India; The road ahead

Open any economic magazine published today and you may expect to find an article on the rising Asian giants and how they are going to overtake the American, European and Japanese economies. You may also expect to find a comparison between China and India, and how the two countries are following different paths to economic superpowerdom. Each article may predict a different year when India may catch up with the current powerhouses, but they all agree on one point, India is a country which has started late, underachieved and from which much is expected in the near future. So is India the seminal prodigy who will achieve what he promises, or is it the kid from whom a lot is expected and who doesn’t know whether he can deliver?

To understand the current economic state of India a quick historical catch-up is called for. India became a sovereign nation in 1947. It gained independence from colonialist control, harbouring a deep mistrust of western capitalist economics. This explains India’s predilection to socialism and the common good. The stress was on central planning and state intervention, state being the benevolent entity acting to protect the interests of an individual. The state’s penchant for commanding and controlling everything ensured that things were done inefficiently. From 1951 to 1979 India’s rate of growth remained around 3.5%. The economic reforms initiated in the 1990s saw the abolition of the Licence Raj and liberalisation of sectors. Today Indian economy is growing at a rate of 9% and has 211 billion $ of foreign exchange reserves, an impressive growth considering that most of this was achieved in the past fifteen years after four decades of dormancy.

The economic reforms gave the Indian economy the much needed air to breathe and paved the way for the next fifteen years of consistent growth. However to maintain the economic growth in the future and to reduce poverty and improve the quality of life of its people, further reforms are necessary. Reforms will encourage foreign direct investment required to supplement domestic resources and boost employment generation. Reforms are crucial in hitherto neglected sectors of infrastructure and power. India has come to the realisation that without proper infrastructure, growth will be hampered. Recent decisions for the modernisation of the Delhi and Mumbai airports, creation of national highways and development of ports show a political realisation of the problem. In February 2006, India passed the Special Economic Zones act with the objective of promoting foreign and domestic investment, encouraging exports, creating employment opportunities and providing world-class infrastructure. As of 2007, more than 500 SEZ have been proposed and 200 have already been created. Like infrastructure, India has also initiated liberalisation of the power sector. In 2003, the Electricity Act was enacted to introduce competition into the sector, protect consumer interests and provide power for all. Availability of infrastructure and power will provide the foundation for achieving sustainable economic growth in the future.

During the last two decades India has made considerable progress in IT and IT enabled services. This is due to the availability of an educated English speaking work-force. Vocationally qualified people are making their mark both domestically and globally. To ensure that India maintains its lead in the knowledge economy it is essential to create a sustainable pool of knowledge-workers. Achieving this would require steps to increase enrolment, attendance and retention of students in primary schools. The probability of getting a primary education in India still depends to a large extent on gender, caste and income. Efforts to improve the quality of public education and policies like provision of mid-day meals are proving effective in this regard. The education system also needs to be more flexible and demand driven to meet the emerging needs of the economy.

Another urgent need can be put in three words “India needs entrepreneurs”. Entrepreneurs are required to capitalise on opportunities and create wealth and jobs. India should focus on creating the right environment for entrepreneurship by making it easy for an individual to start a business. Entrepreneurs should have access to risk capital in the form of venture capital and angel investor funding and an opportunity to network and exchange experiences. This can be achieved by creating centres for entrepreneurship and a close association between the industry and educational institutes to actively assist entrepreneurs.

Social and political changes are concomitant with and necessary for economic transformation. The wealth distribution in India remains highly uneven with over 18% of the people still living below the poverty line. Increasing gap between the rich and poor will be detrimental to the social fabric. Creating employment opportunities in rural areas by encouraging industries to set base would be the right step in this direction. Corruption is another crucial issue stifling economic growth. Corruption is rampant in government where public positions are used for private gain. It takes the form of bribes, evasion of taxes and aggrandizement by public officers. On the Transparency International Corruption Perception Index, India scores a measly 2.9, below China (3.7) and Brazil (3.2). While there is no panacea to this all pervasive and deeply ingrained problem, laws like the Right to Information Act, will go a long way in providing credibility to the public office and increasing the confidence of the common man. This should be accompanied by a transformation of the political mindset to put India strongly on the path to growth. There needs to be a shift away from the religion and caste based politics to the one focused on economic and social development. A political commitment to development and a strong social ethos will encourage private participation, domestic and foreign investment and the peace, so crucial for the economic upliftment of a country.

The social, political and economic changes will have an impact on another contentious issue, labour laws. India’s labour laws are archaic to say the least, hugely influenced by the socialist ideology and the job for life philosophy. The fact that the labour laws have not been amended after the mid 80s vouches for the case that reforms of these laws is long overdue. The increased assimilation of the Indian economy with the global economy would force the government on the path to labour reforms. Reforms would abolish trade unions and restrictive labour regulations. It would create a more dynamic labour market where people are empowered rather than protected and where government intervention is minimum. More liberal labour laws will attract foreign investment, stimulate industrial growth, create more job opportunities and make it easier for people to move between jobs, there by making stringent labour laws nonessential. To achieve this, the employees would need to keep themselves updated with new developments in their field and gain new skills while the employers would be required to provide on job training and employee development. Flexible laws and a mobile labour market will increase the demand for professional human resource consulting services as more and more industries will outsource their HR operations while concentrating on their core strengths.

To summarise, though India has made considerable economic progress, to become a true economic superpower and to contribute to the world economy in a sustainable way, India should further tread down the path of economic reforms, liberalisation of various sectors, abolition of restrictive laws and infrastructure development. This should be accompanied with social and political development particularly in education. Entrepreneurship should be encouraged and corruption should be routed. At the young age of sixty, India is at the right stage to let go of its inhibitions and boldly embrace the new global order.

This essay was chosen by a top business school in Europe as a candidate for their scholarship.