2006 could well be the year in which India began to believe in itself. For three years from 2003-04, we had more than 8 per cent GDP growth, on average. To many, that probably looked and felt like a flash in the pan. You only have to study the growth forecasts that were made for 2006-07 to see the lack of conviction about sustainability: the predictions began at 6 and 6.5 per cent; none crossed 7.5 per cent. Then reality intruded. Growth in the closing quarter (Jan-March) of 2005-06 crossed 9 per cent, and has been 8.9 per cent and 9.2 per cent in the first two quarters of the new financial year. The forecasts have struggled to catch up, and have finally crossed 8 per cent. Still, no one even now is willing to predict 9 per cent GDP growth for the year as whole – though that is what seems to be on the cards.

This caution among forecasters is not reflected in the 5-year perspective of the Planning Commission, which posits 9 per cent average GDP growth for 2007-12, the period of the new (11th) Plan. If the Commission is right (and, for what it is worth, its numbers have been endorsed by the National Development Council), the current year is no flash in the pan; the new momentum is here to stay. Indeed, annual growth by the end of the decade is expected to be 10 per cent. Talk about the elephant dancing.

The first time anyone in a position of responsibility talked of 10 per cent GDP growth was when Manmohan Singh mentioned it in November 2005. It seemed far-fetched then; now it is an official target set for the medium-term future. And unlike the skepticism that greeted the 8 per cent target set by Atal Behari Vajpayee for 2002-07 (the 10th 5-year Plan that is about to draw to a close), there is no questioning now of the new 9 per cent target. The country believes that this is indeed possible.

To understand the significance of this new mentality, remember that the BRICs report in 2003 by Goldman Sachs had forecast 6.1 per cent average annual growth for India in the second half of this decade – and that was considered fast enough to launch India on a take-off trajectory. India celebrated what was then seen as an upbeat forecast. Today, 6 per cent growth would be seen as a disaster story. Perspectives have changed.

 

They could change again. But, at the moment, there is almost boundless optimism. I have talked to dozens of businessmen in recent weeks, and asked them the same question: how rapidly is your business growing? The almost uniform answer is: 20-25 per cent and more. Business Standard did a check, and found (on the basis of balance-sheet data) more than a dozen industries that are now growing faster than software, which has been the poster-boy for the ‘rise of India’ story. The list is an eclectic one: cars and two-wheelers, housing and construction, capital goods and media, various consumer goods segments, among others. And it underlines one of the critical transitions that have taken place: manufacturing has become a growth engine for perhaps the first time in 40 years. This is no longer just a services sector story.

There is no lack of self-belief among ordinary consumers either, for they continue to borrow and spend (and invest in housing) at a rate that implicitly conveys confidence about the buoyancy of their incomes well into the future. Bank credit, for instance, has grown 30 per cent for the fourth year in a row, with retail credit being the fastest-growing segment. India also continues for the nth year to head the Asia list when it comes to annual pay hikes by companies; new hirings have grown and the story everywhere is about the shortage of qualified people – to the point where Reliance wants to bring in more than 1,000 Chinese workers to build its gas pipeline grid. It is not the only company that thinks hiring foreigners may be the solution to the scarcity of qualified brains.

The other manifestation of growing self-belief is the way in which Indian companies have gone overseas and acquired firms there. By one tally, the outgoing foreign investment in 2006 could equal incoming foreign investment. In Europe and Asia, the United States and Africa, Indian entrepreneurs have snapped up companies (at the rate of three or four a week), with the secure confidence that they can create additional value.

Among other things, this speaks of how over the past 15 years they have learnt first to hone their domestic operations so as to get lean and efficient, and to master both quality and productivity. This has helped them record a sustained growth rate in exports of 20 per cent, and the increasing familiarity with other markets and the operations of their competitors has now given them the confidence to assert that they understand where value creation lies, and that they can do better than the others, on their turf. An important aspect of this new phase is the fact that it is not just the big business houses that are doing the acquiring; a range of moderate-sized businesses are doing it too – in a wide range of industries.

 

Back at home, the economy’s growth record has now gone well beyond the scores of the only previous period when India achieved rapid economic growth for a sustained period of time: 7.5 per cent annually in the three years of 1994-97. But some of the concerns of that period are also beginning to surface now: runaway bank credit, a sharp spurt in money supply, a rising inflation graph – in short, the signs of some overheating of the economy. As if to endorse that conclusion, the asset markets are bubbling over too. The stock market now has a price-earning multiple of 22 for the key Sensex stocks (it was only 17 a year ago – and that was considered rich); and real estate prices have doubled in the past couple of years in most towns and cities. The question has to be asked: is a bubble building up, and does it need to be pricked?

 

The answer in the mid-1990s was a definitive yes – and the sharp credit squeeze that resulted led to a deep and long-lasting recession, aided by the Asian crisis and a global slowdown, punctuated briefly by the Internet boom. Wiser from that experience, both the government and the Reserve Bank of India are treading gingerly this time. RBI has begun raising interest rates in slow and modest instalments so as to raise the cost of money and slow down lending, but it has done so with caution, so as to not upset the markets. And in late November it also began tightening money supply – a more assertive signal that, in its view, the economy is showing signs of over-heating and that the runaway growth in credit has to be arrested.

The finance minister may not be pleased. All year, P. Chidambaram has tried to make sure that the banks continue to lend at reasonable rates of interest – he certainly does not want the growth story to end by raising the cost of money (he also happens to be one of the beneficiaries of rapid economic growth, because tax revenues have beaten all budget forecasts and are racing ahead). But the monetary authority is in charge of ensuring macro-economic stability, and the inflation rate (as measured by wholesale prices) has been edging close to the upper end of RBI’s preferred band of 5-5.5 per cent. It was just 4.2 per cent at the start of the financial year, and inflation as measured by consumer prices has already crossed 6.5 per cent.

Some would blame the government for not having curbed its deficit faster, and therefore for being responsible for some avoidable increase in money supply. That may or may not be a justified viewpoint, but the fact is that the central deficit will drop this year to 3.8 per cent of GDP, or less. Add state government deficits and the total national fiscal deficit is in the region of 7.5 per cent of GDP. That is a vast improvement on the 11.5 per cent of the early 1990s, but not good enough when you consider the fact that this has been boom time, and also because a Pay Commission report will be in two years from now. Implementing its recommendations could mean increasing expenditure on pay and pensions by about 1.5 per cent of GDP. That could take the deficit back up to among the highest levels in the world. In an economy that boasts of strong growth, that is not something to be proud of.

 

Meanwhile, though RBI is right to be cautious, the finance minister is also right in arguing that much of the inflation is not caused by excess demand (which greater fiscal correction and a dear money policy would rein in) but by supply shortages or by global forces. Oil prices have been high, metals prices have been at record levels because of global factors, and agricultural commodities have seen their prices climb when harvests have failed; none of this can be resolved by raising interest rates. But it is also true that asset prices have risen to levels that seem unreal in many cases, and India’s inflation rate has been inching further away from global trends, so it would be foolish for RBI to not take some precautionary steps.

The question is whether this will combine with the slowdown in the US economy, along with the sudden and sharp drop in the dollar’s value against most currencies, including to some extent vis-a-vis the rupee, to curtail some of the growth momentum – and if so, by how much. Certainly, recent monthly data suggest that exports may have begun to slow down a touch in the wake of unfavourable currency movements. But the mood among most economic players just now is so upbeat that no one can think of GDP growth dropping below 8 per cent. That is how much self-belief has crept into the bloodstream. To be sure, the business cycle has not been vanquished, and the wheel could (indeed, will) turn yet again, but for now the general conviction is that India is, and will remain, the world’s second fastest growing economy.

 

Several positive spin-offs will result. The most obvious, when you combine it with the initial findings of the national health and family survey which suggest that population growth has dropped faster than might have been suspected till now, is that income per head could double in the next decade – the kind of change last seen in the tigers of East Asia. That will translate into an explosion of demand for all manner of goods and services because of the dynamics of the different numbers at play.

The consuming classes today constitute no more than 30 per cent of the total population of about 1100 million people. If that 30 per cent were to become 50 per cent in a decade’s time, and the total population were to grow from 1100 to something nearing 1250 million, with consumption per head having doubled, then the total spending power of the consuming classes (at today’s prices) would have more than trebled. This power of multiplication translates into annual growth in key markets of up to 15 per cent.

And because of the shape of the Indian income pyramid, the number of people in the higher income brackets will grow even faster – so that demand for the goods and services that these categories consume could grow by 20 per cent and more annually. The evidence of this having begun to happen is already available in company balance sheets that have been seeing more than 20 per cent sales growth annually for the past three years, with expectations from chief executives that growth will, if anything, accelerate.

 

At the same time, the improved levels of productivity in Indian manufacturing have meant that Indian companies are able to win markets overseas – and a sustained 20 per cent growth rate in exports does not seem unreasonable, provided the global economy does not go into a tailspin. In other words, export demand will add to the boom in domestic demand.

Some of the upswing is certainly cyclical, in that we are into the investment phase of the business cycle when capacity is trying to catch up with and move ahead of demand. While the cycle can turn, it is also true that much of the momentum is coming from structural factors because the Indian economy is now morphing quite rapidly. It is this that now underpins the new confidence about being able to sustain rapid growth well into the future.

The other point to note is that the gains in productivity that are evident in industry have brought price benefits to consumers in many sectors. Manufacturing products have seen the lowest price rise among all sectors, for quite a few years now, and that trend is likely to continue even as incomes rise faster than before. If there were comparable gains in productivity on the farms, we would not be seeing the steady drop in growth rates of farm output, and the agrarian crisis and despair that have driven so many farmers to suicide in recent years. The parallel tragedy is that a government that came into office on the promise of working for the aam aadmi (the common man) has not been able to make a difference.

 

For doubters who think that reforms are not always the answer, take a look at how even the country’s decrepit physical infrastructure is beginning to get better – confirming the theory that investment in infrastructure follows rapid growth (as it did in China), not precede it. Figures compiled from the Union Budget suggest that the level of infrastructure investment funded out of the Budget has doubled in just two years, from about 2 per cent of GDP to more than 4 per cent. On top of this, there is the evidence of more private money being invested in infrastructure – the telecom sector, oil and gas exploration and development, the gas grid, the transport infrastructure (airports, ports, aircraft, and of course roads), even power projects – and soon, the new special economic zones.

In India’s big cities, we have new flyovers, mass transport systems of various kinds, and a rapid expansion of housing and commercial space. By one estimate, Pune is expanding outward at the astonishing rate of 2.5 km every year, and the same can probably be said of Gurgaon, neighbouring Delhi, which is spreading out toward the nearby developments of Sohna and Manesar – with real estate prices soaring in both places as a result!

Some of those who refused to acknowledge that India could be shining, are now jumping on the growth bandwagon. The Left Front government in West Bengal is fighting a determined battle to bring the state back on to the country’s industrial map by bagging Tata Motors’ new car project – and refusing to accept that the interests of those whose land is being acquired to house the car plant must be given precedence. This is significant because the foundation of Left politics – and for the rhetoric about ‘inclusive growth’ – is provided by the losers in the system (the poor and the marginalized), while the thrust of a market system is to back the winners.

It may or may not be true that all those whose land is being acquired are losers (for while it is true that their and their sharecroppers’ lives will be disrupted, the farmers are getting a generous price in exchange for the land); but there can be no doubt that the state government sees that it can count itself among the winners only if it gets the car project, creates jobs and earns tax revenue out of the new activity. In Kerala, meanwhile, another Left government has agreed to take a loan from the Asian Development Bank to improve the state’s infrastructure, and objects to the Centre blocking the Chinese from investing in a port project in the state.

 

What is worth noting here and in other spheres is the change of mindset. The laws governing the labour market have not changed, but the competitive framework of markets has forced the trade unions to realize that employee welfare is tied to employer prosperity, and that most of the new jobs are coming from the private sector, not the government or public sector. Meanwhile, the courts have started overturning some of the more outrageous verdicts of the 1970s Leftist phase – an employee can be dismissed for repeatedly sleeping on the job, for instance!

So while the government has done nothing in the area of labour reform, the market has adjusted. Employees and trade unions have become more reasonable in their demands and attitudes, and at least some of the employers see the virtue of dealing from a position of fairness. The result is that so many companies have achieved voluntary redundancies and productivity improvements on such a scale that market reality has clearly prevailed over the formal legal system.

 

In other words, on the two principal issues which provoked such long-standing frustration – the quality of infrastructure and the rules in the labour market – there is movement and a change for the better. This is not happening as part of a textbook reform process (the road programme has certainly suffered a loss of momentum, to take one instance, and the minister for mines has not issued a private mining licence for about two years), but in some unplanned way there has been forward movement, and it has facilitated the growth process. Port charges have dropped, for instance. And the average speed of truck movement on the new highways that have been built is 40 per cent faster than before. In places where power distribution has been privatized, there has been little or no revision of power tariffs for consumers. Phone charges are among the cheapest in the world, and air fares on some of the new low-cost carriers are trying to match that. In sector after sector, the consumer does feel now that he is king and it is the producers who are scrambling for his favours.

The issues that India will have to confront now are three-fold. One has to do with the varying problems of growth rather than the lack of it: supply scarcities rather than the absence of demand that India has long dealt with – and the biggest scarcities will be created by the failure to reform the health and education systems. Another off-shoot of growth will be environmental damage – air and water pollution, the harm done to local ecologies by mining and industrial activity, the growing urgency of global warming now that evidence is there of receding Himalayan glaciers – threatening all the rivers of northern India. And a third is obviously the energy question and India’s external energy dependence as demand zooms. There is a fourth challenge that will result from growth – the challenge of urbanism. India’s towns and cities are becoming urban sprawls on a scale that the developed world has not seen, and the challenges of running such metros at the income levels that India has are going to be huge, if not unpre-cedented.

 

The second set of challenges centres on the inclusiveness question. At one level, it can be argued that the numbers below the poverty line are steadily dropping, and if growth accelerates, some of the trickle-down effect will also help tackle poverty faster. The problem with that cheerful assumption is that it ignores the growing crisis in the government sector, and the government’s increasing inability to deliver basic services to its citizens – which are fundamental to the abolition of poverty. Study, for instance, how the AIDS menace has been allowed to grow before our eyes, to a scale that could begin to threaten economic momentum five or 10 years from now.

Nor indeed can the challenges of bringing Muslims, Dalits and tribals (taken together, more than a third of the population) into the national mainstream be addressed by a non-functioning government system. It is foolhardy to think that private education and medical care systems can take care of the needs of the majority; so there is no private sector substitute available. Nor is public-private partnership the panacea in all situations. The problem has to be addressed at its core, and that is to reform the government and improve its efficacy levels when it comes to the delivery of services it is best placed to do.

The difficulty is that there is no one around and willing to bell the cat. Sonia Gandhi is keen to address the inclusiveness issue, and the new theme this past year has been reservations for all and sundry. But this shows continued poverty of thought (reservations have done little for Dalits and tribals after more than half a century), a lack of understanding of the real reasons for the backwardness of communities (think education), and the temptation to go for non-solutions (or slogans) because they will yield political dividends.

 

The third set of challenges lies squarely in the field of politics. A Cabinet minister has been convicted or murder; another Member of Parliament, after being found guilty of culpable homicide, is being touted as a hero by a major national party. The railway minister is berated in Parliament House’s Central Hall by an MP from his own party, because railway ticket checkers had caught some culprits who happened to be travelling ticketless and were party colleagues. On display here is a degree of disregard for any law that is unnerving – and the problem is certainly more serious than the 55 or 60 administrative districts where the Maoists have greater say than the district administration.

The bald truth is becoming plainer by the day: as the economy gets better, India’s politics gets worse. If politics and governments are not reformed before too long, the fruits of economic development will not reach the poor, the economy will not realize its potential, and the success achieved after decades of sustained endeavour will be overshadowed by political and governance failures.