Ambassador Meera Shankar discusses Indian economy

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India’s real GDP has grown significantly since 2004-05, and the average rate of growth since then has been over 8 percent annually. Though GDP growth decreased somewhat during the recent economic downtown, India still posted large increases.
Source: reserve bank of india

Indian Ambassador to the United States Meera Shankar visited MIT Wednesday to speak about the Indian government’s goal of maintaining a high economic growth rate. Shankar’s talk came as part of the B&K Securities MIT India Forum, a series of lectures by prominent Indians.

As India grapples with concerns over infrastructure and economic equity, its government plans to drive growth through the services, manufacturing, and agricultural sectors.

Though India has seen great progress in the services industry, the nation’s economy is too large to rest on one sector alone. Shankar said manufacturing holds an increasingly important role in India’s future, and the country attracts companies to both produce and sell their goods in India. The government is also encouraging agricultural advancements to revitalize that industry.

As India’s economy expands, officials must ensure growth is sustainable and fair. Despite a large increase in the size of the middle class, millions of the democracy’s citizens still live in poverty and are marginalized members of society. At the same time, India’s infrastructure has fallen behind the level necessary for the country’s recent developments. According to Shankar, India is now employing selective government intervention to increase private investment in infrastructure and to ensure that economic growth reaches as much of the country as possible.

Before the 1990s, India’s economy focused on equity over growth. In 1991, India began liberalizing its economy by decreasing government control over many domestic industries and increasing its openness to the rest of the world. Combined, these actions sought to increase competitiveness and encourage innovation.

Shankar said that the changes have had a positive impact, greatly increasing the nation’s growth rate. The pre-1990s average growth rate of approximately 3 percent per year was infamously termed the “Hindu rate of growth”; since 1997, the country’s growth rate has average 7 percent annually. Even during the recent recession, India continued to post high growth rates. “India is one of the economies that has emerged relatively unscathed from the crisis,” Shankar said.

A three-pronged approach

Shankar said India’s current economic reliance on services, manufacturing, and agriculture can be thought of as “building the economy on three legs, with each leg playing its role in balancing the Indian economy.”

India is perhaps best known internationally for its service industry. The information technology sector, in particular, was one of the fastest-growing segments of India’s economy after liberalization in the ’90s. Shankar said industries like IT took off so quickly because they barely rely on infrastructure, instead drawing their expansion potential from human capital. However, Shankar emphasized that the country cannot skip over the industrialization process characteristic of developing nations and jump straight to a service-based economy. She hopes the nation can renew its focus on real technological advances over wage arbitrage.

India’s manufacturing sector has changed significantly in the past two decades. “When we opened up the economy [in the 1990s], we found that a lot of our companies really went under,” Shankar said. She said this was because of the protectionism from which those companies had benefited in the more closed economy. “Some industrialists complained, saying ‘you are forcing us to run before we have learned to walk,’” Shankar explained.

Since this shaky start, India has emerged as a prime market for a number of industries. The price-sensitive nature of India’s domestic market encourages companies to produce inexpensively if they intend to sell to thrifty Indian consumers. Pharmaceuticals, chemicals, and small, fuel-efficient cars are the primary industries that are taking advantage of India’s manufacturing climate.

In the realm of agriculture, Shankar said that India’s focus is on fostering the next increase in productivity. She said that the industry could be vastly improved by increasing the competency of the food processing system; currently, vast quantities of produce are wasted because they aren’t processed correctly and efficiently. Agriculture as a share of GDP is decreasing, but the government still intends to encourage innovation in the sector.

Emerging challenges

In order to foster long-lasting prosperity, India must ensure its infrastructure is strong enough to serve a vibrant, growing economy while also ensuring all members of society are able to participate in economic growth, said the ambassador. Shankar said that India’s infrastructure is inadequate because it has not kept pace with economic development. Infrastructure will require almost a trillion dollars of investment over the next decade, and the government is devising incentives to draw as much of this money from the private sector as possible, she added.

Success is already visible in the telecommunications industry. Shankar said citizens have many service providers to choose from and that the rates and quality of service are some of the best in the world. “This connectivity is making a huge difference to people at all levels of the economy,” she added.

Airports and seaports are also seeing progress, with new developments and renovations to existing facilities funded primarily by public-private partnerships. Though Shankar stated there is still considerable work to complete, she remains optimistic that this type of development “will provide an engine of growth in the Indian economy for several years to come.”

The electric power industry remains a source of concern. Though the private sector has recently begun investing in power, previous efforts to procure foreign direct investment in the industry were largely unsuccessful, and power shortfalls are not uncommon.

One method of encouraging private infrastructure development is viability gap funding, which uses government subsidies to make profitable ventures that would otherwise be uninviting to private investors. Shankar said that viability gap funding is awarded on a case-by-case basis and covers up to 25 percent of the cost of a project.

Infrastructure limitations also contribute to India’s second major challenge — ensuring that all economic players are afforded equal opportunity to actively contribute to the economy. Rural areas are often cut off from the economic developments of major cities, so extra measures must be put in place to ensure the vitality of these communities. Class divisions also impede full economic progress, and the government is searching for a balance between liberalization and equity. All of these objectives must be undertaken democratically, with the goal of satisfying all stakeholders, said Shankar.

One of the government’s major goals for economic equity is providing a social safety net in impoverished rural areas. The Indian government has established the National Rural Employment Guarantee Scheme, which guarantees 100 days of work each fiscal year to one person per family below the poverty line. These workers are often hired for infrastructure projects, effectively solving two problems with one solution. Shankar said the government also helped minimize the effects of poor harvests after the particularly harsh 2009 monsoon season.

India has also provided low-cost healthcare — like major surgery — to some of its poorer citizens, according to Shankar, but the government is looking at making this project more scalable and fiscally sustainable.

Providing adequate, standardized education to such a large nation has also been a challenge. India is currently working on expanding and improving the Indian Institutes of Technology, which consist of fifteen elite technical universities. The government plans to build a “knowledge network” of colleges and libraries to consolidate information. The hope is to one day extend this network of resources to the village level, where primary education can benefit from having proven educational standards.

All of these transformations must take place “within the framework of a very robust democracy,” Shankar said. Affirmative action has played a large role in ensuring that all members of Indian society are adequately represented. Though India’s Constitution formally abolished the caste system over 50 years ago, prejudice and poverty remain significant barriers for a large portion of the population. About one fifth of the seats in Parliament are reserved for those who would have been considered “untouchables” — the people on the lowest rungs of the caste system. Shankar said that this measure has lead to a much broader political base for the democracy.

Indian states are also being granted greater economic decision-making powers. Though this change has lead to competition among states, the hope is that a “demonstration effect” will allow struggling states to learn from their more successful neighbors. In the future, decentralization can be extended even more to reach the village and municipality level.

Looking toward the future

The eyes of the world are trained on India as the country continues its economic expansion. Shankar said that since the traditional view of development is that poor, diverse countries like India can’t combine democracy and development, the nation’s potential success could have a large impact on the paths other developing nations choose for industrialization. India’s current situation is already raising important concerns about how growth in developing countries should progress.

During the question-and-answer session following Shankar’s talk, many audience members expressed reservations about the side effects of economic growth. They raised points about human rights abuses, corporate responsibility, and the government’s response to the 1984 Bhopal industrial disaster.

Shankar agreed that growth by itself was insufficient to build a healthy nation. She said India is fighting a “backlog of poverty” ­— a poverty issue that has been compounded by further poverty — that makes extending development to all areas of the country difficult. This is why, according to Shankar, the government is pursuing social programs.

However, she disagreed that India’s liberalization and subsequent growth has been harmful. Before 1991, Shankar said, the economic pie was not increasing significantly and the slice for each person was getting smaller. A more market-based system increases opportunities for people at all levels of society and can be very effective if coupled with proper government intervention.

On the topic of corporate responsibility, Shankar said the government was dealing separately with regulating businesses and compensating victims of disasters. India isn’t as experienced as the United States in writing legislation and contracts, and Shankar said her country needs to develop the ability to protect its interests and the interests of its people. She said the media has also improved the situation by taking on an expanded watchdog role.

Another broad concern is the monetary implications of high growth. Inflation was a concern amid a food scarcity resulting from the harsh 2009 monsoon; Shankar said food prices have begun to drop again but they need to fall faster to make food affordable for the poor. The reserve bank has raised interest rates, and legislation to ensure food security in times of high inflation is being considered. Shankar feels high growth is sustainable because of India’s high savings rate — between 34 and 36 percent — and because of India’s significant under-25 population that can power infrastructure renewal in the coming years.

Overall, Shankar feels the India of today is a rich country, combining aspects of poverty with elements of high development. This dichotomy places India in “a unique position globally to act as a bridge between different countries in different stages of development.”

Shankar is optimistic about India’s future: “If India can sustain a growth rate of 8 to 10 percent … I think India will become one of the three largest economies globally — not just in purchasing power parity terms, but in absolute terms.”

Because of India’s potential future as a major world economic power and its current position as a democracy at the crossroads of poverty and industrialization, India is a nation to watch closely. Shankar quoted a favorite saying of Indian Prime Minister Manmohan Singh: “‘It’s not just India that has a stake in India’s success — the whole world has a stake in India’s success.’”