India's growth story at a cross roads

Till the recent slowdown, we had taken India's growth for granted. But now circumspection has increased. It is a good time to look at some of the structural issues which are impeding growth. The Economist dt Dec 13, 2008 ran a detailed feature on India. Here I look at few key points covered in the report.

In 2005 some 456m Indians, or 42% of the population, lived below the poverty line. In 1981, the numbers were 420m and 60% respectively. Clearly poverty in India is not falling fast enough. India has 60m chronically malnourished children, 40% of the world’s total. In 2006 some 2.1m children died in India, more than five times the number in China.

Some 65% of Indians live on agriculture, which accounts for less than 18% of GDP. Shifting them to more productive livelihoods would be hard.

India continues to be plagued by fiscal indiscipline. Public expenditure has risen by over 20% in each of the past two years. But the spending has not been productive. Instead, the government’s largesse was handed out in the usual wasteful ways—on oil and fertiliser subsidies and public-sector pay increases—and on some high-profile welfare schemes where a lot of leakages can be expected.

If India is to sustain a growth rate of 8% or higher, it will need to manage four potential constraints- infrastructure, education, labour laws and land laws.

The infrastructure is bad. It takes an average of 21 days to clear import cargo in India; in Singapore it takes three.

India’s 3.3m km road network is the world’s second-biggest, but most of it is in bad condition. National highways account for only 2% of the total, and only 12% of them, or 8,000km, are dual carriageways. By the end of 2007 China had some 53,600km of highways with four lanes or more. India’s urban roads are choked.

India faces an acccute shortage of power. Last year peak demand exceeded supply by almost 15%. According to the World Bank, 9% of potential industrial output in India is lost to power cuts. Some 600m Indians are not connected to the electricity grid at all.In the next five years, the government plans to increase India’s generating capacity by an annual 14%, or 90,000MW. China added 100,000MW in 2007. But India last year added only about 7,000MW.

Roughly 14m Indians are now being added to the labour market each year. They cannot all work for IT companies. Indeed, because of underinvestment in education, many lack the necessary livelihood skills.

Our labour laws continue to be drag. Our labour markets lack flexibility putting insiders at a tremendous advantage vis a vis job seekers.

Land aquisition continues to be nightmare. Recall Singur. Unless this issue is resolved, there will be strong incentives for industrialists.

Clearly there are many challenges ahead for the next govt. In the past 5 years, high growth came about to favourable circumstances and the dynamism of the private sector, not because of a visionary govt. But in future, things may not be that easy. If our leadership cannot rise to the occasion, we can expect China to increase the already large gap further.