India : Seizing the Opportunities of the

21st Centuryby

Gurcharan Das

March 28, 2008The India Club

Singapore

Even though the world hasjust discovered it, the India

growth story is not new

It has been going on for 25 years

What is the India story?

Rising GDP growth

1.0

3.5

6.0

8.9

Average annual GDP growth

0

2

4

6

8

10

1900-1950 1950-1980 1980-2002 2002-2007

(%)

Population growth is slowing

Sources: 1900-1990: Angus Maddison (1995), Monitoring the World Economy, 1990-2000:Census of India (2001)

1.0

2.22.1

1.81.5

0

0.5

1.0

1.5

2.0

2.5

1901-1950 1951-1980 1981-1990 1991-2000 2001-2010

(%)

Literacy is rising

Source: Census of India (2001)

17

52

65

80

0

20

40

60

80

100

1950 1990 2000 2010 (proj)

(%)

Middle class is exploding

Source: The Consuming Class, National Council of Applied Economic Research, 2002

65

220

368

8%22% 32%

0

100

200

300

400

1980 2000 2010 (proj)

(m)

Poverty is declining

46

26

16

1% of the people have been crossing poverty line each year for 25

years

Equals ~ 200m

0

10

20

30

40

50

1980 2000 2010 (proj)

(%)

Per capita income gains

Source: World Bank

US$ ppp

200520053,0513,051

19801980

1,1781,178

India is now the 4th largest economy

It will overtake Japan between 2012 and 2014

to become the 3rd largest

The India model is unique

Drivers of growth

India

■ Domestic

East and S.E. Asia

■ Exports

Drivers of growth

India

■ Domestic

■ Services

East and S.E. Asia

■ Exports

■ Manufacturing

Drivers of growth

India

■ Domestic

■ Services

■ Consumption

East and S.E. Asia

■ Exports

■ Manufacturing

■ Investment

Drivers of growth

India

■ Domestic

■ Services

■ Consumption

■ High tech, capital intensive industry

East and S.E. Asia

■ Exports

■ Manufacturing

■ Investment

■ Low tech, labour intensive industry

Implications of India model

Domestic led

■ Insulation from global downturns

■ Less volatility

Implication of India model

Services led

■ Have we skipped the industrial revolution?

■ How do we take people from farms to cities?

Implication of India model – Consumption led

41%

45%45%

59%

U.S.

China

Brazil

India

33%

People Friendly:Consumption as % of GDP

Less inequality: Gini Index

The world needs another big consuming economy after the U.S.

58%

42%64%

Europe

China

India

Reasons for success

India’s success is market-led whereas China’s is state induced

The entrepreneur is at thecentre of the Indian model

Rise of globally competitive Indian companies

India has a vibrant private space

■ 100 Indian Companies have market cap of US$ 1bn

■ 1,000 Indian Companies have received foreign institutional investment

■ 125 Fortune 500 companies have R&D bases in India

■ 390 Fortune 500 companies have outsourced software development to India

■ 2% bad loans in Indian banks (v~20% in China)

■ 80% credit goes to private sector (v~10% in China)

Public space is a problem

We have

■ Dynamic democracy with honest elections

■ Free, lively media and press

■ Poor governance

Earlier we had world class institutions, but they are now failing

■ Bureaucracy

■ Judiciary

■ Police

Economy grows at night when government is asleep

What explains India’s economic success?

Even slow reforms add up

■ State getting out of the way

■ Every government has reformed since 1991

Key reforms

■ Opened economy to trade and investment

■ Dismantled controls

■ Lowered tariffs

■ Dropped tax rates

■ Broke public sector monopolies

What explains India’s economic success?

Even slow reforms add up

■ State getting out of the way

■ Young minds are liberated

Mental revolution

■ ‘I want to be Bilgay’

■ Raju’s secret of success

■ Banianisation of society

■ 100 cable channels for $3

■ Hinglish

What explains India’s economic success?

Even slow reforms add up

■ State getting out of the way

■ Young minds are liberated

■ India has found its competitive advantage in the knowledge economy

Looking forward

■ 8% economic growth

■ Democracy will not permit more than 8% unless you have a Thatcher

■ 1.5% population growth

Per capita income

2,100 3,050

5,800

16,800

37,000On a ppp basis

2000 2005 2020 2040 2066

0

10

20

30

40

($000)

Convergence in the 21st century

■ Why convergence is intuitive?

■ Convergence didn’t happen in the 20th century because the world was closed

■ Returning to a world of equality prior to 1750

■ When China and India accounted for 45% of world GDP

Why will growth continue?

Demographic dividend

India’s demographic advantage means that its high growth will

continue longer term whileChina will slow

50% 50%

India will gradually turn middle-class

8%

22%

32%

1980 2000 2010 2020 2040

West of theKanpur-

Chennai line

East of theKanpur-

Chennai line

Chennai

Kanpur-

“By 2010 India will have world’s largest

number of English speakers”

“When 300 million Indians speak a word in a

certain way, that will be the way to speak it.”

Professor David CrystalCambridge Encyclopedia of the English Language

What could stop the show?

Infrastructure

■ Public private partnerships

■ Bad governance

Education System

Is reasonably good for the top 20%

■ Highly competitive business and engineering institutions

Is abysmal for the rest

■ 1 in 4 teachers is absent in government primary schools

■ 54% of children in urban India in private school

Caste system

■ Origin of India’s caste system

■ Classical four castes

■ Today it is alive in the villages but dying in the cities

■ Source of competitive advantage

■ Affirmative action in public sector, but not in the private sector

Role of Religion

India’s pluralism, diversity and tolerance

Hinduism

■ Spiritual entrepreneurialism: Gurus

■ No hierarchy: Every Brahmin thinks he is the Pope

■ 300 million gods: Lack of theological narcissism

85%

Hindu

12%

Muslim

2%

Sikh

1%

Christian

Elephant and not Tiger

■ India got democracy before capitalism and this has made all the difference

■ It will be slower than China but its path will be surer

■ Elephant at 8% is formidable

■ India more likely to preserve its way of life

The Wise Elephant