Better option than oil and gas pipelines

Updated: Nov 11 2003, 05:30am hrs
Treat this article as you will either as a sober tract on future growth possibilities, or the ranting of a proselytiser of reforms. But first, some very recent history. In the last fortnight, I had three revelations. The first was a conference where CK Prahalad spoke on manufacturing. Prahalad is one of the most logically persuasive speakers of our times. In the course of an hours presentation followed by an hour and a halfs debate, I was convinced of his message: Today, India has everything to aspire for double digit growth. The second was examining a large set of global data. The third was a close look at our demographic data. Taken together, Im convinced that the economic history of India is at a point of inflexion at a stage where we have all the ingredients in place to trigger an era of explosive growth. In the nuclear physics analogy used by finance minister Jaswant Singh, Indias economy is approaching criticality.

For the time being, lets forget about the 7 per cent plus growth for 2003-04 that is now being forecast by many organisations the CII being one such. Much of that is due to the 7.5 per cent estimated growth in the agricultural sector, which alone ought to contribute 1.8 percentage points to growth. Consider instead the industrial and services sectors. The former constitutes 26 per cent of GDP and will clock 6.3-6.5 per cent growth in 2003-04; and the latter, which accounts for half our GDP, will post 7.5 per cent. In other words, these two sectors will contribute to 5.4-5.5 per cent growth of GDP. In 5 of the last 10 years, the industrial sector has grown faster than 6.5 per cent; and in six of these, services has grown at 7.5 per cent or above. So, having been there, and done that, there is no reason to believe that these growth rates are not replicable in the future. Which major OECD country can claim to have even 5.4 per cent GDP growth The answer: None.

Now consider the state of the global economy. Although the US is beginning to show recovery, the best that it can hope for in 2003 is around 3.5 per cent growth. And it is still jobless growth: Non-farm unemployment in the US is still at a high of 6 per cent. Japan, too, may be in very mild almost imperceptible recovery mode. Even so, it will be lucky to achieve anything over 1 per cent growth, which will be a great achievement after 6 years of economic decline. Germany is the sick man of Europe. France will not change its outmoded labour laws, its 35 hours work week, and a profligate and increasingly untenable social security system; moreover, it too is going through the beginnings of a downturn. Taken together, the Euro zone will be very lucky to post even 1 per cent growth. Oh, yes, Australia is doing very well. So, what is its expected growth rate in 2003 3 per cent, thank you very much. In India, a growth rate below 5 per cent is a cause for deep gloom, and below 4 per cent will activate national mourning.

Now for the third point: Indias cost advantages. We know of these in IT and IT services, and this sector will certainly contribute to $50 billion of exports by 2010, if not earlier. The logic of global capitalism demands cost cutting through outsourcing; and India, having established a brand presence in IT and IT-enabled services, is very well placed to leverage this opportunity. This can also be true in healthcare. An open heart surgery in the US costs anywhere between $80,000 and $120,000. In India, exactly the same treatment costs no more than $3,500. Even if you add air fares, hotel expenses and the like, India still has an eight to twelve times cost advantage.

These are not the only sectors. We are developing an international presence in auto components, steel (Tata Steel is one of the lowest cost producers in the world), engineering and fabrication and pharmaceuticals, to name a few. Consider pharmaceuticals. Almost every OECD nation is experiencing ageing of the population, which is resulting in growing medical bills and higher insurance liabilities. Simultaneously, over $25 bn worth of drugs will go off-patent in this decade. India, with its huge skills in pharmaceutical chemistry, should be able to garner a sizeable share of this generic drugs pie. Ranbaxy and Dr Reddys have already been successfully using its R&D strengths to play the global patent challenge game. Others will follow.

Now consider demography. Today, India has a working population of 525 million; by 2020, this will be 762 mn. Even if 5 per cent of this work force developed adequate IT, engineering, healthcare and English language skills, we could be providing an internationally competitive labour pool of 38 mn people whose strengths can be utilised to make India the destination of choice for various forms of outsourcing.

There are two other aspects of our demography. First, India will enjoy a sharp decline in the dependency ratio (the number of dependents per person in working age) from 0.94 today to 0.72 in 2020. This is a major drop, and will translate to much greater discretionary expenditure than before. So, the domestic market will expand not only because of overall GDP growth, but also because of this demographic change. Second, youth will dominate in no uncertain terms. Thats great news, for they will not be encumbered by the historical baggage of licences and controls, and will deal with challenges far more pro-actively than their parents. If you dont believe me, see how todays younger entrepreneurs make the captains of industry of the 1980s look like havaldars. This change has just begun, and is only going to accelerate.

Let me round off with some numbers stuff that make companies drool. If India averages 6.5 per cent growth throughout this decade, it will have a GDP of $809 bn (at 1995 prices and exchange rates), a market size of at least $550 bn and will generate annual household savings of $210 bn. Now, through a wave of reforms, if growth could be gradually scaled up half a percentage point per year to 8 per cent, we would have a GDP of almost $900 bn, a domestic market worth almost $600 bn and savings of $225 bn.

Thats when India can claim to be a major player in the world. It is there to be got provided our leaders, industrialists, workers and intelligentsia recognise this. Are we going to get there Or will we continue to find excuses for non-performance Thats something we as a people need to focus on.

The author is the Chief Economist of CII. These views are personal