India’s Growth

Speaker: Professor Veena Jha

The meeting began with a presentation by Professor Veena Jha on India’s recent growth performance. She discussed the drivers of India’s growth, the effects of growth, and implications for other countries; in particular the growth affects on the EU and Africa and the resultant policy lessons.   

India’s growth path started around 25 years ago in the 1980s. Over the 1980s annual growth averaged at around 5%, increasing to around 7% throughout the 1990s and reaching 9% into the 2000s. Since the 1990s investment has increased by around 5% per annum (p.a.). Since the 2000s growth has been a lot more substantive. Although agriculture contributed to growth during the 90s, more recently its contribution has slowed, and instead non-farm employment has taken off since 1999.

Poverty Reduction

Since 1999 there has been a significant reduction in poverty as measured by calorific intake. The main reasons for poverty reduction were noted as:

• reduced food price inflation, increased imports and also increased production of agricultural goods such as horticulture;
• demographic changes resulting in a 60% labour participation rate and a low dependency ratio.       

Since the 2000s India’s real GDP growth has improved and annual real GDP per capita growth has increased as a result of demographic changes. Across rural and urban areas, on average poverty has reduced – as measured by calorific intake and the income required to sustain consumption. Since the 2000s poverty by this measure has reduced on average by 1% p.a. Informal asset formation has also increased, further decreasing the vulnerability of the poor. Inter-state migration and the internal liberalisation of India has enabled labourers to be paid more than the minimum wage and build up assets. 

Comparing states across India, although the difference between rich and poor states is still quite pronounced, on average the Human Development Index across all states has risen whilst the co-efficient of variation has fallen, thus growth is evening out and inter-state migration is playing a key role through which poverty is reduced and assets are built up.

Drivers of Growth

Services account for around 60% of GDP in India today. The economy is more open, there has been a reduction in applied tariffs from 100% in 1991 to 12% in 2006. Professor Jha noted that India’s growth has been fuelled by a supportive international economic environment, but that now India is itself contributing to global economic growth substantially. Three main growth drivers were highlighted:

• Demographic dividend of a young population: There is a 60% labour force participation rate and currently a low dependency ratio which means that household savings have increased substantially. Household savings rose from around 16% in the late 1980s to around 24% in recent years.

• Growing middle class fuelling domestic consumption: Around 340million Indians now have an annual income above poverty levels but below $10k p.a. Around 100million Indians have an income ranging from $10k to $40k p.a. This has fuelled a domestic consumer boom.     

• Strong companies in a modernised capital market:  Market capitalisation on the Bombay Stock Exchange has increased fourteen fold from $50billion in 1990/1 to $680billion in 2005/6.

Although India’s growth performance has been impressive, it needs to be made more inclusive through stimulating agricultural growth. Although service growth is strong, the manufacturing sector is relatively weak, the two sectors need to be linked and manufacturing should drive service provision domestically. Labour participation rates although noted as a driver of growth are not as high as in China (82%) and should therefore be increased. Other potential obstacles to India’s growth include the ability to maintain price stability, fiscal consolidation (particularly difficult in an election year) and infrastructural bottlenecks.    

Reference is made to the most recent World Bank study ‘Dancing with Giants’ in which Winters et al. (2007) suggest that there is scope for India to substantially increase trade without hurting the development prospects of other economies. In fact as India continues to grow it is more likely that activities are outsourced to other developing countries, such as Cambodia.

India’s Growth and Africa

India is not nearly as big a player in Africa as China. Currently donor assistance is around $2billion. Questions remain as to whether India will become a source of FDI to Africa, and if so – into which sectors?

India’s Growth and the Global Environment

India is on the whole an energy scarce country with a per capita consumption around 1/7th that of the UK and 1/4 that of China. India’s energy intensity of growth has declined by 0.2% per annum over the last 25 years. If India were to continue to grow at around 5% p.a. until 2050 studies project that total energy demand is likely to rise by about three times by 2050. If India is to reduce environmental impacts in terms of GHG emission it is necessary that investments in clean energy increase. The Indian government is focusing on the environment and aims to increase renewable energy’s share of power from 5% to 20-25%. India already has the world’s fourth largest wind power industry and the third largest photovoltaic industry.

In summary, Veena drew attention to the ability to maintain price stability as being one of the key ingredients of the success of India’s growth strategy, including wage stability and fiscal consolidation: giving the government the fiscal space to allocate more resources to capital investment and social and economic infrastructure.  

Discussant: Dr Vince Cable MP, Deputy Leader of the UK Liberal Democrats and MP for Twickenham

Dr Cable began the discussion by putting the growth of China and India into historical perspective. In the 1960s India’s situation was considered by most development specialists to be hopeless. With reference to Gunnar Myrdal’s (1968) ‘The Asian Dilemma’ the religion of India meant that growth and development was suppressed by cultural baggage. Overall people were pessimistic as to the opportunities available to India: however, by the 1980s things started to change. The old model had run out of steam, and fundamental changes took place. India’s growth has picked up tremendously, particularly so in the 2000s.

The growth process in India has been driven by two key factors:

• internal dynamics fuelled by domestic demand, purchasing power and the growth of the so called ‘middle classes’;
• trade between Indian states and the Indian common market – previously suppressed through borders and other delays.  As inter-state trade has picked up this has created a new growth dynamic.    

Comparing India and China in terms of politics, as a democracy India has a fall-back position which gives it a form of stability. This is not the case in China. However, with India’s form of democracy also comes a weakness in the quality of governance, between states, where there is often a marked comparison.     

The possible external difficulties, faced by both India and China in the future, relate to how we in the developed world adapt to them. If we are unable to adapt, we may affect their future growth. The key question therefore is how do we adapt to China and India’s’ growth?
          
China’s Growth

Speaker: Guy de Jonquieres, Senior Fellow at Chatham House and The European Centre for International Political Economy, formerly The Financial Times’ Asia Columnist and Commentator

China’s economic development has been breathtaking. In less than a generation it has transformed itself to the worlds 4th largest economy as measured in nominal dollar terms, it is the world’s 3rd biggest international trader, 2nd largest manufacturer and has the world’s largest current account surplus and foreign exchange reserves.
Last year, China contributed 17 per cent of global growth, the same as the US. China has lifted some 400m people out of poverty, according to the World Bank, and raised literacy levels to more than 90 per cent, from only 10 per cent in 1950. Over that period, life expectancy has almost doubled, while infant mortality rates have plummeted.

The ‘dash for growth’ started with the modernisation and economic reforms introduced by Deng Xiaoping in the form of experiments described as being akin to ‘crossing the river by feeling for stones’. 

Guy highlighted four reforms in particular that in his opinion had contributed to China’s impressive growth performance:

• farm reforms – the replacement of Mao-era communal farms with smallholdings and the freeing of agricultural prices. The result of which brought increases in farm output, productivity and rural incomes;
• wholesale demolition of import and inward investment barriers at a speed and scale without precedent in any country;
• the reform of loss making state-owned enterprises;
• the encouragement of private enterprise which today account for around 1/5th of domestic Chinese company output.

The second key ingredient of the Chinese growth experience is a massive increase in fixed-asset investment in physical infrastructure equalling more than 40% of GDP. Guy argued that investment has been the main driver of growth in China over the last 20 years rather than exports. Coupled with better management this has enabled China to raise manufacturing productivity by 20% p.a. for over a decade. The bedrock of China’s industrial competitiveness is rapid productivity gains and not cheap labour or an undervalued currency.

Vast pools of cheap domestic capital have been created, investment rates have been financed by a high domestic savings rate, low interest rates and large retained (and often untaxed) earnings from corporate profits.

Impacts of China’s growth

China’s dash for growth has promoted rapid development; it has been achieved at huge costs, both social and economic. It has also created vast and complex policy challenges for the future. Some of the problems and policy challenges outlined by Guy include:

• with reference to comments made by Martin Wolf of the FT, any economy with an investment rate as extraordinarily high as China’s should have been growing very much faster. Growth has been hugely wasteful, in terms of capital and resources;

• excessive reliance on manufacturing investment to drive growth has created severe and worsening environmental problems. According to the World Bank, 20 of the world’s 30 most polluted cities are in China;

• the fixation with manufacturing – 36 per cent of economic output -  has produced serious distortions and imbalances. Spending on social infrastructure has steadily deteriorated in quality and has been neglected, pension arrangements are almost non-existent. At 0.8 per cent of GDP, government health spending is lower than in the 1980s;

• income inequality is growing rapidly. The main reasons are due to: uneven regional development; second, until recently, untaxed corporate profits; and third, whilst manufacturing pays relatively high wages, by most estimates Chinese industry employs no more people today than before the mass state-owned industry closures of the 1990s;

• financial system remains primitive. Inefficient pricing of capital leads to its misallocation, encouraging excessive flows into property and equity markets and repeatedly creating serious risks of asset bubbles;

• increasing reliance since 2005 on exports to drive growth has contributed to an explosion of its current account surplus and worsening global financial imbalances, if unchecked, it risks inciting a protectionist backlash.

China’s leadership is aware of the dangers and vast and complex policy challenges of the future. There is an emphasis on shifting from all-out growth to a wider range of priorities. Fixed investment is being dampened whilst more attention and money is being paid to cleaning up the environment, improving social programs and narrowing income inequality. Guy notes that these changes are being driven at least as much by Beijing’s concerns with political survival as by economic calculations. Increasingly the Chinese people are demanding a better distribution of the fruits of growth in ways that not only raise their purchasing power but also improve their overall quality of life.

Three powerful secular trends argue for a change in China’s development model:

• the reliance on fixed asset investment as the prime growth driver will eventually become unsustainable because the sheer amount of capital needed to fund it will simply be too great to be affordable;
• environmental concerns; water is the most pressing issue. Not only is it in increasingly short supply but much of what is available is contaminated by large-scale industrial pollution. That will have political, as well as economic, consequences;
• The third is demographics. The long-tail effects of the “one-child” policy imposed in the 1960s will soon be felt with a vengeance. China’s population is set to peak by or before 2030 – and the working population well before then. When that happens, the question may no longer be whether China’s growth miracle will continue, but whether the country can avoid growing old before it grows rich.        

Nonetheless China’s growth has had powerful demonstration effects in the rest of the developing world. China’s example, has helped energise attitudes to growth. In politically less free countries, notably in Africa, China’s model appeals to ruling elites because it suggests that economies can prosper under authoritarian and non-democratic regimes. Whether those regimes are ready to undertake the same radical market reforms as China remains an open question.

Summing up, Guy noted that the picture of China’s impact is continuously evolving and far from clear-cut. Overall, attitudes in other developing countries to China’s rise remain ambivalent. While welcoming the short-term benefits it has brought, many also wonder how long they will last and whether they, as well as China, will remain winners in the future.

Questions and Answers

To what extent are China and India willing to cut CO2 emissions?
Guy: China is 60-65% energy self-sufficient, from mostly coal, but it is diversifying. It has taken moves to restrict car use. The difficulty in making transitions to clean energy sources is compounded by the weak rule of law in terms of enforcement. The environmental agency lacks clout and resources. There is a core-periphery problem in that local constituencies still view growth as their main objective.   
Veena: India has a relatively low level of energy consumption. The government is quite aware that energy consumption and growth in energy supplies must be clean and green. The key issue is how to divert resources into renewable energy.

Given concerns over product safety, quality and traceability, to what extent has the quantity of growth overridden the quality of growth?
Guy: Most Chinese manufactures are produced under brand names, most are either produced under joint ventures or are wholly owned by Western companies. Nonetheless the Chinese government is concerned that health and safety concerns will result in increasing protectionism using the SPS/TBT agreements under the WTO.     
Veena: Fewer concerns have been raised as to India’s product safety. Only the top producers of drugs in India export. India is developing certification mechanisms within country.    

What are the costs and benefits of China and India’s aid in Africa?
Guy: Investment and aid in Africa is made in the self-interest of China. It is quite clear in its objectives and intentions and to some extent has no sympathy with Africa’s development dilemmas given it’s own history; which is rather ironic.   
Veena:  Indian aid in Africa is largely humanitarian, providing mosquito nets, drugs etc. The scale of Indian aid in Africa is around 1/10th of the Chinese. Indian aid is turn-key and employs Africans. It is therefore very different to Chinese aid.