India’s Turn

An Ideal Husband, the play by Oscar Wilde, tells a story of unrealistic expectations. Lady Chiltern, a woman of strict principles, idolizes her husband, a rising star in politics. Their life is filled with nectar and ambrosia, until the appearance of Mrs. Cheveley. She comes with a letter – one that proves Sir Robert Chiltern’s fortunes were made on the back of privileged information during the construction of the Suez Canal. In exchange for this letter, she seeks support for the construction of a new canal in Argentina.

Having previously denounced the Argentine project as a fraud, Sir Robert is faced with a dilemma. Should he alter his stance or allow the contents of the letter to come to light? Either course will result in the demolition of his spotless character and bring an end to his marriage. Although he loathes disabusing his wife of her unrealistic expectations, he realizes no amount of money can buy back his past.

The same principle holds for governments. Every administration is hostage to the actions undertaken by previous ones. India’s development is littered with shortcomings dictated by the choice of mistaken policies in the past.

But, in contrast to Sir Robert who cannot buy back his earlier errors, the Indian government can reform and create a new world. If India persists in its commitment to reform, the country could become the most successful developing country in the world in the next 20 years.

Since 1990, the growth performances of China and India have been approximately triple and double the world average respectively.  What are the reasons behind such extraordinary achievement? Both countries enjoy high rates of investment. Both changed their policy environment in the last few decades and opened up to international trade despite the choice of different strategies. China has become a global exporter of electronic goods and a partner in the international segmentation of production processes in manufacturing. India has become a global center for information and communication technology services.

The next decades are pregnant with challenges. But as opposed to China which runs a society of 1.3 billion people with a system of authoritarian planned capitalism, India’s 1.1 billion people enjoy the flexibility of a democratic regime.

Soon India will also enjoy the advantage of a demographic dividend (in part responsible for the two countries high growth rates). Remember that a demographic dividend is related to high output per capita in countries where the majority of the population is of working age and the increase in the share in total population of working age people can create a virtuous cycle of economic growth.

The UN Population Division projects the share in total population of working population (15-64 years) to reach its peak in China in 2010, and in India in 2040. China has already consumed almost all its demographic dividend. Its labor demand is increasing more rapidly than the workforce (in part because the increase in the working age population is slowing down as a result of the strict implementation of the one-child policy since the early 1980s). The tightening supply of migrant workers in the coastal areas has contributed to real wage increases in excess of GDP growth since 1998 and before too long, mass exports of cheap goods will move to more competitive areas of the globe.

India must be prepared to grab this opportunity as its demography soon will begin to move in its favor. Children dependency ratio will fall in the next decade and the increase in the working age population will contribute to higher savings. Higher savings could be channeled to productive investment through a dynamic financial sector. For this to happen, the quality of institutions must continue to improve. With the right policies in place and with infrastructure investment, India can create job opportunities for the growing numbers of people of working age and secure high growth from the demographic dividend.

When do you think India will replace China as the most dynamic economy on the globe? Or do you think I am talking about unrealistic expectations?