The Conundrum of Growth in India

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India is often touted as the next China — a similarly sized population is expected to offer vast potential, particularly coming from a low per capita usage of metals, energy and just about everything else.

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India just needs to be freed from bureaucracy and the shackles of its earlier obsession with socialism and it will boom, supporters have been saying for years.

Yet India’s growth has persistently fallen short of expectations, often to the dismay of Western firms investing billions in what they have hoped would be the next big thing.

It’s not that India isn’t growing. At 6.5%, it is almost certainly growing faster than China this year. Despite claims of “on target” 6.5% growth in China, a more realistic measure is probably 4.5%, according to Roger Bootle, chairman of Capital Economics, writing in the Telegraph.

Nevertheless, China has achieved an unprecedented rise in living standards, with perhaps the greatest achievement being the creation of a prosperous middle class numbering in the hundreds of millions.

It is this middle class that has allowed the switch from export-led to domestic consumption — without their combined demand auto sales, white goods and the construction sector (and the list goes on), it would be dead in the water.

India, by comparison, has a paltry middle class.

The top 1% of Indian adults, a rich enclave of just 8 million inhabitants making at least $20,000 a year, equates to roughly Hong Kong in terms of population and average income, The Economist says. The next 9% is akin to Central Europe, in the middle of the global wealth pack.

Even the top 1% would struggle on $20,000 per annum to afford $20,000 for a small BMW or over $1,000 for an iPhone.

The next 40% of India’s population neatly mirrors its combined South Asian poor neighbors, Bangladesh and Pakistan, hardly in the market at all for Western-priced brands. The remaining half-billion or so are on a par with the most destitute bits of Africa, explains a report in The Economist.

So why has India apparently failed where China succeeded?

The Economist has some ideas, but in the process raises doubts as to whether India will ever achieve China’s levels of growth or, more importantly, raise the living standards of all but the richest few.

Narendra Modi has achieved much since his appointment. His Goods and Services Tax (GST) and also a bank recapitalization program have been two notable achievements. It is also true the economy has grown at a fair clip in recent years; however, during his watch inequality has gotten worse rather than better.

Educational standards are abysmal, The Economist says, churning out millions of adults equipped only for menial work. India’s graduates go on to toil in small or micro-enterprises, operating informally; these “employ” 93% of all Indians, in part part because outdated employment laws severely penalizing employers taking on more than 99 workers, effectively capping the size of most enterprises. Without the well-paid middle management and engineering jobs that come with larger enterprises, India’s workers are consigned to the sweat shops of back street enterprises.

Even worse, only a quarter of women work — a share that has seen a precipitous decline in the past decade the report notes, denying households of the benefits of a second income and the living standards it brings.

If labor laws are a major hurdle, land laws are just as bad, making the acquisition of land for development fraught with delays, cost and uncertainty. Even major corporations struggle to get approval for greenfield sites — in a way that would be inconceivable in China — and are sometimes forced abroad for expansion opportunities.

Such changes of the rules are entirely within the remit of government but one of India’s greatest strengths is also one of its weaknesses.

India is rightly proud of its unbroken record as a huge and vibrant democracy — the world’s largest — but politicians are at the mercy of their electorates and the vast majority of often rural poor, surviving on $3-5 a day are not going to vote for politicians that campaign on policies of reducing workers’ rights, increasing mobility, limiting planning laws or removing wasteful subsidies and benefits. Turkeys don’t vote for Christmas and India’s poor are easily persuaded by ambitious politicians less worried about the country’s prospects and more worried about personal advancement.

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It seems strange to blame a country’s lack of progress on something as simple as a lack of a middle class, like putting the chicken before the egg. But it is as much cause as symptom of India’s woeful record on inequality that the poor are getting only marginally richer, the tiny minority of rich are getting very much richer and the squeezed middle are failing to grow in the manner that emerging economies have elsewhere in Asia.

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