The India Myth

October 23, 2014 Topic: Politics Region: India

The India Myth

The ubiquitous reports of India’s emergence as a great power are bogus. The road is long, the advance slow and the arrival date uncertain.

Still, to gain substantial economic influence, India’s leaders will have to implement many politically unpopular reforms that are required to restore and maintain high rates of growth, boost trade and attract greater sums of FDI. These include cutting subsidies for basic commodities, revamping entrenched and rigid labor laws, opening protected sectors—such as retail, agriculture and services—to foreign competition, and stamping out tax evasion, which in India is both ubiquitous and an art form. These aren’t the only steps needed to make the economy grow faster and more sustainably so that the increased resources required to bolster India’s bid for great-power status become available.

Take education. While India’s progress in educating what fifty years ago was a largely illiterate society has been impressive, there’s much more that needs doing on this front to boost Indian economic power. The countries that are already front-rank economic powers achieved near-universal literacy long ago, while in China, Indonesia and Malaysia more than 90 percent of the population is literate. In India, the figure is 74 percent. While that’s a massive increase compared to the proportion in 1947, the quality of Indian schools is uneven because problems such as moribund curricula, substandard classrooms and widespread absenteeism among teachers abound. The success of states like Kerala, Tamil Nadu and Himachal Pradesh contrasts starkly with the failures of the educational system in others, such as Bihar, Uttar Pradesh and Madhya Pradesh. What might be called the “effective literacy rate” is thus lower than suggested by the national average, especially in rural areas (where about 70 percent of the population still lives) and among females. Moreover, India’s schools are not producing the skilled labor needed by local and foreign firms at anywhere near the required rate, and too many of those with degrees in science and engineering are not readily employable on account of the poor quality of their training. Indian higher education has a proud history that spans centuries and boasts some venerable institutions, but according to economists Jagdish Bhagwati and Arvind Panagariya, even its elite engineering and management schools don’t make the “top 200” list in global surveys; by contrast, the best universities of other major Asian economic powers have cracked the top 100.

Likewise, vast sums will have to be mobilized (from tax revenues or government-backed, dollar-denominated bonds) to modernize and expand India’s antediluvian infrastructure. The list of pressing needs is long. It includes building or revamping water-management and sanitation systems; bridges, railways and roads; harbors and airports; and power plants (to end chronic electricity shortages and even blackouts). Fixing India’s infrastructure by building more rail and air networks, bridges and ports won’t be cheap: the price tag is estimated to be $1 trillion. But absent a colossal effort, the drag on India’s growth could amount to 2 percent a year. Access to computers and the Internet must also be scaled up dramatically if India is to compete successfully in the global marketplace. Despite the publicity India’s prowess in IT receives, society-wide access to information technologies remains unimpressive. In 2008, according to the World Bank, India had 7.9 Internet users per 100 people. That number had grown to 15.1 by 2013. But by then Guatemala had 19.7, Haiti 10.6, Kyrgyzstan 23.4 and the Dominican Republic 45.9. The figure for China was 45.8, in Germany and France and the United States it was over 80, and in Denmark it was 94.6. Even allowing for India’s mammoth size and population, this dismal comparison speaks for itself.

India faces an even more fundamental problem—one that makes prognostications about its impending ascent to great-power status sound surreal. Simply put, the country still lacks the human capital required for acquiring the power and influence commensurate with its leaders’ aspirations. Consider some pertinent numbers. India’s per capita income in 2013 was $5,350. By comparison, China’s was $11,850, Japan’s was $37,630 and—tellingly—South Korea’s, which was comparable to India’s in the early 1950s, was $33,440. Nearly one-third of Indians still subsist on $1.25 a day or less. India places 135th out of 187 on the UNDP’s Human Development Index, a composite measure of access to basic necessities. Similarly, it ranks 102nd out of 132 on the Social Progress Index, which assesses countries’ records in meeting people’s essential social and economic needs. In UNICEF’s rankings, India (with 48 percent) places fourth in the proportion of children who are stunted and second (43 percent) in the percentage of those who are underweight (“severe” or “moderate”). The handful of Asian countries with worse records includes Afghanistan, Pakistan, Myanmar and Papua New Guinea—not good company for a country that yearns to be global power. As Jean Drèze and Amartya Sen demonstrate in a recent book, despite its robust economic growth during much of the last two decades, India lags far behind the other “BRICS” in such measures as citizens’ access to potable water and basic health and sanitation services, the immunization of children and nutrition. Worse, its performance is poor even relative to some of the world’s poorest countries. In India’s own neighborhood, Bangladesh and Nepal, despite having smaller per capita incomes and slower growth rates, have done better on several key quality-of-life measures.

Among the consequences of having shopworn infrastructure, relatively low literacy rates and a substandard educational system, along with an industrial manufacturing sector that’s small relative to that of its competitors—all problems that the Asian “tigers,” and China thereafter, overcame—is that, as wages in China have risen, multinational corporations haven’t relocated to India to the degree one would expect given the size of the Indian market and the low cost of Indian labor. Instead, they have gone elsewhere—not just because of India’s inadequate human capital and infrastructure, but also because of bureaucratic barriers that hinder business and investment and persist despite the reforms of the past two decades. These problems help explain why India places 134th out of 189—just below Yemen—in the World Bank’s “Ease of Doing Business Index.” Not surprisingly, India attracts far less FDI than it needs to boost growth and productivity. From 2010 to 2012, FDI inflows to India averaged $27 billion a year, compared to $119.5 billion for gargantuan China, $55 billion for tiny Singapore and $60 billion for Brazil, a member of the BRICS coalition to which India belongs. Malaysia attracted $10.3 billion and Thailand $8.3 billion—both far more than India in per capita terms. Yet the former has a population of thirty million (2.3 percent of India’s) and the latter sixty-seven million (5 percent of India’s).

It’s often said that India, unlike China, has the advantage of a relatively young population and will therefore not face labor shortages. What often goes unmentioned is that the largest population increases are occurring in some of India’s poorest states (Madhya Pradesh, Uttar Pradesh and Bihar), not in those (such as Kerala and Tamil Nadu) that have been the best at meeting basic economic needs and in increasing literacy.

These same deficiencies have prevented India from establishing a significant position in global trade. While it does rank fifteenth on a list of the top twenty economies in the dollar value of merchandise trade, its exports and imports combined in 2012 totaled $784 billion. Several countries with smaller GDPs and much smaller populations outranked it, including Singapore, Belgium and the Netherlands. China’s trade, valued at nearly $4 trillion and about on par with that of the United States, accounted for 10.5 percent of the value of all international trade in 2012. The dollar value of India’s trade amounted to one-fifth of China’s and to 2 percent of the global total, even though India has roughly 17.5 percent of the world’s population, about the same proportion China does. India does fare better in trade in commercial services: in 2012, it ranked seventh in a list of the top exporting countries; but its share was still only 74 percent of China’s (which still lacks a powerful service sector) and 4.4 percent of the world total, comparable to that of Spain and the Netherlands.

Apart from the quantity and complexity of the problems that have to be addressed, India’s democratic system is not conducive to enacting controversial economic changes quickly. Because of their authoritarian political systems, China, as well as Taiwan and South Korea in their nondemocratic phases, could push through sweeping reforms that helped establish the foundation for rapid industrialization and economic growth. India’s raucous, vibrant democracy is rightly admired, but it impedes the implementation of deep economic reform. Creaky coalition governments are common at the center, and headstrong local power brokers (the chief ministers of its twenty-nine states) can be veritable kingmakers. Labor unions are powerful, and militant and caste-based political alliances are impenetrable yet influential. Then there’s an electorate that’s not shy about registering its displeasure at the ballot box when economic reforms bring pain or when the increased competition from abroad threatens traditional sectors, such as small retail shops, agriculture or industries long shielded by various forms of protectionism. In principle, Modi, who faces the challenge of overcoming such obstacles, is well placed to do so given his economic track record, his popularity and the BJP’s massive electoral mandate. Modi may style himself as a no-nonsense, business-friendly, results-oriented manager, but he won’t be able to demolish these deeply rooted impediments to reform without a tough struggle. Running Gujarat was one thing. Acting as India’s CEO will be quite another.