** India Needs to Do Better

SR Monitor 

Jun 20, 2016 

India Needs to Do Better - Abridged version of talk delivered at CEPII, Paris by Professor Mohan Guruswamy

In late 2012 India became the world's 3rd largest economy in PPP terms and has grown at an average rate of 7.4% over the 2004-2014 period, from about $750 bns to $2 trn. India is expected to be the 3rd economy (maybe the 2nd) after China and the US by 2050.

In the 2000’s, India's share of the global GDP has increased, from 4 to 6%. Since 2012, China’s growth rate has been decreasing, from 7.5% to 6.7%, while the Indian growth rate has been going up, from 5.4% to 7.5%. The point of inflexion was last year, when the Indian growth rate overtook that of China.

However, these figures can be explained by the aging of the Chinese population, as the dependency ratio has become very adverse. China is thus getting old before it gets truly rich. This aging process already happened to Europe some time ago and will also happen in India. We're just moving 20 to 25 years behind China.

The Indian contribution to global growth rose between the 2000's and the 2010's, from 8.6% to 9.9%, while the Chinese contribution went from 21.8% to 26.4%. Over this period, the American contribution was steady, around 12%.

India is changing rapidly due to the population dynamics. The share of the population between 10 and 24 years reached 28% in 2013 and will rise significantly over the next 15 years, whereas the world average is 25%. China’s population is getting older and this is not surprising, as once you become middle-class, you usually don't have more than one child. The rise of the dependency ratio will make it hard for China to maintain its current growth rate.

Out of 23 million students enrolled in India’s bachelor's programs, 20 million are studying social science and, and only 3 million are studying technology and engineering. There is now an obvious lack of technical manpower in India. Moreover, in 2013, only 161 scholars in engineering and technology were in PhD programs, which means that there will just not be enough qualified engineering teachers in India. We have to import them from Europe or America. On the other side, the Indian students who do their PhD program in the US and are supposed to come back to India, end up choosing a career in the US.

Indeed, 3 million Indian people live in the US and the average income of an Indian family established in the US rising to $90,000 - 20% of new American hi-tech start-ups are Indian. It is very easy for any student of the half a dozen top Indian engineering schools to get a visa to the US. These students are almost 100% certain to get a job from the day of their arrival. We can now call the US ‘the land of our children.”

India now has a growing and determining Indian middle-and upper class. 2 million households have an income of over $100,000, these households represent about ten million people; 31 million households have an income of over $20,000, representing 160 million people; 71 million households have an income of over $1000, representing 359 million people; and 135 households are considered as deprived, representing 684 million people. Considering India is able to successfully conduct space missions and a probe to Mars, but has 684 million people living under the poverty line, it is easy to understand why India is a country of paradoxes.

India's middle-class is clearly burgeoning, as it will grow dramatically until 2050, and will overtake that of China in the next 20 years. 180 millions families are entering the middle class, which represent 900 million people. They will need transportation, housing, public systems, etc. This consumption will obviously drive growth.

Accompanying such a dramatic growth of the middle-class will be a challenge, as several elements are needed: A 4% agriculture growth is needed. The Investment/GDP ratio has to rise. For this the Savings/GDP ratio cannot stay at 30%. It has to go up to 40 – 45%. This seems possible, as this ratio was still 36% a few years ago. It is necessary to raise more taxes, as improved tax collection with fewer leakages will ensure this. Last and probably most important of all - bring Indian money back as FDI.

The mismatch of manpower is growing, as 41 million high-skilled workers and 45 million medium-skilled workers are needed. We have engineers, doctors, social scientists, economists, but we lack skilled blue collars to operate with machines. These jobs are not valued enough and people are turning away from these kind of careers. On the other hand, there is a surplus of around 90 million low-skilled workers. This portends a crisis that can destabilize social as twelve million young Indians are joining the workforce every year now.

The FDI trends, which reached $62 billion last year, could foster Indian growth. Of this 68% was from investors clearly fronting for Indians, suggesting major round-tripping. FDI in India is mostly Indian and the government’s efforts to attract FDI will succeed only when India becomes more attractive as an investment destination to Indians.

The problem is there are much more illicit outflows from India than official FDI into India. For instance, between 2004 and 2013, only $258 billion were invested in India, while the illicit outflows from India reached $510 billion (the licit outflows being up to $100 billion). Thus, India continues to be a net exporter of capital.

Nothing can be more illustrative than the fact that Germany had got 7.2 billion Euros of Indian investments, but only invested 3.2 billion Euros in India. It is a similar trend with some other countries too. Why? One thing is certain there are much fewer bureaucratic constraints abroad than in India, prompting the Indians to invest abroad. This trend is undesirable and should stop as soon as possible. India’s biggest conglomerate, the House of Tata, is now more invested abroad than in India. The Chairman of the Group said it was largely because it was easier to do business abroad.

Moreover, only 26% of the FDI are heading to the manufacturing sector, which is not sufficient to create jobs. In contrast with it, more than 70% of FDI in China foster the manufacturing sector.

One of the biggest problems in India is the centralisation of the economy and the high public expenditures, with a central government share of total public administration expenditure (wages) at about 40%. This ratio has not changed since 1960, and wages paid by the central government amount to 3.4% of GDP. While the States governments' share represents 45% of the total, the local governments’ only represents 15%. This excessive centralisation is the legacy, and probably a hangover, from the British colonial system. In comparison, the share of central government administrative expenditure in China went down from 74% in 1953 to 23% this year.

Indeed, while the biggest State is growing at 4.7%, the smaller states show faster growth rates, above 8%.

There are also wide variations between States in terms of growth population. For instance, Kerala, which is the most advanced and educated State, stop variations growing in terms of people.

Reforms that the Government should carry out in the coming years:

- Industrialise to create jobs

- Educate and encourage youth for jobs in the industrial sector and reduce undersupply

- Invest in irrigation to reduce ecological damage and increase farm or productivity. Consolidate holdings

- Build infrastructure. Eliminate Roads. Ports and Railway bottlenecks

- Speed reforms to make power sector profitable and investment worthy, labour productive and India investment friendly

- Address regional inequality issues

- Cut down subsidies

- Reform Government and decentralise