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Can India Become The New Economic Powerhouse Of Asia? – Analysis

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By Dr. Altay Atlı*

The world is going through a time when efforts of recovery and restructuring in the aftermath of the global financial crisis have to be made in a setting defined by deepening geopolitical risks and widening instabilities in various parts of the globe. The slowdown in the Chinese economy is adversely affecting not only this country, but also the entire world. Large-scale developing countries like Russia and Brazil are suffering from both structural shortcomings at home and deteriorating demand conditions in external markets. The United States is in a relatively better situation, albeit still far from its pre-crisis strength. Meanwhile, in Europe where the impact of the crisis is still being felt deeply, the future of the union and the Euro is unknown.

In this not-so-rosy picture, India distinguishes itself from other major economies with its high performance and increasing growth rates. According to the latest data, the Indian economy has grown by 7.3 percent over the last quarter of a year, thus surpassing China’s 6.9 percent over the same period. While China’s growth is slowing down, India’s rates are following an increasing trend. This situation, when jointly considering the size of India’s economy and population, leads to the following question: Can India replace China as Asia’s new economic powerhouse?

India has a number of strengths that are enabling the current growth trend. To start with, India is starting from a very low base, thus having a large capacity for growth. According to International Monetary Fund data, per capita income in India is still only $1,688, compared with $8,280 in China. Having reached the middle-income level, China is now making efforts to undertake the necessary structural transformations that would catapult the country into the high-income class, and to this end, it is trying to make the shift from labor-intensive, low added value and low cost manufacturing towards capital and technology-intensive, higher added value production. As a consequence of this process, China’s economy is slowing down, with growth rates going down from double digits to more modest figures. India, on the other hand, is still at the early stages of its economic growth, and there is still much space for India to achieve growth through inexpensive labor and low costs. In this respect, India’s large and young population constitutes an advantage as well. According to latest available statistics, India’s population size is close to the threshold of 1.3 billion people. The country is forecasted to overtake China and become the most populous country on earth by the year 2020. In the meantime, with 50 percent of its population being under the age of 25, and 65 percent under 35, India also has the advantage of a young labor force.

Current developments in the global economy are also providing a positive environment for India’s growth. Lack of global demand is certainly not good news for India; however this is compensated for by the low commodity prices, as India is largely dependent on imports for many items, including oil. As this article was being written, the price of crude oil had gone down to the historical low of 26 dollars per barrel. This price level is a reason to celebrate for India, which has to cover 70 percent of its energy needs through imports, and makes it possible for Delhi’s policy makers to canalize finances allocated for purchasing oil to projects aimed at improving economic capacity instead.

India has a strong services sector. Its share of 55 percent in the nation’s GDP overshadows manufacturing and agriculture with 30 percent and 15 percent respectively. In addition to its dominant share, the services sector is also the fastest growing segment of the economy. Over the last quarter of 2015, the services sector has grown by 9 percent, and in certain sub-sectors this rate was even higher. For instance, in information technologies (IT), which is India’s flagship industry, annual growth rate reaches 60 percent. With a yearly export volume of $100 billion, IT is the engine of growth in India, nourished by a young and well-trained population with the necessary English skills.

One arm of India’s strategy today is to develop the non-IT areas of its services sector. Tourism is a main pillar of the strategy in this respect. India is already one of the most popular tourism destinations in the world, and it is now shifting its focus to areas with higher added value, such as health tourism. India’s health tourism market has already reached a size of $3 billion, owing to the existence of a widespread network of hospitals and 45 thousand new doctors joining the ranks of health personnel every year, all working at wages one-tenth of those in the West. In other words, low cost is an advantage for India in this field too.

India’s greatest challenge is the shortcomings of the manufacturing sector. This is a country that has followed a different way compared with the East Asian models that have advanced by developing the manufacturing industry first, and only then moving on to the service sector. In India, services came first, and manufacturing followed \ behind. However, a developing manufacturing sector is the sine qua non condition for the sustainability of growth. Despite its share of 55 percent in the nation’s GDP, the services sector is generating only 25 percent of employment. The well-educated urban middle class get the jobs in the services sector, while the rural population, at least a certain portion of it, is absorbed by agriculture. A strong manufacturing sector is absolutely needed in order to incorporate the rapidly increasing young population in the labor force and to ensure that migration from rural areas to large cities creates not unemployment, but value for the economy

The government of Narendra Modi, which took office in 2014, prioritized the development of the manufacturing industry and initiated an investment program aiming to turn India into the world’s factory, the same way China made itself the world’s factory. Wages in India’s manufacturing sector are one-quarter of those in China’s prosperous eastern coast, and this is a significant advantage for attracting investment. However, there are two structural problems that India’s manufacturing is facing. First of all, there is the underdevelopment of the physical infrastructure. India is currently far behind China in terms of the quantity and quality of roads, highways, and rail networks. One-third of the country’s population does not have access to electricity. The industry relies on coal for its energy needs, and coal is neither clean nor efficient as a source of energy. In agriculture, the lack of irrigation infrastructure is so serious that there are draughts even in times of monsoon.

A solid manufacturing industry requires adequate infrastructure, but there is another problem here: bureaucratic barriers. This problem is not unique to manufacturing, it hurts the entire economy. Despite recent reductions in red tape, establishing a company, engaging in commercial activities, making an investment and buying land requires entrepreneurs to go through a number of complicated bureaucratic procedures, and this understandably discourages companies, both domestic and foreign.

India has managed to achieve a growth rate higher than China, although its manufacturing sector is not sufficiently developed yet and there remain significant bureaucratic barriers slowing down commercial initiatives. Improvement can only be possible if the Modi government carries out its reform program without making compromises. If this can be done, there is no reason why India can’t be the new economic powerhouse of Asia.

*Dr. Altay Atlı is a research fellow at the Asia-Pacific Studies Center of USAK. He is also an adjunct professor at Boğaziçi University Asian Studies program

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