Event Report: The New India
The Atlantic Initiative hosted a discussion on May 22, 2007 on India as an emerging economic power, part of the continuing Atlantic Lunch Club event series in Berlin. German Ambassador Heimo Richter, who spent a five-year term in India from 2000 to 2005, and Maria Lanzeni, Economist and Head of Emerging Markets at Deutsche Bank Research, talked about strategies for Western engagement that will yield benefits from the growing market and vast labor pool in India that many analysts have been praising.
According to a recent study by Deutsche Bank Research, India is the fastest growing economy worldwide and is expected to become the third largest economic power behind the US and China by 2020, taking into account purchasing power parity. India is expected to develop from a global service provider to a regional economic superpower.
As Lanzeni pointed out, India has consolidated its economic growth within the last few years. A number of factors have aided to this stable ascension—a rather untypical economic development for emerging markets when compared to the Chinese "boom and bust" example. These factors include the increasing openness of India’s economy to the global market, economic reforms since the beginning of the 1990s and a young and talented labor force.
India has become an attractive recipient of foreign direct investment. Though still on relatively low levels in terms of GDP (0.8%), FDI has risen by 40% in the last two years as a result of successfully attracting investors. Domestic savings have also risen from 23% to 30% in the last 15 years and are expected to increase to 40% by 2020. Reserves are urgently needed for reinvestment in the country’s infrastructure. India lacks a functional transport system, and if its harbors are not modernized they will fail to keep pace with the country’s economic ambitions.
In order to maintain its stable growth, the country seeks to diversify its economic portfolio. Although India is still the world’s "back office" (IT services are the number one export and make up the lion’s share of profitable revenue-creating economic activities, worth $40 billion in 2006), other sectors like food-processing, biotechnology and the automotive subcontractor industry are beginning to play an important role as well.
Richter, nevertheless, views the development of the Indian economy with some caution. India is struggling to tackle an array of internal and external challenges. To what extent and how fast India will grow is closely linked to the task of overcoming the challenges the country is facing. The neighboring countries India and Pakistan were at the brink of war in 2001. Tensions have cooled since then, but the conflict remains at the surface. Former ambassador Richter predicted that as long as Pakistan is governed by a fairly rational political elite, saber-rattling is not likely to reoccur between the two nuclear powers.
India remains in economic competition with China, but has no ambition to become a counterweight, however much the US would like to assign India this role. Analysts do predict that India will become a regional economic powerhouse. Whereas China will increasingly have to cope with an aging population, India’s large and youthful population will help to sustain growth. Figures on domestic savings and foreign investment, coupled with the fiscal deficit—the Achilles’ heel of Indian politics, as Ambassador Richter stated—are the reason why India continues to lag behind in comparison.
According to Richter, one of the biggest internal challenges is the fight against poverty. Despite a booming economy, 28% of the population must live on less than one dollar a day. Regional income disparities could lead to massive migration and political instability. Although the poverty rate has been decreasing continuously for more than 20 years, a lot will have to be done to lift people out of food shortages and income insecurity. According to Lanzeni much will rely on the buildup of the manufacturing sector, which could help provide more jobs. Currently, agriculture still accounts for 60% of all economic activities, though it provides only 20% of GDP. Furthermore, a high inflation and a booming real estate and stock market bear the risk of a bubble that could eventually endanger solid and stable growth.
Although India has on a vast labor pool, some experts predict that only 25% of educated engineers will be able to work for companies on an international level. Ironically, India will have to face the problem of labor demand in the near future. Therefore, India’s demography can be seen as a chance as well as a challenge. While seen as a factor for sustaining economic development on the one side, once the younger generation pours into the labor market, India will have to cope with mass unemployment (currently at around 9%) on the other side. So far even booming sectors like IT-Services have only contributed to the creation of 1.3% of new jobs.
Regardless of the challenges the country is facing, Richter urged engagement with India and support of its fight against poverty, corruption and red tape. In contrast to China, India is a politically stable country with deep roots in democracy and rule of law. Europe should invest and support the emergence of India and in order to benefit from its success in the long run.
Niklas Keller
