Happy birthday: life begins at 50

Can elephants become tigers? The animal in the question is, of course, India, and the reason for asking it now is, of course, its 50th anniversary. The popular judgement is that the country's first half century has been a democratic success but an economic disappointment. Favourable political but unfavourable economic comparisons are made not just with Pakistan, but more importantly with that other Asian giant, China. If China can achieve economic take-off, why can't India?

But 20 years ago, the economic comparison would have seemed more evenly balanced. India was bumbling on, hampered by bureaucracy, with living standards only inching upwards. But at least it had not experienced the mass starvation that had swept China twice as a result of economic mismanagement associated with the "great leap forward" and the "cultural revolution".

Then China changed gear. The economic reforms which started in 1979 induced a long period of self-sustaining growth which continues to this day. Instead of growth being 3 or 4 per cent in a good year and negative in a bad, the Chinese economy has been expanding at 8 to 10 per cent compound, year after year. On present projections it will overtake the US as the world's largest economy towards the end of the first decade of the next century, or early in the second. That such a change could result from a shift in economic policy obviously raises the possibility that India might do the same.

In fact there has been a significant improvement in Indian economic performance in the past few years. The Byzantine regulations that shackled Indian business have been relaxed to some extent, and the economy has been chalking up very respectable growth - 7.1 per cent in 1995, 6.5 in 1996 and a forecast 7 per cent this year. Sure, China's growth has been running at close to 10 per cent over this period, but 7 per cent is pretty much the average for South-east Asia, the world's most dynamic growth region.

In any case, India is already an economic giant, particularly if the calculations for the size of an economy are done at purchasing power parity rather than current exchange rates. An OECD study two years ago looked at the size of the main world economies in 1820 and 1992, taking purchasing power parity as the base, and I have updated this data with some World Bank figures in the graph. As you can see on the right-hand chart, India is already a larger economy than France, and it could well overtake Germany to become the world's fourth-largest economy before China overhauls the US. Indeed with Japan growing at 1 to 2 per cent, it is conceivable that it could become the world's third- largest economy by 2020.

This should not strike us as so odd. Before the Industrial Revolution enabled countries to make a sudden step-change in their growth rates, the output per head of European countries was not that much higher than that of India and China. In the Middle Ages it might well have been lower. Even by 1820, when industrialisation was well established in Britain, GDP per head here was only two or three times higher than that of India, not more than 10 times as it is today.

The left-hand chart shows the position of the world economies in 1820, when China was by far the largest and India was the second. So in a way, the ascent of the large-population countries to the top of the league would be nothing new. Even if the present developed countries retain some advantage over India and China and produce two or three times their output per head, the sheer size of India's and China's populations ought to ensure they will resume positions at the top of the table.

Still, "ought to" is not the same as "will". The experience of Thailand, Indonesia and Malaysia in the past few weeks has given a useful reminder that things in these so-called emerging economies can go wrong - that economic development is rarely a straight-line phenomenon. A number of things need to come right if India is to sustain a 7 per cent growth rate, let alone achieve an even faster one.

Most obviously, the still-modest economic liberalisation needs to be sustained. While the message has got home that over-regulation will lead to stagnation, this will not necessarily prevent further bouts of political interference in the economy. In any case, liberalisation in India has a long way to go, for the signals of the market are frequently overridden. (Think of the hostility to the market which exists even here and multiply that opposition many-fold for India.)

Even if market reforms continue, there is a great backlog of infrastructural investment. This damages the economy. For example Bangalore, the software capital of India, still suffers frequent power blackouts as the public utility struggles to keep up with rising demand for electricity. Continuous power is vital for computers so everyone working on them must have back- up generators, which are much less efficient (and more polluting) than the public supply.

Other signs of growing pains include the office rents in the business district of Bombay, which are now the highest in the world. As growth continues, the strains on the country's infrastructure will grow too. The rise in living standards for most of its people will inevitably be curtailed by this.

Perhaps the biggest block to a sustained rise in living standards, though, is India's size. The country will probably overtake China in population within one generation. It needs 2 to 3 per cent growth just to maintain existing living standards, particularly since the scale of resources needed to feed a much larger population will mop up a lot of the fruits of growth. Wealth will continue to be very unevenly spread, with a small proportion of highly skilled people who can only be retained in India if they are paid something close to world salaries, a large (but not very well-off) middle class, and at least one-third of the population staying below the poverty line.

India's size means it cannot follow the same growth model as the "tigers" of Malaysia, Thailand, Taiwan and Singapore, with their relatively small populations. And India cannot rely on exporting a relatively narrow range of consumer products to spur growth: the rest of the world will not buy enough. The Indian growth model has therefore to be much more like that of China, relying on the internal market. So it needs to push the fruits of its own growth down to the middle class in order to sustain demand.

My own guess is that the next 10 years will be somewhat disappointing. Growth will be good by the standards of the 1960s and 1970s, but there will be too many hiccups for India to make more than a modest dent in its problems of poverty, health care, education and so on. Politicians will continue to make mistakes in economic management.

Nevertheless, India's pool of highly skilled people will underpin growth and at some stage early next century - perhaps the second decade - its economic performance will achieve a step change for the better. Even a slightly disappointing performance will not stop India becoming a much bigger player in the world economy. Its second half-century will, economically, be more impressive than its first.

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