India’s new-found economic muscle4 min read . Updated: 22 Aug 2010, 08:24 PM IST
India’s new-found economic muscle
India’s new-found economic muscle
After weeks of holding out, Research In Motion Ltd (the company behind the ubiquitous BlackBerry) blinked and agreed to address some of the concerns raised by the home ministry on accessing encrypted messages that move across its network. Last month, the National Aviation Co. of India Ltd (Nacil) demanded compensation of almost $1 billion (Rs4,660 crore) from Boeing Co. for a nearly three-year delay in delivery of the 787 Dreamliner jets as it was setting back the airline’s expansion plans.
What was striking was the tenor adopted by Indian officials during the negotiations. It signalled business and was devoid of the usual rhetoric. And what was better was that the threat resulted in compliance.
Also Read Anil Padmanabhan’s earlier columns
While home ministry officials were categorical that they would not compromise on their demands for full access to the Blackberry network, Nacil was matter of fact. In an interview to Mint on 22 July, Air India’s chairman Arvind Jadhav said, “We are asking Boeing to rework the entire negotiations on 787s and impose stiff penalties for next deliveries. If they say that (on) 31 March they are going to deliver a 787 and they don’t happen to do it, then every one day of delivery delay, it will (have a penalty). If that they agree (to), then I will commit my resources to it."
The two incidents, entirely unrelated otherwise, emphasize India’s new-found economic muscle and, more importantly, its willingness to flex it if required. This is an entirely new trait and something that would have been unheard of even five years ago although it has been in the works for a while.
The 2008 global economic meltdown accelerated the process and suddenly pitchforked India into the limelight. The fact that the subsequent recovery in developed economies has been uncertain and with economists now predicting that it would take long even while concerns are building up on China has only cemented the perception about India.
What has happened is that India has transitioned to a position where it can deliver a credible threat and this flows not so much from its recently acquired status as a trillion-dollar economy. Instead it is because of the country’s underlying economic potential. This has been apparent for some time, but now there is empirical evidence on hand.
A report put out by the Asian Development Bank (ADB) last week on “The rise of Asia’s middle class" reveals that the middle class in Asia almost trebled from 21% of the population in 1990 to 56% in 2008. The two countries powering this growth and which will continue to do so in the future are India and China. According to the report, the population share of the middle class (defined as those who spend between $2 and $20 a day) increased from 29% in 1993-94 to 38% in 2004-05. Hence, the number of middle class in India is estimated by ADB to have been 418 million in 2004-05—more than the population of the US.
The demographic profile of the middle class population is overwhelmingly in favour of the lower middle class (LMC) spending $2-$4 per day at 170.3 million; 73.6 million is the mid-middle, 15.1 million upper class with the balance making up the affluent. While there is some upward progression within the middle-class segments, the largest change is obviously, for a developing economy such as India, in the LMC.
This is an opportunity as well as a challenge to public policy. Especially if you take into account the number of the poor, estimated by ADB at 514.3 million. In these difficult times it will be a challenge to retain the new additions in the LMC even as every effort is undertaken to bump up people from below the poverty line. Those who challenge big spending on subsidies and welfare measures should keep this in mind.
If, however, the government does succeed, then the consumer market potential is tremendous; the trick is to get the pricing right. The burgeoning of cellphone connections to over half a billion is a vindication of this belief. Companies are obviously buying into this argument.
This commercial power is something that China used brutally to its advantage when it went about its economic game plan. We cannot be sure whether, like in China, there is a cohesive and coordinated thought process underlying the bold commercial stands being taken by various arms of the government. It is more likely, especially given the state of drift in governance that we are witnessing, that this is accruing from independent posturing. That’s a pity because China has demonstrated that there is much to gain by a calibrated use of economic power.
Anil Padmanabhan is a deputy managing editor of Mint and writes every week on the intersection of politics and economics. Comments are welcome at firstname.lastname@example.org