Hamish McRae: The rise of Bollywood and the lessons the Chancellor can apply to our public sector

The Indian economy will pass France and the UK in size in about five years' time
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Gordon Brown may have gone to India to study the economy but all they want to ask him about is the mistreatment of a Bollywood star on Celebrity Big Brother. That is unsurprising, for Shilpa Shetty is huge in India, relatively much bigger on the celeb stakes than any of the other inmates and perhaps rather better known in India than Mr Brown is in the UK.

It seems our Chancellor is not a close follower of the programme, and not many of us will hold that against him. The row may have taken the shine off his tour but at least they are not burning effigies of him. He should use the whole episode - as a professed supporter of the British film industry - to study one extremely successful part of the Indian software industry, Bollywood.

Is Bollywood really software? Well, yes, in the sense that it produces content that is viewed on hardware. It pre-dates the communications revolution but arguably is adapting better to it than its elder sibling, Hollywood. What matters is content and Bollywood has been very quick to adapt content to fit demand. As a result, it is growing much faster than the Indian economy as a whole, about 13 per cent a year against 8 per cent growth. It is also extremely efficient, with an average production cost of a film of $1.5m against $50m in Hollywood. And it is big, typically producing 1,000 films a year vis-à-vis Hollywood's 750.

My point is that if you want to understand what India is good at, you should look not just at the conventional software industry, centred on Bangalore. India's hi-tech industry is indeed very successful but it remains quite small as an overall part of the economy. A quarter of the country's output is still agriculture and it employs more than 65 per cent of the workforce; the largest export sector is textiles, as you might expect, but the second largest is gems and jewellery. Earnings from software are probably the fastest-growing sector but in overall terms they are still quite small.

If India is to continue to grow at between 8 and 10 per cent a year, the balance of its economy will change and it cannot grow by relying on what, in the West, are seen as its typical growth areas. It won't be just call centres and computer software. The communications industries, including Bollywood, will have a role too but actually the big drive will come from conventional industry.

This leads to the really big debate in India. It has, over the past seven years, moved from a growth rate of 4 to 5 per cent to one of more than 8 per cent (see first graph). There is a short-term question as to whether there will be some fall-off, perhaps to 7.5 per cent next year, but there is the long-term question as to whether it can move beyond 8 per cent, to double-digit growth some time in the future.

The case for that was made yesterday, as it happens, by the minister of external affairs, Shri Pranab Mukherjee. In a speech to the chambers of commerce, he points out that people used to regard India as being unable to rise beyond the so-called "Hindu rate of growth". Now that idea was dead.

"India's economy registered an average rate of growth exceeding 8 per cent during the last three years, " he said. "In the first six months of the current fiscal year, the GDP growth was 9.1 per cent, which is a record in itself. India's industrial production grew at 10.3 per cent and manufacturing sector at 11.2 per cent during the current year [up to October], which is the fastest pace in a decade. Exports are growing at three times the growth of GDP at around 25 per cent during the last four years."

Given that achievement, he continued: "It is perfectly logical to aspire for a double-digit growth in the coming years. It is an achievable target and realisable goal."

If that proves right then the world really will have another China on its books. On my quick calculation, the Indian economy will pass France and the UK in size in about five years' time. But almost more important than the growth itself is India's changing perception of itself. It has gone from being a recipient of aid to being, for many countries, a donor. Last year was the first when it invested more abroad in foreign direct investment than it received. I suppose you could cite the Tata bid for Corus as an example of this new confidence and new financial muscle.

What might check this? General financial conditions are reasonably benign but only reasonably so, for there are some signs of overheating. That is why growth is expected to slow this year and next. As you can see in the other graphs, consumer prices are trending upwards and the current account has moved into deficit. As should happen given the still-strong growth, the public finances are projected to carry on improving (final graph) and that is encouraging. But there are signs of strain.

The big question, then, is whether the economy can shrug off these strains and achieve an even higher rate. There are two really big roadblocks. One is infrastructure; the other trained people.

On infrastructure India is making a big push at the moment, particularly with road-building. But its airports are still a problem, though its airlines are improving rapidly. There are environmental concerns too. Yes, it needs to build the roads and more and better accommodation. But building uses energy and water, both of which are tight.

As far as trained people are concerned, India is indeed making a great effort but there are problems of quality: people may on paper have the credentials to do a job but don't have the breadth of experience or the "soft" skills needed. At the top the quality is wonderful but there is a long tail and you can admire the effort made to improve education while still arguing that there is a long way to go.

That last point was acknowledged by the minister. Shri Mukherjee said: "While some of our higher educational institutions have become world class, much needs to be done to improve the school education."

I think the main thing going for India here is the breadth of the economic base. China is very dependent on foreign investment to drive its export business. India is not. China has not developed much of a service export trade. India has. Bollywood itself has become a big exporter, mostly it is true to the Indian communities overseas. Now it is exporting the talents of its stars. Somehow, I think Ms Shetty is going to come rather well out of her disagreeable experiences on the Big Brother set. All power to her if she does break out of Bollywood to the global market for talent. As for Mr Brown, I hope he learns from India that you can have a lean operation and still deliver high quality output - and then applies what he has learnt to the public sector here.