India looking like an Asian tiger

HONG KONG: For anyone despairing over India’s manifest limitations in physical infrastructure or its labour market rigidities vis-à-vis China, UBS’ chief Asia economist Jonathan Anderson has an inspirational message. To understand how the Indian economic growth story will unfold over the next five years, he says, you must look not at the China of today but at how China was, circa 1990.

“Things were bad in China even 15 years ago,” recalls Anderson. “In fact, China was in arguably a worse state than India may seem today: it had no private ownership, no legal framework for investment, and was awash in recession.” Even the physical infrastructure came years later. “It was a horrid slog getting between cities: we didn’t have the gleaming airports we see today, and Chinese airlines were still flying those scary Soviet-era airplanes.”

And there was no “national economy” or a national distribution network to speak of. “Everything was done locally, and the first US multinational that showed up realised to its horror that it had to slog it out in every little market…” All that, he says, has changed only in the past five years, and yet even today, China is in many ways working through the remnants of an autarkic provincial-based economy.

And how did the turnaround come about in China? “It’s not as if China’s leaders woke up one day and decided to change things,” says Anderson. “In fact, it was a bottom-up process.” It started in Guangdong province in southern China, where the first special economic zones came up, and where there were people willing to bend a few rules, give a few tax breaks… “Soon, other provincial leaders got onto the bandwagon, and it spread. And it wasn’t until 1993-94 that the government started to introduce consistent and serious liberalisation measures that put the groundwork in place for this great export boom we see today.”

Similarly, says Anderson, India too is ripe for a “bottom-up” reform revolution.

“India’s success won’t come about because either the Congress or the BJP puts in place a wide-ranging set of central reforms. It will be because one or two states get the export story right, put the infrastructure in place, bend a few rules and labour laws, give some tax breaks, get the investments going and, suddenly, start to grow at 14-15%…” And then, he predicts, “everyone will want to get onto the bandwagon.” To that extent, the infamous Indian red tape won’t be a serious impediment.

“We can talk all day about how uncompetitive Indian exports are and how rigid its labour laws are, but the statistics tell another story: India is looking more and more like an Asian tiger,” adds Anderson. Fifteen years ago, goods and services exports as a proportion of GDP was 7-8%; today it’s 16-17%. And over the same period, Indian exports as a share of GDP have more than doubled. And when you consider that the savings rate in India has gone up from around 20% of GDP to 30% of GDP, and investment rates have risen in tandem, India looks similar to China in the late 1980s and early 1990s: poised for a boom, says Anderson.

However, India cannot hope to make the most of this window of growth opportunity if it doesn’t generate a manufacturing story. “A lot of people talk about India’s special growth path - that its productivity can be driven through the services sector, and that it didn’t really need the sweatshops,” says Anderson. “ I call it hogwash.” To bring the unskilled rural peasants out of the countryside, in the manner that China did, India has to embrace low-end, export-oriented manufacturing.”

And although India is identified with “knowledge economy” exports -software and pharma - “if you talk about India’s exports for the next 20 years, it has to be low-end manufacturing, if you want to generate jobs,” says Anderson. “It’s a nice juncture for India to start getting this story going because China is beginning to lose steam, its pricing power and its competitiveness. That’s because although China isn’t running out of workers, it’s running out of young workers, and that’s putting pressure on wages and costs. China is becoming a more expensive place, and India can work it to its advantage.”