When will we get a comparative perspective?

OMKAR GOSWAMI

back to issue

FOR a country whose myriad cultures have hardly any tradition of history or historiography, we are a surprisingly sturdy ‘time-series’ people. We are perpetually comparing ourselves today with how we were five or ten years ago. For instance, Remember 1992, when the only domestic airline was Indian Airlines? Remember how bad the food and service was, and how difficult it was to get a ticket on demand to suddenly fly to Bombay? Now, look at the difference! We have three airlines competing with each other. There are 27 daily flights between Delhi and Mumbai (tragically, Bombay, Calcutta and Madras got lumpenised in the jet stream of linguistic chauvinism that was perhaps the only ‘human face’ of liberalisation). Only last week, my nephew Guttu went to the airport, used his credit card and hopped on to the next available flight. And, what about credit cards?

Time series makes for comforting comparisons. After all, India has progressed substantively since the horrible days of May 1991, when we had barely three weeks worth of foreign currency reserves, astronomical import tariffs, pervasive quotas, myriad administered interest rates, public sector reservations, and a licence-control-permit raj from the tip of the hair to the toenails. More power to India for all the changes that have occurred in the last 11 years.

But, are the changes good enough? As you can imagine, this question can hardly be answered by the time series approach. It requires a ‘cross-sectional’ mentality – one that asks where India stands vis-à-vis her competitors in Asia. This is where the problem lies. We as a nation are so insular in our worldview and so good at self-congratulation that we fail to see how far others have progressed over the last dozen years compared to us.

 

 

This article is an exercise in comparison of some critical social and economic indicators. As we know very well, Prime Minister Atal Bihari Vajpayee has sounded the clarion cry for 8 per cent GDP growth for the next decade. Heady stuff this, especially in a milieu where the economy has been hard-pressed to cross 5.5 per cent growth. Achieving this in an increasingly integrated world economy requires quantum leaps in global competitiveness. And, there are at least four critical macroeconomic determinants of such competitiveness. These are (i) the quality of the present and future labour force, (ii) the quality of physical, social and financial infrastructure, (iii) extent of openness of the economy, and (iv) efficiency of the government’s fiscal management. Let’s discuss each of these at some level of quantitative detail.

A necessary condition for sustaining competitiveness is the present and future quality of labour force. This will become critical in this century, given the key role that will be played by knowledge inputs in all spheres of economic activity. How do we fare vis-à-vis Asia in terms of basic indicators such as infant mortality, life expectancy at birth, and adult female and male literacy?

It’s useful to begin with birth. A country’s infant mortality rate is a robust indicator of the extent of genuine development – for it underscores the state of a delivering mother’s health, her household’s income and capabilities to access health facilities, and the extent to which such facilities are available for the citizens as a whole. From the time-series perspective, India seems to have done pretty well over the last decade. In 1992, 79 infants died out of every 1,000 live births. By 2000, this had dropped to 69 – a creditable fall of 13 per cent in eight years.

However, as Table 1 shows, India compares abysmally with the rest of Asia that matters. Our infant mortality is 8.5 times that of Malaysia’s, over 4.5 times that of Sri Lanka’s, twice that of China’s and almost 2.5 times that of the Asian average.

 

TABLE 1

Infant Mortality (per 1,000 live births), 1992 and 2000

 

1992

2000

Malaysia

15

8

Korea, Rep.

11

8

Sri Lanka

18

15

Vietnam

37

27

Thailand

34

28

Mean

36

29

Philippines

36

31

China

38

32

Indonesia

55

41

India

79

69

Source: World Development Report.

 

 

Regarding life expectancy at birth, India has again performed quite creditably if we look at things in a time-series way. The average Indian who was born in 1992 could expect to live for 61 years. In 2000, this average had increased to 63 years. Table 2, however, gives the cross-sectional perspective and demonstrates that India lags far, far behind other Asian countries. The average child born in 2000 in Malaysia, South Korea and Sri Lanka is expected to live 16 per cent longer than in India; the average Chinese 11 per cent longer; and the average non-Indian Asian 10 per cent longer. It has everything to do with the social transformation in these countries, which have reduced mass poverty, increased nutrition and nourishment, and have thus raised the expected life of the people.

 

TABLE 2

Life Expectancy at Birth, 1992 and 2000 (in years)

 

1992

2000

Malaysia

71

73

South Korea

71

73

Sri Lanka

72

73

China

69

70

Mean

68

69

Philippines

66

69

Thailand

70

69

Vietnam

67

69

Indonesia

63

66

India

61

63

Source: World Development Report.

 

 

Let’s now look at basic education – the backbone of growth of any knowledge-based economy. Tables 3(a) and 3(b) give the data on adult male and adult female illiteracy in 1991 and 2000. In passing, it ought to be mentioned that India’s criterion for literacy is very low. All that is needed for a person to prove that s(he) is literate is to be able to write his or her name. Even so, India has certainly progressed. Illiteracy among adult males has dropped by 16 per cent in nine years; and among adult females by 14 per cent. However, as in infant mortality and life expectancy, we lie at the bottom of the heap. And, despite our much vaunted statistic of the number of graduate engineers produced per year, India has a very long way to go before she can claim to have an adult literacy level that can sustain 8 per cent GDP growth on a sustained basis for a decade or more – something that is a must if we hope to eliminate mass poverty by 2015.

 

TABLES 3 (a) and (b)

Adult Male and Female Illiteracy (%), 1991 and 2000

Male

1991

2000

Korea, Rep.

1.5

0.9

Thailand

4.4

2.9

Vietnam

5.4

4.5

Philippines

6.7

4.5

Sri Lanka

7.0

5.6

Indonesia

12.5

8.2

Mean

11.1

8.3

China

12.9

8.4

Malaysia

12.4

8.6

India

37.4

31.6

 

Female

1991

2000

Korea, Rep.

6.2

3.6

Philippines

7.7

4.9

Thailand

9.9

6.1

Vietnam

12.6

8.6

Sri Lanka

14.8

11.0

Mean

21.9

16.3

Malaysia

24.3

16.6

Indonesia

26.2

18.0

China

31.9

23.7

India

63.1

54.6

Source: World Development Report.

 

What about the second macroeconomic factor that determines competitiveness and growth – the state of our physical infrastructure? Of late, we have been regularly touting our progress in the making of national highways. This is indeed true. Financed by the Re.1 cess per litre of petrol and diesel and monitored with uncharacteristic gusto by the Prime Minister’s Office, the highways programme has been moving at a brisk pace. Contracts have been awarded for constructing every kilometre of the 5,846 km Golden Quadrilateral Highways Programme; and as I write, a quarter of this length is already four-laned, while the residual three-quarters is under implementation. In June 2002, I travelled from Delhi to Dalhousie, and can vouch for the fact that the highway was a dream right up to Jalandhar.

 

 

And, yet, does it compare with the highways development programme in Malaysia, or even China? Today, China has over 120,000 kms of either four- or six-laned highways, and the government is determined to add another 30,000 km by the time Beijing holds the Olympics in 2008. Travel out of Shanghai to points north, west and south and you will see that the quality of these cemented highways are world class – far, far ahead of the bituminised roads that we lay out in India. According to the Global Competitiveness Report 2001-02, the quality of Malaysia’s roads is 10.6 per cent better than the global average; Thailand’s is 12.8 per cent better; China’s is 6.4 per cent worse; while India’s is 23 per cent worse. Again, we are pretty close to the bottom of the pack.

 

TABLE 4 (a)

Foreign Trade in Goods and Services as a Percentage of GDP, 1991 and 2000

 

1991

2000

Malaysia

159.3

231.0

Thailand

78.5

125.9

Philippines

62.2

106.5

Vietnam

63.7

102.0

Sri Lanka

67.6

90.2

Korea, Rep.

57.7

86.5

Indonesia

49.9

74.1

China

35.5

49.1

India

18.1

30.5

Source: World Development Report.

 

TABLE 4 (b)

Average Unweighted Import Tariff (%), 2001

 

2001

Thailand

3.7

Sri Lanka

7.4

Philippines

8.3

Korea, Rep.

8.6

Indonesia

8.9

Malaysia

9.5

China

17.0

Vietnam

17.5

India

27.2

Source: World Development Report.

 

We have certainly progressed a great deal as far as telephones go. Prior to 1990, an average urban Indian without connections and ‘pulls’ had to wait at least two years – more typically three to four – before getting a fixed line connection. Today, consumers in the main metros and some other large cities get telephones virtually on demand. Unheard of even in 1995, there are over 6 million cellular phone subscribers in India today, and it is the most rapidly growing telephony sector in the country.

As we are often told, farmers in the Punjab and western Uttar Pradesh use cell phones all the time, while fishermen in Kerala use mobiles to decide which port is offering the best prices for their daily catch. Great stuff! Now consider the situation in China. Dragon land has over 95 million cell phone users, and is adding more subscribers per month than India does per year. Today, our cell phone density is about to touch 1 per cent. China’s is almost 9 per cent; Malaysia’s is at the developed country level of 60 per cent.

As far as power supply goes, the less said the better. Per capita power consumption in India is a mere 379 kwh per year, compared to 758 kwh in China and 1,352 kwh in China. And, thanks to rampant cross-subsidisation and ridiculous pricing policies of almost all state electricity boards, we still had a peak demand shortage of 12.5 per cent in 2000-01 – something that shows no signs of abating in the near future. Today, over 70 per cent of manufacturing units rely on their own generator sets – a percentage unheard of in China and throughout South-East and East Asia.

Let’s now move on to the third macroeconomic factor behind competitiveness, namely, the extent of openness of the economy – or the share of foreign trade in a country’s GDP as well as the level of import tariffs. ‘Openness’ matters for many reasons, of which two are particularly important. First, greater share of imports at globally competitive prices reduces domestic cost of production and, hence, increases competitiveness and growth. And, second, greater share of exports in GDP creates an environment that rewards international quality, best-in-class delivery and competitive, global price conscious export-oriented businesses. Here too, as Tables 4(a) and 4(b) show, India is at the bottom of the pole: her share of foreign trade in GDP is the lowest in Asia (and this includes our software exports), while her import tariff is the highest in Asia.

 

 

The fourth macroeconomic determinant of competitiveness is management of the exchequer. Fiscal prudence is critical on three grounds. First, consistently high general government deficits are unsustainable in the long run, and raise the cost of capital in the medium term to uncompetitive levels. Second, deficits prompt ‘crowding out’, which adversely affects private sector investment. And third, there is an adverse signalling effect – which says to all and sundry that the government cannot control the exchequer. As Table 5 shows, India scores very poorly on the deficit front. The data is for 2000-01. By the end of this fiscal year, the combined deficit of central and state governments will exceed 11 per cent of GDP. We are rapidly heading for an internal debt trap.

 

TABLE 5

Overall Government Deficit as a Percentage of GDP, 2000

 

Fiscal deficit/surplus

Korea

1.0

Chile

0.1

Mexico

-1.1

Thailand

-2.2

China

-2.7

Indonesia

-3.3

Philippines

-4.1

Brazil

-4.3

Vietnam

-4.8

Malaysia

-5.8

Sri Lanka

-9.4

India

-10.1

Source: World Development Report.

 

 

So, while we may have been doing quite well over the 1990s (though, even that’s not true for fiscal management after 1996), we are really way behind the curve compared to the rest of Asia that counts. That brings me to the second, and shorter, part of this article. Suppose fairy godmother loved our prime minister and granted him the wish for 8 per cent GDP growth over the next dozen years. What would that mean in terms of sectoral growth? And, even after attaining such a blitzkrieg rate of growth, where would we be compared to China?

 

 

Our growth in software and IT is quite staggering, and there is absolutely no reason why, fuelled by this growth, the services sector cannot grow at something like 8.5 per cent per year. Incidentally, this is an incredibly high long term rate of growth – for it implies that the service sector will double its real income every eight and half years. Even so, that won’t be enough to trigger an overall 8 per cent GDP growth. Given that we are a country of over a billion people, and that agriculture will not grow at a rate much more than 2 per cent per year, 8 per cent GDP growth is feasible if and only if the industrial sector grows at a constant real rate of 11 per cent per year.

After five horrible years of declining growth rates, industrial sector growth has picked up to 7 per cent over the last eight months, and the estimate is that the year will end with an average of 6.5 per cent growth. But that’s a long way from getting 11 per cent growth year on year for the next twelve years. It seems like a Herculean task – not entirely impossible but in today’s context, extremely difficult. However, if it were to happen, then the share of the industrial sector will rise from the present ridiculously low level of 26 per cent of GDP to 38 per cent in 2015.

By the way, that is no great shakes. Today, China’s and Malaysia’s share of industry is 51 per cent of GDP; Korea’s is 42 per cent; and Thailand’s is 40 per cent. In other words, even if Indian industry grows at this spectacular long term rate, our share of industrial output in GDP will still be substantially less than China’s and Malaysia’s, and lower than Thailand’s and Korea’s.

 

 

Moreover, attaining 8 per cent GDP growth over the next twelve years implies a growing gap between domestic savings and India’s investment needs – a gap that has to bridged by foreign direct and portfolio investments. Today, India attracts not much more than $6 billion of foreign direct as well as portfolio investment per year. If we were to attain 8 per cent GDP growth, the foreign investment needs will rise to $25 billion per year by 2010 and $35 billion by 2015. The numbers look staggering. But, it is worth remembering that a country called China has been raking in $45 billion of foreign investment per year over the last decade and that, in 2002, it will have got close to $60 billion.

So, in a fundamental way, how we rank vis-à-vis Asia will be determined by this nation’s appetite for rapid and sustained reforms. If the last five years is any guide, we seem to a two-steps forward, one-step back and three-steps sideways kind of economy. However, miracles do happen and, the Lord knows, we too can become reform oriented superstars.

 

 

Let me outline a few reforms that we need in the next two years to create an environment that can facilitate this 8 per cent growth. These are only some reforms, not all. Here’s a way in which readers can judge for themselves.

1. Will the Electricity Bill be passed?

2. Will we raise electricity tariffs to cover at least marginal cost?

3. Will we make the bankrupt State Electricity Boards efficient and truly autonomous?

4. Will we privatise transmission and distribution?

5. Will we succeed in attracting FDI and domestic investments first in transmission and distribution and then in generation?

6. Will we bring about sweeping changes in the Industrial Disputes Act, Factories Act and Contract Labour Act to impart greater flexibility in labour laws?

7. Will all small scale reservations be removed?

8. Will we bring down import tariff lines to only two rates, 10 per cent and 20 per cent, thus reducing our trade-weighted tariff to 12 per cent?

9. Will we properly implement a genuine VAT regime by 2003?

10. Will there be just two rates of excise duty, 8 per cent and 16 per cent?

11. Average port and customs delay for importing is 10 days. Will ports be modernised and privatised to eliminate delays?

12. Will we repeal SICA and BIFR and replace these with expeditious bankruptcy restructuring and liquidation processes?

13. Will we cut Statutory Liquidity Ratio from 25 per cent to no more than 10 per cent?

14. Will we privatise two smaller state owned banks in 2003, followed by three more in 2004, and then the rest between 2005 and 2008?

15. Will we allow up to 74 per cent FDI in all banks, including state owned banks, and remove the 10 per cent cap on voting rights?

16. Will we allow foreign partners of private insurance companies to raise ownership to 100 per cent?

17. Will we legislate the Fiscal Responsibility Bill with well-defined caps on fiscal deficit, revenue deficit and public debt?

18. Will we see sustained reforms in fiscal parameters to set the stage for full capital account convertibility by 2005?

19. Will we free telecom, insurance, banking, retailing and print media to 100 per cent FDI?

20. Will we radically step up our privatisation programme?

21. Will the road programme continue to move at the same rapid pace?

22. Will there be a similar cess financed programme for modernising the railway system?

23. Will we see radical land market reforms?

Give 2 points to each question if you think the reform will be carried out in the next two years. Give 1 if you think there’s a 50:50 chance. And otherwise. If the score is 0-20, forget about 8 per cent growth. If it is 21-35, maybe there’s some chance. If it is above 35, then we can look forward to 8 per cent.

 

 

Finally, suppose we do manage 8 per cent GDP growth right up to 2015, how will we stack up with China, the other huge country in Asia? If the dragon continues growing at 8 per cent, as most expect it will, China’s per capita GDP (in constant 1995 US dollars) will still be 133 per cent higher than India’s. Sobering thought, isn’t it? Shows how far behind we are, and how hard it will be to play catch up. I just have one question: How come our worthies in Parliament don’t think about this? Maybe that explains why we are where we are – and why we revel in time-series, instead of cross-section.

top