President Bush's visit to India showcased that nation's emergence as an increasingly important member of the global economy. Its enhanced stature befits a nation with a population of 1 billion and an average annual economic growth of nearly 6% since 1980.
Though the subcontinent's ascent has been overshadowed by China's sizzling performance, India has the second-fastest-growing major economy in the world over the past 25 years. In recent years it has provided the third-largest contribution to global gross domestic product (GDP) growth, accounting for about 10% of the total worldwide, trailing only China and the U.S.
The Bush visit coincided with the recently stepped-up pace of Indian GDP growth has led to growing optimism about the sustainability of growth in the 7% to 8% range seen over the past few years. The country's fourth-quarter (October to December) GDP report released Feb. 28 showed growth at 7.6% at a seasonally adjusted annual rate, a fractional moderation from previous quarters.
That leaves year-over-year growth for the first nine months of the Indian fiscal year (ending in March) at 7.9%.
Agricultural growth
Given that performance, it was hardly unreasonable for Finance Minister P. Chidambaram in his annual budget speech on Feb. 28 to project 8.1% growth in the current fiscal year. He called the economy's prospects "just as good, if not better" for the 2007 fiscal year starting Apr. 1.
As before, agricultural output can be critical to India's aggregate growth, with the severity of the annual monsoon a determining factor.
Though perhaps a third of the population still lives in poverty, India boasts a growing middle class, which at perhaps 250 million people would exceed the population of any other country aside from China and the U.S. In addition, India represents the most rapidly growing consumer market other than China.
One sign of the remarkable growth
The number of mobile-phone subscribers in India jumped 20%, from 64.6 million to 77.6 million, during the final three months of 2005.
Service industries, making up half of India's economy, grew at a robust 9.1%, year over year, during the December quarter, while manufacturing rose 8.4%, and agriculture grew 3.4%. Services have attracted the most attention, as Indian outfits have taken advantage of telecommunications advances, and the population's proficiency in English, to play a growing role in the global outsourcing boom, including software, finance, and call centers.
Help from abroad
India remains well behind China in merchandise trade, as manufacturing's share of the economy is currently about 16%, compared with 39% in China. Infrastructure shortcomings (e.g. roads, railways, ports, and power systems) are widely seen as the biggest constraint on Indian manufacturing growth. The government is aiming to step up spending on infrastructure, in part as a way to lure more foreign investment, though its ambitions are limited by fiscal constraints.
Of course, India's boom is attracting money from other parts of the globe. Direct foreign investment has averaged about $5 billion over the past five years, hitting $6 billion in 2005, but still only about one-tenth of China's total of a little more than $60 billion. The government has said it aims to attract $10 billion of foreign investments this year, promising to simplify its investment rules.
In contrast, overseas portfolio investors bought a net $10.7 billion in Indian equities in 2005, fueling a rally in which the Mumbai Sensex Index gained 42% for the year, carrying it to record levels in 2006. The existence of a sound financial-market infrastructure makes India a much more feasible avenue for equity players than China, where investment has so far come primarily through corporate FDI and private equity channels.
Stock investors are attracted by indigenous companies tapping the entrepreneurial streak in the Indian population.
Absorbing technology
In contrast to China's trade surplus, India's trade deficit will likely exceed $50 billion in the 2006 fiscal year. This financial quagmire may signal a widening in its current account deficit to more than $20 billion this fiscal year -- more than 2.5% of GDP. This is more than balanced by solid capital account inflows, but leaves India dependent upon potentially volatile investment flows.
Mindful of how the Asian currency crisis of 1997-98 highlighted the downside of vulnerability to a potential reversal in such capital flows, the Reserve Bank of India, reluctant to allow the current account deficit to widen further, will likely resist significant appreciation of its currency, the rupee -- echoing the approach of its fellow Asian giant.
Superior productivity growth underlies the above-average economic growth in India. Per-capita annual GDP growth averaged 3.6% during 1980-2001, a marked acceleration from about 1% during the previous decades. India's growth in this regard is similar to China's rise, though the Middle Kingdom's average productivity growth of 6% has far outstripped India's.
Like China, India's stepped-up productivity can be attributed to its absorption of more-advanced technology from the outside world, along with the migration of the rural population to urban centers where productivity is typically higher. India's urban population share rose from 23% in 1981 to 28% in 2001. (Over that same span in China, it doubled from about 20% to a little more than 40%.)
Following China
In both cases, economic liberalization since 1980 accelerated growth. Although India had never gone as far as Marxist China, it was notorious for its bureaucratic market restrictions. It epitomized the distrust of foreign trade and investment typical of many former colonies.
This began to change slowly during the 1980s with the relaxing of widespread licensing restrictions and barriers on access to foreign equipment. This process was accelerated in the wake of the 1990 currency crisis, with further liberalization of foreign trade and investment and the opening up of services such as telecom.
The current administration of Prime Minister Manmohan Singh, since coming into office in 2004, has implemented further selected reforms, including abolishing the capital gains tax and cutting the corporate tax rate. An increasingly self-confident India appears more inclined to open up to the world as it sees what China has been able to achieve.
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