Few countries have improved their economic prospects so dramatically as India has in the last twenty years. Indeed, one would be hard-pressed to read a long-term forecast that did not view India as a large and growing force in the world economy. With a population of over 1 billion (as of 2008), it might seem like it could hardly be any other way. Nevertheless, the story was once very different in India. A Brookings Institution report on January 13 states that India was, “…essentially insulated” from world markets as recently as 1990. Not only did, “…ups and downs in the world economy matter little” to India, but perhaps worse, “…movements in the Indian economy were even less consequential for the world economy”, as the proportion of world trade and investment India personally accounted for was negligible at best. Difficult as it may be to believe today, foreign direct investment in India stood at a paltry $100 million in 1991. By 2006-2007, FDI had increased to $19 billion. Moreover, Business Standard reports that India boasted a 9% per annum growth rate between 2004-2009. Despite being all but irrelevant to the world economy just two decades ago, India has clearly become a force to be reckoned with on the global stage. Continuing our series on growing economies, we’ll look more closely at India’s economic landscape – the opportunities, government incentives to producers, fastest-growing industries, and what the future holds.
The phrase “economic opportunity” is frequently used in economic discussions, but within India, it has always had a somewhat nebulous meaning. For generations, the opportunities open to citizens were determined by a socially stratified “caste” system and one’s place within it, which was itself determined by birth. A University of California at Santa Barbara essay referred to the 3,000 year old caste system as a, “…pernicious practice that discriminates against nearly a fourth of the country’s billion-plus population.” Naturally, such a system was not conducive to widespread prosperity or entrepreneurship, and as a result, neither flourished until the caste system began to wither away. Fortunately, as the BBC reports, “…today, caste barriers have largely broken down in the large cities.” The result has been nothing short of transformative from an economic standpoint. A USA Today article from 2004 interviews Sumant Anand, a native Indian returning home after a three year absence. When asked about his friends, Anand remarked, “…they were all talking about opportunities in India rather than how to find jobs in the USA.” In a stunning turnaround from just ten or fifteen years earlier, Anand reports that, “…if you talk to people my age, nobody wants to leave India.”
Largely thanks to market reforms and caste system erosion, India has begun transitioning from low-paid outsourcing fodder into a sophisticated service economy. The nation’s, “…world-class software developers are moving into high-margin consulting”, striving ambitiously to, “…take business from the likes of Accenture and IBM.” In fact, India’s IT industry alone Outsourcing professionals have graduated from, “…filling orders for infomercial ab crunchers to handling financial analysis for Wall Street firms.” And India’s drug makers, previously held in contempt by the developed world for patent piracy, “…are being wooed by the same global giants whose medicines they were copycatting.” In short, India has become a place where talented, intelligent and hard-working people can get ahead.
The Incentives and Top Performers
No small amount of India’s longtime economic struggles owed to the government’s perennially “self-reliant” policies. As early as 1947, when it became an independent country, India “…set out to achieve what its leaders called swadeshi, or self-reliance”, according to USA Today. In practice, swadeshi amounted to, “…walling out foreign investment and imports, and playing the role of obstructionist in global free-trade talks.” Unfortunately, in its quest to be self-reliant, India succeeded only in reducing itself to economic helplessness and virtual destitution. Liberalization occurred at an, “…agonizingly slow pace” until 1991, when soaring oil prices triggered a balance-of-payments crisis. Since then, India has taken great strides to promote entrepreneurship, trade, production and risk-taking throughout the economy. One major boost came in the form of lowered tariffs on imports, which were as high as 87%-113% as recently as the early 1990’s. Today, import tariffs are generally lower than 20%. Another longtime obstacle to entrepreneurship were stifling foreign exchange controls, which limited when and how much profit foreign multinationals could take home from India. After being shunned by multinationals for decades, the foreign exchange controls were relaxed, and in 2007 the BBC reported that multinationals were “…leading India’s IT revolution.”
Another incentive that has done much to spur business activity in India is the removal of arbitrary restrictions and barriers. In 1988, for instance, the BBC explains that the Indian government did not make it easy for Texas Instruments to do business there. So involved with every minute detail was the government that, “…the Indian Ministry of Communications refused to allow them to set up their own private satellite dish unless a government official was present in the control room of the company’s satellite data transmission centre at all times.” Fortunately, “…within a decade, all such barriers were swept aside”, and the cost of data transmission subsequently, “…plunged due to the creation of trans-oceanic fibre optical cable networks.” The 2009 Legatum Prosperity Index gives India favorable marks as well, observing the existence of, “…only 11 formal business start up procedures.” USA Today notes, in agreement, “…private business can now do virtually anything except operate a railroad, nuclear power plant or university.” As word of India’s new found permissiveness to entrepreneurs spread, multinationals began doing business there in unprecedented numbers. Today “…more than 500 major international companies have IT operations in Bangalore alone.”
As mentioned, India’s $28 billion IT industry is an economic juggernaut and easily its most robust sector. Additionally, however, the country boasts the world’s fastest-growing telecom market, with some estimates clocking new subscriber signups at 1.6 million per month. NextBillion reported that 2008 was, “…a watershed when India’s subscriber base topped 350 million users to make its network the second largest in the world after China, displacing the US.” (NextBillion also explains how the telecom industry has benefited tremendously from the lower tariffs discussed earlier.) India is also the global leader in business process outsourcing, exporting $25 billion worth of such services per year as of 2007 and expected to rise to $60 billion by 2010, according to BBC.
What The Future Holds
While businesses like Hewlett-Packard, Dell, IBM, and Accenture coming in India is certainly encouraging, perhaps more encouraging than any isolated event is the overall, ongoing trend of liberalization in India’s economy. In 1991, trade in goods and services as a proportion of India’s GDP stood at a meager 16%. By 2007, that number had shot up to 49%, according to the Brookings Institution. The country also, “…grew 13% per annum in real dollars during the four year period spanning 2003-04 to 2006-07.” Brookings notes that, “…if this rate is maintained and the US economy grows at 3% per annum”, India will grow to “two fifths of the US economy in just two decades.” Nor, it should be noted, are US companies only making “token” investments in India. In 2007, networking giant Cisco Systems “announced a $1.1 billion investment in Bangalore, creating 6,000 jobs” in one fell swoop. Chief Globalization Officer Wim Elfrink weighed in on the deal by declaring “we believe that India is the hub for the world where the ICT sector is concerned.” Taking the improvements and deregulation of the last twenty years into account, it seems that India is on the road to joining the world’s major economies in less time than anyone thought possible.