0. Introduction

It is widely accepted that, should public opinion and international institutions choose a long-term development objective for India, it would probably be economic growth and elimination of poverty. Whereas in other countries – such as Uganda or other African countries – development objectives could be formulated in terms of health-related issues – mainly the erradication of AIDS – in India those problems are not so widespread so far. Therefore the main goal for India’s future is that of poverty reduction and economic development in order to increase the standard of living of Indian citizens.

During our 12-day trip around India, we were able to discuss the country’s economic development and the strategies to achieve it in practically all our visits. Just for illustrative purposes, here are some of the comments that I collected from some of those visits:

• PRIA’s mission considered literacy and increase in democratic participation – mainly for women and minorities – as the key for long-term development.
• ASSOCHAM focused on international trade and strict compliance with WTO rules.
• The Government’s view – outlined both by Dr. APJ Abdul Kalam and Mr. Arun Shourie – mainly encourages, among other factors, education and agriculture.
• Mr. Raman Roy – CEO of Spectramind – and Mr. Azim H Premji – chairman of WIPRO – both mentioned that India should keep a low-cost structure for its future success.
• Mr. Scott Bayman – CEO of GE India – considered that Government support for foreign investment was critical for economic development.
• Etc ...

It is not necessary to go into further detail to describe our hosts’ different opinions. The main fact is that, although the Indian government has a clear vision of how to achieve economic development and reduce poverty in the long term, the optimal strategies to achieve this goal are not so clear, and the different economic agents have different opinions. Some would like to emphasize education; others believe that the key to growth is international trade; concerning Indian economy, some regard agriculture as the engine for future growth. Are all these opinions compatible? Can they be carried out at the same time? Are, maybe, any of the aforementioned opinions even wrong or in need of completion?

This paper does not attempt to outline ‘the ultimate and optimal’ economic development strategy for India. The main objective of the paper is to summarize the recent achievements of development in India and comment on the pros and cons of the different reforms and strategies that can be pursued to achieve long-term economic growth. At the end of the paper I will also try to ‘play the policymaker’s game’ and state my personal opinion on this matter, taking into account that no optimal policy exists and that other opinions are also possible.

The paper is divided in 4 sections. Section 1 describes the recent economic developments in India. Section 2 starts the discussion of India’s future economic development strategy by outlining the key points of Vision 2020. Section 3 constitutes the core of the paper, as it discusses the pros and cons of the different economic development strategies. Finally, section 4 summarizes my personal view on India’s future economic development. Section 5 lists some documents where to find additional information.

1. Brief History of Economic Development in India

Since India gained its independence from the British Empire in 1947 economic development has gone – from an economic point of view – through broadly three stages: the first 30 years – strong centralization –, the 80s – some reforms – and the 90s – radical reforms.

Congress was the political force that ruled the country until the 80s. Nehru established a system of socialist-like economic controls and centralization. This system remained in place until the end of the period, when some reforms started to be implemented. According to the system, the key strategies for economic development were basically the development of large and heavy industries – in a way similar to the Soviet Union model – under state control and central planning, import substitution, price controls, and restrictions on private initiatives. As a consequence of these policies several conglomerates developed. However the results were not as good as expected: annual GDP growth was on average 3.9% in the 50s, 3.7% in the 60s, and 3.1% in the 1970s [1]. In the manufacturing sector, for example, the growth rates of labor and factor productivity from 1960 to 1980 were approximately 2% and 0%, respectively [2].

In the 80s, mainly with Rajiv Gandhi, the government implemented some reforms towards liberalization. The reforms consisted on “reducing the barriers to entry and expansion, simplifying procedures, and providing easier access to better technology and intermediate material imports” [3]. Annual GDP growth in this decade increased to 5.6% [4].

The 90s started with two critical events in the recent Indian economic history: the crisis of 90/91, and the general elections. In the 1991 general elections Congress lost its majority and formed a minority government. Due to the balance of payments crisis, the government was forced to get help from the IMF and to start more radical economic reforms. The main reforms implemented during this decade can be summarized as follows [5]:
1. Reduction in and/or abolition of some restrictions, such as high tariff rates, import licensing, and quantitative restrictions on international trade.
2. Reducing the barriers to entry for foreign direct investment (FDI).
3. Abolition of industrial licensing for almost all industries.
4. Allowing private initiative in industries previously reserved for the public sector.
5. Reduction in the tax rates along with simplifications in tax structures.
6. Introducing greater flexibility in interest rates and improving the supervision and regulation of the banking system.

These reforms were a total success, and India achieved an average 6% GDP growth [6] during the decade, second only to China in the region. This rate of growth slowed somehow at the end of the decade.

What is the outlook’s for today’s economy? India is still one of the fastest-growing developing countries – the Economist Intelligence Unit expects a growth rate of 6.7% in 2004, well above the 3.8% growth expected for the global world’s economy. However the fiscal deficit still remains a problem: it averaged 10% of GDP for the period 1996- 2001 [7]. In 2001 the fiscal deficit was 4.7% of GDP, and it is expected to increase to 5.4% in 2004 [8].

2. Vision 2020

The official economic priorities for the next two decades have been described in a 108- page December 2002 document called India Vision 2020. As other countries in Asia did before in similar documents – such Singapore and Malaysia – this document aims to outline the goals of the Indian development policy, and the broad strategies that are needed to achieve those goals.

Vision 2020 defines nine “nodal points for Indian prosperity” which range from peace and security to full employment and work values. The plan is quite specific regarding some issues, and quite broad and unclear regarding others. In this section I’ll try to summarize the main points that an independent reader can get from reading the plan. The main goal of Vision 2020 is to eliminate poverty and increase the standard of living of the Indian population. This goal can be translated in the following main economic objectives:
• Achieve an average GDP growth rate of 8.5% to 9.0% over 20 years.
• Create 200 million new employments in order to achieve full employment.
• Abolish illiteracy and achieve 100% of primary and secondary school enrollment.

The document does not describe in full detail the specific strategies necessary to achieve the former objectives. However it does define the framework in which those strategies should fit. I think it is valuable to summarize the main pillars of that framework:
• Employment. Full employment is seeked as a means of gaining economic independence and improving health and malnutrition. The plan mentions that the private sector and specifically SMEs will be the main source to create and absorb new employment. The sectors that will get the lion’s share of new employment will be agriculture, tourism and outsourcing of services.
• Education. Education is regarded as the vehicle to increase the country’s productivity. Education is to be improved at all levels, from increasing primary and secondary education enrollment levels to increasing vocational training. The plan mentions the need to bring IT into schools in order to both improve digital literacy and make education cheaper. Implementing this policy would need to double the investment in education from a current 4% to 8% of GNP.
• Agriculture. Food production will soon reach subsistence levels, and by 2020 India will be a net exporter of food. This must be supported by sharp increases in productivity, mainly caused by applying new technologies to agricultural processes. The workforce dedicated to agriculture will be reduced from 56% today to 40% in 2020.
• Healthcare. The main policies address the eradication of infectious diseases and reducing child mortality. The plan requires a four-time increase on the healthcare budget to achieve these objectives.
• Infrastructure. The plan considers investments in infrastructure in order to improve the telecommunications network, the transportation facilities – mainly roads – and water infrastructure. An expected increase in energy demand should be faced by increasing efficiency in energy production and an increased focus on environmentally-friendly energy production.
• Service outsourcing. The plan also focuses on the export of services – outsourcing of services from OECD countries – as a key for growth.

The previous list does not intend to be exhaustive, but just to highlight the main points of the plan. The plan also touches other issues such as international relations with neighboring countries. Although these issues are very relevant for the country’s development, they are not purely economic issues and therefore are beyond the scope of this paper.

3. Comments on the Model for Development

The two previous sections have described the past, current and forecasted future situation for the Indian economy. According to these sections, the main question to be solved looking forward – the question that Vision 2020 attempts to solve – would be: how to achieve 9% annual growth rates keeping a stable economy? In summary, the official strategy encourages an increase in government spending in order to improve employment, education and infrastructure, and focuses mainly on agriculture, outsourcing of services and globalization to make the economy grow. But the plan fails to describe the potential drawbacks of following these steps. This section attempts to criticize these strategies.

Increased government spending

The plan assumes a significant increase in government spending in order to support growth. Among others, the increase includes a four-fold increase in transportation investment, a two-fold increase in education, a four-fold increase in healthcare, ... The plan fails to mention the fiscal deficit that the government has been running for the last decade. In fact an increase in government expenditure would position the economy on the verge of a second crisis.

What are the possibilities to achieve growth without further increasing the fiscal deficit? It seems clear to me that all the reforms outlined in Vision 2020 cannot be developed at the same time, but there is a need to prioritize the reforms: if for example an educational reform is the path to be chosen, there seems to be little room for huge investments in infrastructure, which should be left to the private sector initiative. In addition to prioritizing, the government should also cut its expenditures in those areas that are noncritical. There seem to be three areas where the budget could be adjusted: defense, administration, and increased privatization. The continuous tensions with Pakistan have increased the defense budget in the past years. A diplomatic effort would be very positive for the country’s economy, as it would help to redirect funds to other areas for development. Also there is a need for a leaner administration (reducing the number of government employees, or even the number of official institutions), and for increased privatization – in addition to raising funds to pay back the government’s debt, privatization of state-owned companies would contribute to increase efficiencies.

To summarize: The government fiscal deficit seems to impose severe restrictions on development. Rather than increasing spending and risking another crisis, the government should evaluate other alternatives such as prioritizing the reforms calendar, reforming the private sector to encourage investments in those areas that are left outside the government’s scope, and reduce expenditures in other areas.

Agriculture and outsourcing of services as the basis for development

Vision 2020 – and several speakers that we met during our trip – mentioned that India will have two key competitive advantages in the future: agriculture and low cost of services. This is certainly true, as India enjoys a lower cost of living than developed countries, and its geographical location, land and weather make it a perfect place for agriculture. Therefore any sound economic policy must take into account these two sectors. In fact India aims to increase the weight of services in the GDP to approach those percentages of developed countries.

However if India aims to achieve a 9-10% growth rate for the next two decades (that is, similar to what Japan did in the second half of the 20th century), a focus on low-cost service providing and agriculture does not seem to be enough. On the one hand, focusing on agriculture and food exports is very risky: one has just to look at the devastating effects that a sharp reduction on the price of coffee had in the Ugandan economy just a few years ago. In addition to this, agriculture seems to be the path chosen by all developing countries to achieve growth. This means that the supply of food is very likely to increase in the following years while the demand for food in the developed countries is stagnating. The development plan claims – cleverly – that in order to beat competitors a focus in food exporting must be accompanied by a sharp increase in productivity. However increases in productivity will take food prices further down, and are not likely to be achieved in the medium term – land efficiency in India is today one of the lowest in the world. Furthermore, sharp increases in efficiency are accompanied by the use of genetically-modified crops. As of today, the EU, one of the major consumers, does not accept genetically-modified products.

On the other hand focusing on being the lowest-cost service provider does not seem to be sustainable in the long term. It certainly is one vehicle for development. However service outsourcing usually includes those tasks that are less value-added, such as call centers, administrative tasks, etc ... Positioning India as the main provider of this kind of services risks margin erosion in the medium term. Moreover these services do not contribute to significantly increasing the knowledge of the workforce. Finally it is also safe to say that, if a country positions itself as a low-cost provider, there are only two possible alternatives for the country in the future: either it keeps being the low-cost provider and therefore will never match the living standards of other countries, or the cost advantage disappears and other strategy is needed to sustain growth.

To summarize: Agriculture and low-cost providing of services are certainly two basic pillars for medium-term economic development. However there are some concerns that cast some doubts on the capacity of these sectors to be almost the sole pillars for longterm growth. Maybe a focus on developing other industries should also be considered.

Globalization and trade

There is probably not a single argument – at least there is not a single one in the references that I found – against opening the Indian economy to the global economy. India is taking all the necessary steps to fully comply with WTO trade requirements. There is evidence that the trade liberalization measures implemented during the last decade have been positive for the economy.

There is only one concern that I would like to highlight regarding globalization. Although it is a fact that fully open trade is always better than no trade, it is also a fact that intelligent trade is very likely to be better than fully open trade. What do I mean with this? India policymakers must carefully consider if the whole economy should open up, or if some sectors should still be protected. However the motivation to protect certain economic sectors should not be that of protecting current employment or current Indian companies, but that of creating the fundamentals for an internationally competitive sector that sustains economic growth in the future – something similar to what Korea did with electronics, for example.

To summarize: International trade seems critical for India’s economic future, but maybe some degree of protectionism should exist regarding certain economic sectors.

Education

From a theoretical point of view, education is one of the key levers to sustain long-term productivity increases in any country. In the case of India, given the state of literacy and educations, improving citizens’ access to better education seems to be the top priority. Improving education has several advantages, mainly:
• Increased awareness on nutrition, healthcare and population control, with a direct impact in life expectancy.
• Improved access of all citizens to administrative services.
• Increased participation on democratic institutions.
• Professional and motivated workforce.

The previous benefits require reforming the education at all levels. The main concern with education as an economic policy is that it only contributes to changes in the economy in the long-term. That is, the effects of an educational reform today can only be noticed in an economy at least 10 years after the reform has been implemented. Therefore although education is key to achieve long-term growth, it does not help in the mediumterm. Other policies and reforms are needed to sustain medium-term growth and finance the educational reform.

To summarize: Education is a reform key for the long-term, but it is not likely to help to achieve short-term and medium-term high growth rates.

4. Conclusion

The previous section has summarized the pros and cons of the main structural reforms proposed for India to achieve long-term economic growth. There can be many opinions on what the optimal policies for economic development are, mostly because economics is not a ‘pure’ science, and there is always some uncertainty involved. Therefore one can try to justify a certain economic policy knowing that there will always be supporters and detractors.

Having said that, I consider that the economic reforms outlined in Vision 2020 and the economic beliefs that we found during our trip are sub-optimal for the future economic development of India. They will certainly contribute to growth, but I do not find likely that, just by themselves, they will be able to achieve a 9% annual growth over the next 20 years.

Instead, I would emphasize the following aspects:
• Foreign Direct Investment. The focus of government reforms should not be increasing spending to create growth, but to increase foreign investment in the country. Given India’s current situation, the only way to achieve high rates of growth in the medium-term is by foreign investment. This requires putting in place the institutions necessary for investors to feel comfortable investing in India, reducing the restrictions for investments, and creating a stable economic environment.
• Budget cuts. There is a critical need to reduce fiscal deficit in order to create a stable economic environment: the international community must be certain that inflation will be kept low and that the currency does not risk a sharp depreciation. Furthermore reducing the deficit will allow the government to be flexible to support demand in those years with low economic cycle. Therefore spending should be reduced, mainly in the areas of defense and administration.
• Education. I fully support education as a necessary reform for the long-term, both at the primary and secondary levels and at the undergraduate and graduate levels. I consider Vision 2020 does a great job describing the steps for improving education.
• Pick ‘winning’ development sectors and protect them. Agriculture does not seem the perfect sector to sustain long-term economic growth because of the reasons outlined in section 3. I really think that a deeper study should be undertaken to identify long-term value-creation sectors (some candidates to be analyzed could be nanotechnology, biotech and pharma, optics, ...) and take the appropriate actions to encourage their development within the country. These actions could include:
o Focusing graduate education on those sectors.
o Implementing benefits for investing in those sectors (such as tax reductions).
o Granting special low-interest loans to national companies in the selected sectors.
• Infrastructure. One of the main drawbacks of doing business in India is the lack of appropriate infrastructure (transport, water, ...). Although the plan mentions that this is important for growth, I want to emphasize that this is critical for development: unless an appropriate infrastructure is developed, private investment is not likely to boom. If the government is not able to invest in infrastructure due to budget cuts, similar measures to the ones mentioned above must be implemented to encourage private investment in telecom, transportation and water facilities.
• Employment. Full employment should not be pursued as a strategy per se. Full employment should be achieved as a result of other policies and reforms that stimulate demand. Pursuing full employment as a strategy on its own risks socializing the labor market – minimum wages, unemployment benefits, inefficiencies, ... – and in fact hurting economic development in the long term.

5. References and further reading

1. Annual GDP growth at factor cost, Central Statistical Organization (CSO)
2. Ahluwalia, Isher J., 1991, Productivity and Growth in Indian Manufacturing (New Delhi: Oxford University Press)
3. Ahluwalia, Isher J., 1991, Productivity and Growth in Indian Manufacturing (New Delhi: Oxford University Press)
4. Annual GDP growth at factor cost, Central Statistical Organization (CSO)
5. Unel, Bulent, 2003, Productivity Trends in India’s Manufacturing Sectors in the Last Two Decades (IMF Working Paper)
6. Real GDP growth 1992-2001, World Economic Outlook (WEO) database
7. General Government Balances, World Economic Outlook (WEO) database
8. The Economist Intelligence Unit, 2003, India Country Report

There are several sources of information about Indian economy. Some of them are useful summaries of the economy, and others are opinions or studies on economic policies. Among the most useful that I have found are:

• Nirupam Bajpai, Jeffrey Sachs, Mark Blaxill and Arun Baira, January 2000, “Foreign Direct Investment in India: How can $10 billion of annual inflows be realized?” (CID, The Boston Consulting Group)
• Nirupam Bajpai and Jeffrey Sachs, May 2000, “India’s Decade of Development” (CID Working Paper No. 46)
• Jeffrey Sachs and Nirupam Bajpai, February 2001, “The Decade of Development: Goal Setting and Policy Challenges in India” (CID Working Paper No. 62)
• Nirupam Bajpai, March 2001, “Sustaining High Rates of Economic Growth in India” (CID Working Paper No. 65)
• Nirupam Bajpai, April 2002, “A Decade of Economic Reforms in India: the Unfinished Agenda” (CID Working Paper No. 89)
• Planning Commission – Government of India, December 2002, “India Vision 2020”
• The Economist Intelligence Unit, March 2003, “India Country Report”
• The Economist Intelligence Unit, November 2002, “India Country Commerce”
• The Economist Intelligence Unit, 2002, “India Country Profile 2002”
• Bureau of Economic and Business Affairs, February 2002, “2001 Country Reports on Economic Policy and Trade Practices: India” (U.S. Department of State) Statistical Appendix” (International Monetary Fund)
• Rudiger Dornbusch, April 1999, “A century of unrivalled prosperity” (MIT working paper).

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