India’s challenges ahead

India’s challenges ahead
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First Published: Wed, May 13 2009. 11 00 PM IST
Updated: Wed, May 13 2009. 11 00 PM IST
The future of the Indian economy still looks bright, even though growth stood at 5.3% during the third quarter of the last fiscal year, against industry expectations. This massive setback is largely due to contractions in the agriculture, forestry and fishing, and manufacturing sectors. Yet, the future of the Indian economy is safer than that of many other countries.
There are many factors that play to India’s advantage. The country is bestowed with huge skilled human resources, faster growth and growing recognition of the Indian services sector, ever-growing market across products, increasing consumerism, interest in pushing financial sector reforms and decreasing unnecessary governmental controls, significant interest shown by foreign entrepreneurs in India and, most importantly, the existence of a 400-million-strong middle class. India is getting its say in international diplomacy and achieving prominence in geopolitical affairs.
India has become an internationally competitive job market. Today, the economy grows at a rate only next to that of China’s. At this juncture, India is on the threshold of an economic revolution. The present global financial crisis gives us an historic window of opportunity for the next several decades.
As time passes, India will lose these advantages, including its present superior demographic dividend, being counted as a hot investment destination, rising levels of domestic investment and growing consumerism. Basically, the long-run growth of any economy depends upon population growth, capital accumulation and productivity growth. These are the three primary growth drivers of any economy. India’s working age population will continue to increase even through the 2020s. China’s will decline steadily because of its one-child policy. India has a well-developed and fairly tested capital market, which would be further strengthened by pushing financial sector reforms. The country’s democratic government will make our financial institutions less vulnerable to any unforeseen political instability.
In terms of productivity, India is also well ahead of China. India has been saving and investing around 25% of its gross domestic product (GDP) in recent years. China, in contrast, invests around 50% of its GDP. India has been achieving 6-7% growth from 25% investment. In the case of China, it registers around 9% GDP growth rate from an investment rate of 50%. In a nutshell, India uses its capital more efficiently and ensures much higher gains in factor productivity. The only concern is that India’s domestic investment (savings rate) has to grow at a faster pace and should touch 28% to ensure 7% growth rate with the help of well-developed capital markets. Higher savings could mean higher investments and growth, with the presumption that the financial sector does a good job by identifying and pushing these savings into viable and productive projects.
At the same time, it is expected that the present problems and future apprehensions such as poverty, unemployment, illiteracy, conservatism, corruption, criminalization of politics and economic disparities will be addressed effectively by the incoming government to ensure that India is one of the fastest growing countries in the world for years to come.
Soumendra K. Dash is chief economist, CARE Ratings. Views expressed here are personal. Comment at otherviews@livemint.com
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First Published: Wed, May 13 2009. 11 00 PM IST