rate to 6.9 percent, its highest level in 11 years.

The surge in food prices has been especially painful for China's poor majority, who spend up to half their incomes on food.

Suppliers of meat, eggs and other food have been ordered to report price increases over 5 percent to the government.

Premier Wen Jiabao warned last week that with global prices for crude oil, grain and other commodities rising, pressure for Chinese prices to rise "is still great."

Local authorities have been ordered to pay subsidies to the poor to cushion the blow of higher food costs.

http://biz.yahoo.com/ap/080114/china_economy.html

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[indian economy]

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