The Bennett Newsletter
I have suffered much angst recently as media commentators have deprecated India. It is amazing that so many adopt a spurious cultural superiority. It is especially paradoxical when sports commentators are involved, for Indian supporters are the acme of sportsmanship while drunken louts spoil games in Australasia.
The world had better get used to the idea that India is going to be a major power with extensive investments in Australasia. It will be a major market for New Zealand and a huge source of students and tourists. Our common language, democratic tradition, tolerance of diversity, love of cricket will anchor an amiable relationship.
There are futurologists who are already predicting that India will be the greatest superpower by 2050. I think India will be one of the greatest economies by that time but I do not think that we are moving from an era of two great powers in the 1950’s, to two great powers in 2050. Assuming the US, EU and China remain important, it is possible that several major entities will compete, with Brazil, Indonesia, Turkey and even Nigeria being contenders.
India is capable of rapid economic growth because its saving rate of about 36% of gdp. This allows massive investment, especially as some foreign capital is available. Massive investment has been a key factor in the emergence of other Asian powerhouses.
India’s growth model is interesting because it democratically attempts to lift the welfare of the whole population. It is not opting for the export-led model of growth initiated by Japan in the early 19 century and followed by China and others subsequently.
The pitfall of that model is that domestic prices and standard of living is held down to remain competitive in world markets. This means that the domestic market can absorb relatively few products either for domestic of foreign producers. Foreign powers resent the competition of “cheap” goods, and accuse the exporter of unfair completion and dumping. Japan became a pariah in the 1920’s and ‘thirties but it had to export or die as its own people were too poor to consume a significant part of its production. There is an element of Japan’s predicaments in China’s position today.
India has the wisdom to believe that it needs to drive Domestic Demand if it wants to expand faster that its current 9% p.a. growth rate target. It also wants to ensure that any growth is inclusive, and not exclusive to the country’s urban rich. Hence its 2010 budget is extremely significant in economic history because its main focus has been on rural development. There is a raft of new economic and social development plans.
This contrasts with China’s urban emphasis. Its rural areas are missing out on the country’s growth. Beijing has permitted some agricultural prices to rise because its farmers are desperate but it keeps a lid on prices to curb inflation and wage demands of workers. It is limiting agriculture’s potential and unwittingly motivating its poor, deprived rural people to flood into the towns in search of a better life.
India has chosen a more sustainable model. This year it will double spending on its successful rural employment scheme which guarantees 100 days of work to everyone who wants it. It has also established a task force to look at rural debt as many farmers have committed suicide. It creates jobs by spending 10% of gdp on roads and other infrastructure. it provides food guarantees.
This is good policy: but the poor will remain in vast numbers. The proportion of poor is presently about 50%, and even with massive growth, about a third of the population will still be poor in 2020.
The budget had been attacked by those who always seek to benefit from the new economics. There have been the usual cries for asset sales, relaxation on rules for foreign investment and end to subsidies. But the government is unmoved.
I like to think that India is guided by graduates of the London School of Economics who were inculcated with the need to consider the social implications of their actions. China is ruled by engineers, India by humane economists.
But it has other advantages. It has a young population, with a low dependency ratio. The working age population will grow by 20% in the next 10 years while China has a rapidly aging population, and because of its one-child policy, a rapidly shrinking one too.
It is also democratic. It is fashionable to deride India for this. There were many prophecies of gloom about the Commonwealth Games being a failure, but my observation is that the facilities are unmatched in history. The advantage of democracy is that the people’s talents are unleashed, and business can flourish without state interference.
India is innovative in software, in film, in creating products like the $2000 car and other products which will find mass appeal. It also has advantages as the knowledge economy flourishes.
Even with high growth the poor will remain in vast numbers. The proportion of poor is presently about 50%, and even with massive growth, about a third of the population will still be poor in 2020. But the remaining population are potential customers. By 2020 India will have a middle class market of 180 million customers whose need will drive the real economy at home and abroad.
Retail spending alone is estimated to increase 6 times in the next ten years as India enthusiastically adopts a growing “mall mania”. Demand for basic education, health, financial services and accommodation will be at white heat.
New Zealand will have tremendous opportunities to export goods and services to the opening Indian economy. The commodity needs of India will be huge; from food to materials such as timber. The Indian shareholding in Pike river coal is indicative of other opportunities. The best opportunites could be in technology and services as India races to become the third biggest economy by 2025.
I have reviewed many analyses of India’s prospects and believe they are too optimistic. I do not believe it can sustain a growth rate of about 9% for the next decade. It needs a tighter monetary policy to be sustainable, especially as food inflation is around 16% and there are asset bubbles in -the -making. Its transport system is under tremendous strain. It is desperately short of water and trees, so environmental constraints are too easily over-looked. Nevertheless, its surge to greatness looks irresistible.
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