An Indian American’s Plea For Economic Partnership Between India And US

An Overview of the Economy in India
I. Overview

India is Asia’s third largest economy in nominal GDP. It hasa GDP of over $1.6 trillion, growing even during this globalrecession at approximately 6% per annum.

II. India Economic Reforms
How did India reach this point?In 1991, faced with a balance of payment crisis, India beganthe process of liberalizing its economy. While India has hadmany successive governments since 1991, with different rulingparties, the overall direction of liberalization has remainedthe same. Some may call it slow, plodding, reform, whichstudiously ignores contentious issues such as labor lawreforms. However, the fact is that India is today transformedfrom a socialist economy, with growth rates of 3 to 3.5%, to amarket economy, with an average growth rate of over 6%.

Let’s put this into perspective:

  • Since 1991, India’s GDP has more than quadrupled;
  • Today, India is the third largest economy in the world inpurchasing power parity and tenth largest in nominal GDP;
  • Its foreign exchange reserves have grown from anegligible level to about $300 billion;
  • It has great strengths ininformation technology, auto components,telecommunications, chemicals, apparels andpharmaceuticals;
  • India has become one of the consumption and growthengines of the world;· IMF forecasts that India is expected to continue its growthmomentum for the next 20 years becoming five times itspresent size.
  • Poverty Reduction
    The best testimony to India’s economic reforms is the factthat, depending on how you define poverty, they helped 100 to300 million people to escape poverty. The history of economicreforms in India has proved that there is a direct correlationbetween the progress of economic reforms and elimination ofpoverty… more economic reforms in India have alwaystranslated into less poverty.

    III. What are the Key Drives of India’s Economy
    There are four key drivers of India’s economy:
    (i) Savings Rate

  • The first key driver is India’s high savings rate;
  • India has a savings rate of approximately 30%;
  • Which mean approximately $0.5 trillion dollars isavailable each year from domestic savings as investiblecapital;
  • India’s savings rate went up from 20% in 1991 to 30%today;
  • So as India’s GDP grows, India’s savings grow, both inactual numbers and percentage terms, and provide the criticalcapital require to finance its further growth;
  • At the same time, unlike China, India’s savings rate is notso high as to choke-off domestic demand.
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    (ii) Service Sector
    The second driver of India’s growth is its service sector which has:

  • Increased its share of the GDP from 41% in 1991 to over57%;
  • Creating an additional wealth of over $6.5 trillion;
  • This sector has grown at a rate of approximately 10%annually in the last decade;
  • It provides employment to 23% of the work force and isgrowing quickly; and
  • Accounts for approximately 33% of India’s total exports.
  • The biggest growth engines of this sector continue to be:

  • information technology and information technologyenabled services;
  • which have grown at a compound annual growth rate ofapproximately 20% over the last few years; and
  • generate a cumulative annual revenue of about $75 billion.
  • Cheap labor, low rents, tax incentives made India a hub for ITservices and outsourcing.While some of these advantages arebeing eroded, India’s service sector, nevertheless, continues togrow, with a low-end services moving to cheaper destinationslike Malaysia, Bangladesh, and Philippines and high-end valueadded services moving to India.

    (iii) Demographic Dividend
    The third key driver of the India’s economy is itsdemographic dividend.

  • India is an old country getting younger every day;
  • Half of India’s population is under 30 years old;
  • This will lead to an addition of 120 million people to theworking population in the next decade;
  • which already constitutes over 60% of the presentpopulation;
  • According to PricewaterhouseCoopers’ forecast, theworking age population growth rate in India will be thehighest among major economies in the world;
  • According to the United Nations, the median age of Indianpopulation is the lowest among the major economies and willcontinue to remain the lowest until 2020;
  • For instance, according to the United Nations, the medianage of population in India in 2020 will be 27.5 years, which willcompare very favorably to 37.5 years in China and the U.S., 42.5years in Europe and 47.5 years in Japan;
  • This will provide India with a requisite workforce, whichwhen properly educated and trained, would be a key driver forthis growth; and
  • It would also lead to a huge increase in the demand forgoods and services typically associated with the youngpopulation because a young wage earner starting life needseverything a house (and everything that goes withit), car, entertainment etc. and in his/her optimism isgenerally a liberal spender.
  • (iv) Urbanization
    The fourth key driver of India’s economy is increasingurbanization.

  • McKinzie forecasts that by 2030 the urbanized populationof India would increase by 70% to 590 million people;
  • The increasing urbanization is projected to requireinvestments in housing, education, healthcare, urbantransportation, telecommunications and sports facilities;
  • For example, increasing urbanization would require Indiato add 700 to 800 million square feet of residential andcommercial space every year. That is like building a brandnew Chicago every year.
  • IV. What are the Key Challenges to India’s Growth
    There are four key challenges to India’s growth:
    (i) Infrastructure

    One of the biggest challenges that India faces is the lack ofinfrastructure. Almost every statistic on India’s infrastructurespeaks of its inadequacy.The Indian government plans to counter the problem withan investment of $1 trillion during 2012-2017, half of whichwill be in the private sector, with significant public/privatepartnerships. A significant portion of this investment isplanned to be made in the construction of a high-speed roadnetwork, dedicated rail-freight corridor, intra-city connectivitythrough metros, power projects and telecommunicationnetworks. The road and metro rail capacities in India areexpected to increase by 20 times during the next two decades.All major airports are being modernized to internationalstandards. Therefore, once India gets its act together oninfrastructure, India’s infrastructure sector, with its massivecapital outlays and multiplier effect on growth, could be thebiggest driver of India’s growth and the biggest opportunityfor foreign investors.

    (ii) Massive Inefficient Public Sector
    The second key challenge for India is the massive inefficientpublic sector, a vestige of its socialist past. The Indiangovernment has made some progress towards privatization ofthe public sector. Generally, it has preferred to dribble downequity in the public sector companies, rather than sellstrategic stakes in government companies. However, the paceof privatization in India continues to be disappointing.

    (iii) Agriculture
    The third key challenge for India is its agricultural sector.Agriculture which supports over 50% of India’s populationsaw a decline from 32% of the GDP to approximately 16% ofthe GDP during the last two decades, which has resulted inincreasing disparity between the rural population and theurban population. This is a challenge that the Indiangovernment needs to tackle head on with a quantum leap insupply chain management and agricultural technology. TheIndian government has increased its budgetary support foragriculture from $800 million in 2001 to $2.7 billion in 2011.For all its shortcomings, agriculture sector is India’s mostpromising sector. Today, 40% of the total agricultural producein India which leaves the farm gates does not reach theconsumers because of lack of roads, refrigeration facilities,storage facilities, cold storage facilities and other supply chainissues. Therefore, as India builds its infrastructure andstrengthens its supply chain, the agricultural sector wouldreceive a boost and could become a key driver of the Indianeconomy.(iv) Manufacturing Sector The fourth key challenge ofIndia’s economy is its manufacturing sector. India’smanufacturing sector also has not done as well as its servicesector and India’s share in the world manufacturing is stillrelatively modest. However, rising middle class and consumerdemand is boosting India’s manufacturing sector. The grosscapital formation in industry has grown at a compoundannual growth rate of 11.76% between 2005 and 2010.

    However, India’s manufacturing sector also has greatpromise:

  • First, the development of the Delhi-Mumbai IndustrialCorridor will give a great boost to India’s manufacturingsector.
  • Second, the key challenge to India’s manufacturing sectoris that more than half of manufacturing is done in theinefficient, public sector. Therefore, as India privatizes itspublic sector, it would add efficiency to the manufacturingsector which could give the manufacturing sector a quantumleap.
  • Third, Indian manufacturing sector has struggled againstan artificially low RNB. As China, under the U.S. pressure,allows RNB to appreciate, India’s manufacturing sector willbecome more competitive.
  • V. How can the U.S. and India Help Each Other?
    U.S. is a rich developed economy that needs stable newmarkets to fuel its growth. India is an emerging economy thatneeds large capital investments, know-how in critical areassuch as supply chain management and a market for its servicesector.

    VI. Conclusion
    The idea of the world’s two largest democracies, U.S. andIndia, working together in an economic partnership, so thateach becomes the growth engine of the other is “an idea whosetime has come” and as Victor Hugo said, “an invasion ofarmies can be resisted, but not an idea whose time has come.”

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