INDIAN GDP

India has come a long way from 1991, when the Prime Minister admitted while presenting the annual Budget that the crisis in the economy was both ‘acute’ and ‘deep’. The financial crisis back then forced the government to loosen stiff regulations hampering economic growth and initiating reforms in various sectors.

These reforms helped kick-start a nearly dormant economy. The gross domestic product (GDP) jumped to 9% in 2005-06, up from 5.57% in 1990-91. The projected growth for 2006-07 is 9.2%, making it the second year running into a 9% growth.

The rising GDP has turned India into one of the fastest growing economies in the world. But to really get into the big league, it must grow at 10% in the coming years. The question now being asked is: Is this growth possible? Financial pundits assert that this can happen, provided certain policies and processes are put into place urgently.

Inclusive Growth:

India’s growth has benefited its prospering middle class. Engaged largely in the fast growing services sector, they are both contributing to India’s success and also enjoying its benefits.

But this growth story has an ominous side as it has left behind a large majority of Indians. According to a recent survey, one out of every five poor people in the world is an Indian. This skewed economic ratio must be addressed, as any growth that is not inclusive can never sustain itself on a long-term basis.

In this context, one of the biggest sufferers is rural India as it lacks the basic social and infrastructure services in healthcare, roads, education and drinking water.

Agriculture:

Sluggish development in rural India is aggravated by the near-stagnant growth of agriculture. Although services and manufacturing industries are driving economic growth, 60 % of India’s labor force is still dependent on agriculture. Agriculture also remains the single largest contributor to the country’s GDP. If a sector so critical to the economy grows at an insignificant 2% where other sectors like services and manufacturing clock over 10%, then it is clear that this sector requires a major overhaul.

Currently, agriculture is too heavily dependent on monsoons. India’s GDP tumbles every time there is an erratic monsoon. India also has one of the highest wastages in the world, touching nearly 90% in some cases.

In addition, external factors like global climactic changes also play havoc with agricultural productivity. To quote an example, every 1 degree rise in temperature above normal in the second half of December causes a wheat yield loss of approximately 315 kg per hectare. There are also other culprits like soil degradation.

The proposed entry of foreign biggies like Wal-Mart, along with Indian hotshots like Reliance, in organized retail is expected to benefit agriculture. They could explore ways to enhance productivity by reducing inefficiencies & wastage during transportation. And as these retail outlets integrate their supply chains, farmers are expected to get a better price for their products.

Apart from allowing FDI in retail, drastic initiatives in areas such as land reforms, irrigation, knowledge enhancement and effective credit are required to jump-start the sagging agricultural growth.

Infrastructure:

Many international business rating agencies and businessmen highlight weak infrastructure as the key impediment for India's growth. According to estimates, poor infrastructure adds 3-6 percent to the Indian manufacturer’s cost of doing business.

The growth that has occurred to date has happened in spite of poor infrastructure. But for this momentum to continue, India needs better highways, ports, railways, airports and most of all, urban infrastructure that meets world-class standards.

Public-private partnership can come together to develop state-of-the-art infrastructure that will push sectors like manufacturing, agriculture and retail to reach their true potential.

Education:

India’s population potential is tremendous. But paradoxically, in a country of 100 billion, lack of skilled manpower may yet prove to be the biggest hurdle in attaining double-digit growth. The reason: Educated people do not necessarily translate into employable people. Estimates indicate that only one out of every 4 engineers passing out in India is employable. And this shortage of skilled manpower is pushing salaries northwards, gradually eating away at India’s cost-advantage.

The government has come up with some innovative schemes to bridge the gap. It plans to launch ‘Finishing Schools’ for graduate engineers. Working in collaboration with IITs and other reputed colleges, these ‘finishing schools’ will admit students graduating from engineering colleges and attempt to enhance their conceptual knowledge.

This is a welcome step, but the problem requires a long-term solution. The availability of highly skilled manpower at a reasonable cost gave India a distinctive advantage. People are the biggest asset of any country. India must invest in its people, or there will be a serious repercussion on its long-term growth prospects.

State Role:

BBC World had recently commissioned an international poll involving approximately 10,000 people in 10 countries across the globe. The respondents were questioned on who they believed would be the world’s top economies by 2026. A quarter of the respondents answered that India would emerge as the third biggest economy by 2026, after China and U.S.A. The poll is an indication of the general optimism the world has about India’s growth story. The potential is there, but a lot of work is needed to realize it.

An emerging economy requires strict fiscal discipline where there is no room for short-run subsidies and government handouts. Still, indulgences like serious under-pricing of water and electricity, subsidized fuel and an aversion to tax the wealthiest farmers remains a chronic problem. And this shows up adversely in the fiscal deficit, as India has the highest fiscal deficit amongst major emerging markets. Worse, India is probably the only emerging market to have witnessed a relatively smaller correction in its deficit over the past five years.

Because India is a democracy, good economic sense sometimes get sacrificed for vote-bank-driven politics. But if India is to reach double-digit growth, policy decisions must be made on sound economic ground and not for political gains.

The elephant has now learned to dance – but can it rock ‘n’ roll? The answer is blowing in the wind.