Hamish McRae: Watch out as India sprints ahead

The test of the new government will be if it can get the benefits of growth to the poor

On present trends India will pass the UK in the size of its economy in about 10 years' time. The world's largest democracy may even do that a bit earlier if the elections just concluded enable further improvements in the way it is governed – as the financial markets now signal. And of course the faster the Indian economy grows, the greater the impact on the rest of us. It won't just be Land Rover and Jaguar that will be rescued by an Indian company; the direct influence of its economic power will go far beyond the odd takeover.

The scale of the Congress Party victory in the election did more than just cheer up the share markets. It raised the hope within India and abroad that the Indian economy might step up the pace from being a good economic performer to being, well, something markedly better. For those of us who know and respect India, this is a thrilling possibility.

To see the significance of the election you have to go back to 1991, when the present prime minister, Manmohan Singh, became finance minister. He was faced with a catastrophe. The country had a fiscal deficit of 8.5 per cent of GDP ( almost as large as the UK will run this year) and the central bank had only a billion dollars of reserves – enough to cover only two weeks' imports. In the following years he turned the economy round, partly by cutting public spending but also by tax and regulatory reforms.

The reforms were, by and large, accepted when the rival BJP subsequently took power, and there has been some further consolidation since Manmohan Singh, now as prime minister, returned to office as head of what was a rather weak coalition in 2004.

It would be wrong to portray the BJP as anti-reforms, for Indian politics are much more complicated than that. But there is a general perception, and I think this is right, that a Congress-led government, and particularly one led by Manmohan Singh, will be more likely to take the next steps the country needs both to secure its growth path and do a rather better job at spreading the wealth down through to the people currently left behind.

So what needs to be done? It would be presumptuous to set out any set of past prescriptions to the country's vast array of problems and opportunities, but there are some broad things that can sensibly be said.

One is that governance at every level remains a problem. It would be naïve to think of the prime issue being corruption but it is partly that.

Let me try and explain. Last year in Bangalore I had one of those eureka moments, when I suddenly understood why corruption was so much more of a barrier to development in India than in China. I was talking with a group of prominent residents from the business and professional community about the delays and other difficulties in commissioning the new airport. One of our group had worked in both countries and explained why he found it so much easier to get big infrastructural projects built in China.

In China you had to get the support of the local municipality and that inevitably meant that money in some form or other changed hands. But then you had a deal. In India the problem was that no deal was ever final; you thought you had agreement but then some other blockage emerged and you had to square someone else. Quite aside from any moral issues – for that was a whole separate argument – the practical effect was that everything took much longer than it needed to – and much longer than in China.

You can defend the Indian system by noting that if a project has democratic consent, that is a sounder basis for operation than the Chinese command and control system. But democracy can be flawed, as the failure of Tata to commission its new Nano plant near Kolkata has shown.

If poor governance inhibits the building of infrastructure, it also impairs the provision of education. At the top end, Indian education is excellent and there is huge demand at every level. One of the most thrilling experiences I have had was seeing nursery schools in Mumbai, in Dharavi, the place now made famous by Slumdog Millionaire. Beautifully turned-out children eager to learn and learn in English, for that was a path to a better future.

But there are huge gaps at every level, from nursery education to poor quality education at second-tier universities. It is a huge task and a start has been made, but India does lag behind China in the quality of its education system.

Other reforms that the new government is keen to pursue include further financial liberalisation and increased trade with neighbours. Indian banks have managed to avoid most of the tank-traps that their counterparts in the developed world have fallen into and deserve a round of applause for that. But the banking sector remains small and underdeveloped. Loans as a percentage of GDP are half that of China. The needs for finance, particularly for infrastructure, are massive and it has been calculated that freeing up the financial sector could add more than 1 percentage point to annual growth in GDP.

But the ultimate test of this new government will be whether it can get the benefits of growth through to the poor. As Manmohan Singh puts it: "India happens to be a rich country inhabited by very poor people." The ultimate purpose of all growth must surely be to improve people's living standards and life opportunities. So this growth must come through in a sustainable manner, sustainable in environmental as well as other terms, for it is the poor that suffer most from environmental degradation.

It may be that one of the reasons why Congress has done well in these elections is that the poor, particularly the rural poor, recognise that the new government will seek to make sure that more of the fruits of growth are pushed down towards them.

In the meantime, for the rest of the world, the big point is that the onward march of what will become the world's third largest economy is secure for a while yet.

h.mcrae@independent.co.uk