The Hindu Business Line : Optimism on the economy’s direction

With the demographic dividend paying off and sensible economics working in its favour, India cannot afford to jettison these advantages to petty politics.

T. C. A. Ramanujam

A double-digit inflation rate, threatening food crisis, climbing fuel prices and the imbroglio over the nuclear deal – all theseand more raise the question as to the direction the Indian economy is likely to take in the near future.

Is growth slowing down? Will an unstable polity throw the economic system into chaos? These are basic doubts. According to the National Sample Survey, 77 per cent of all Indians (836 million in 2004-05) live on less than Rs 3,000 month with a family of 5. The illiterate population equals the entire population of the US.

The share of public expenditure on education in India is just 10.7 per cent, far below the levels in China, Russia, the UK and the US. About 62 per cent of the students who enrol drop out by the time they reach Std X.

The real economic scenario, however, is not all that grim. By March, 2008, India had 300 million mobile phone connections; 8 million new connections are being added every month. By 2010, we will have 1,150 million people with mobile phone connections. Are we that poor as made out by the NSS data?

Rising Young Middle Class

A Swedish strategy group ‘Kairos Future’ conducted a global youth survey in 2007 covering 22,000 respondents from 17 countries belonging to both the developed and the developing world.

The survey concluded that the Danes and the young Indians were among the most optimistic people looking forward to the future of their societies with a great deal of hope and self confidence. The vast majority of our population is below the age of 35.

For them, the national icon for the future can only be Narayana Moorthy, Azim Premji and that incurable dreamer Dr Abdul Kalam. This young generation has studied the past with great care.

Prof Aravind Panagariya of Columbia University has come out with a path- breaking book India: The Emerging Giant. Our success in reaching the 9 per cent growth target is attributed by him to the liberalisation of the economy from 1991 under the stewardship of Dr Manmohan Singh. The dismantling of the licence-permit Quota-raj resulted in the lowering of tariffs on inputs and promoted the easy entry to foreign investors. It led to the triumph of market-friendly reforms.

On the other hand, Prof Aravind Subramaniam of the Peterson Institute for International Economics in Washington DC has come out with his own version of India’s success story. In his book India’s Turn: Understanding the Economic Transformation, Prof Subramaniam does not like to belittle India’s growth in the decades before 1991. He believes that we owe a lot to the ground-work laid in the decades before 1991 and earlier.

Nehru’s emphasis on science and education enabled India to acquire a skilled work force and industrial experience, unhurried by foreign competition. True, those pre-reform years, often referred to as the ‘dark age of India’s economic history’, herded businesses into heavy industry, chemicals and engineering, leaving the economy reliant on capital and credentials.

The abundant unskilled labour remained unutilised. But then, our successful companies learnt to prosper despite controls and regulations which protected a minority of organised job holders at the expense of the vast army of job seekers. These companies carried on with these laws and succeeded in spite of those laws.

Opting out of system

Prof Subramaniam also highlights the fact the newly affluent class does not bother to fight to reform our ailing public institutions. On the contrary, they have opted out of the system, enrolling their children in reputed private schools and installing their own generators.

The latest response to the poor public amenities and infrastructure is to be seen in the proposal now being mooted by some leading Mumbai industrialists to have regular helicopter service from their sky-high residences to their office premises.

We have travelled a long way from the time when the market was denied as the main driving force of development. Today, we have accepted a market-based incentive system along with a cautious and right use of State control as the general policy prescription for development.

The role of the State is to encourage people to become entrepreneurs and promote less regulated competitive markets and to enable smoother flow of capital and labour. India is no longer a closed economy. The demographic dividend is paying off.

Demographic dividend

According to Goldman Sachs (2007), India’s GDP will surpass that of the US by 2050 and India will be the second largest global economy. A study by the McKinsey Global Institute on India’s future prospects highlights the significant role played by our youthful middle class.

It is a pity that politics is dominated by the geriatric generation in India at a time when the rest of the world is pinning its hopes on the young. Mr Barack Obama is 46 years old. The Tory party in the UK is led by Mr David Cameron who is 41 years old and the shadow Chancellor is Mr George Osborne, who is 37 years old.

There is much to be said for the view that inflation will be controlled by the time the next harvest comes into the market. Research is going on at hectic speed all over the world to find a cheap substitute, such as solar power, for petroleum products.

Nuclear power may still arrive and Dr Manmohan Singh, who pioneered our economic reforms in 1991, may still leave a rich legacy for posterity to remember him when the Nuclear Supply Group starts supplying fuel for our atomic power plants shortly.

Sensible economics

The Economist pointed out recently: “Although India is a net exporter of economists, its policies still suffer from a deficit of economic logic”.

We can still hope that the deficit of economic logic will be made good in the next few months. After all, which country in the world can boast of a classical economist as the head of the Government? And this at a time when India is surrounded by a number of failed States such as Bangladesh, Afghanistan, Pakistan and Iraq. Pakistan’s growth has slowed to 5.8 per cent and inflation is at 19 per cent there.

India is among the small number of successful countries to have experimented with absolutely democratic policies to reach a sustainable economic growth rate. This success should not be frittered away by petty politics.

(The author is a former Chief Commissioner of Income Tax.)