Structural problems were inherent in India’s unusual model of economic development, which relied on a limited pool of skilled labor rather than an abundant supply of unskilled labour.
For the past three decades, the Indian economy has grown impressively, at an average annual rate of 6.4 per cent. From 2002 to 2011, when the average rate was 7.7 per cent, India seemed to be closing in on China - unstoppable, and engaged in a second "tryst with destiny," to borrow Jawaharlal Nehru's phrase.
The economic potential of its vast population, expected to be the world's largest by the middle of the next decade, appeared to be unleashed as India jettisoned the stifling central planning and economic controls bequeathed it by Nehru and the nation's other socialist founders.
But India's self-confidence has been shaken. Growth has slowed to 4.4 per cent a year; the rupee is in free fall, resulting in higher prices for imported goods; and the specter of a potential crisis, brought on by rising inflation and crippling budget deficits, looms.
To some extent, India has been just another victim of the ebb and flow of global finance, which it embraced too enthusiastically. The threat (or promise) of tighter monetary policies at the Federal Reserve and a resurgent American economy threaten to suck capital, and economic dynamism, out of many emerging market economies.
But India's problems have deep and stubborn origins of the country's own making.
The current government, which took office in 2004, has made two fundamental errors. First, it assumed that growth was on autopilot and failed to address serious structural problems. Second, flush with revenues, it began major redistribution programs, neglecting their consequences: higher fiscal and trade deficits.
Structural problems were inherent in India's unusual model of economic development, which relied on a limited pool of skilled labour rather than an abundant supply of cheap, unskilled, semi-literate labour. This meant that India specialized in call centers, writing software for European companies and providing back-office services for American health insurers and law firms and the like, rather than in a manufacturing model. Other economies that have developed successfully - Taiwan, Singapore, South Korea and China - relied in their early years on manufacturing, which provided more jobs for the poor.
Two decades of double-digit growth in pay for skilled labour have caused wages to rise and have chipped away at India's competitive advantage. Countries like the Philippines have emerged as attractive alternatives for outsourcing. India's higher-education system is not generating enough talent to meet the demand for higher skills. Worst of all, India is failing to make full use of the estimated one million low-skilled workers who enter the job market every month.
Manufacturing requires transparent rules and reliable infrastructure. India is deficient in both. High-profile scandals over the allocation of mobile broadband spectrum, coal and land have undermined confidence in the government.
If land cannot be easily acquired and coal supplies easily guaranteed, the private sector will shy away from investing in the power grid BSE 0.26 %. Irregular electricity holds back investments in factories.
India's panoply of regulations, including inflexible labour laws, discourages companies from expanding. As they grow, large Indian businesses prefer to substitute machines for unskilled labour. During China's three-decade boom (1978-2010), manufacturing accounted for about 34 per cent of China's economy. In India, this number peaked at 17 per cent in 1995 and is now around 14 per cent.
In fairness, poverty has sharply declined over the last three decades, to about 20 per cent from around 50 per cent. But since the greatest beneficiaries were the highly skilled and talented, the Indian public has demanded that growth be more inclusive. Democratic and competitive politics have compelled politicians to address this challenge, and revenues from buoyant growth provided the means to do so.
The economic potential of its vast population, expected to be the world's largest by the middle of the next decade, appeared to be unleashed as India jettisoned the stifling central planning and economic controls bequeathed it by Nehru and the nation's other socialist founders.
But India's self-confidence has been shaken. Growth has slowed to 4.4 per cent a year; the rupee is in free fall, resulting in higher prices for imported goods; and the specter of a potential crisis, brought on by rising inflation and crippling budget deficits, looms.
To some extent, India has been just another victim of the ebb and flow of global finance, which it embraced too enthusiastically. The threat (or promise) of tighter monetary policies at the Federal Reserve and a resurgent American economy threaten to suck capital, and economic dynamism, out of many emerging market economies.
But India's problems have deep and stubborn origins of the country's own making.
The current government, which took office in 2004, has made two fundamental errors. First, it assumed that growth was on autopilot and failed to address serious structural problems. Second, flush with revenues, it began major redistribution programs, neglecting their consequences: higher fiscal and trade deficits.
Structural problems were inherent in India's unusual model of economic development, which relied on a limited pool of skilled labour rather than an abundant supply of cheap, unskilled, semi-literate labour. This meant that India specialized in call centers, writing software for European companies and providing back-office services for American health insurers and law firms and the like, rather than in a manufacturing model. Other economies that have developed successfully - Taiwan, Singapore, South Korea and China - relied in their early years on manufacturing, which provided more jobs for the poor.
Two decades of double-digit growth in pay for skilled labour have caused wages to rise and have chipped away at India's competitive advantage. Countries like the Philippines have emerged as attractive alternatives for outsourcing. India's higher-education system is not generating enough talent to meet the demand for higher skills. Worst of all, India is failing to make full use of the estimated one million low-skilled workers who enter the job market every month.
Manufacturing requires transparent rules and reliable infrastructure. India is deficient in both. High-profile scandals over the allocation of mobile broadband spectrum, coal and land have undermined confidence in the government.
If land cannot be easily acquired and coal supplies easily guaranteed, the private sector will shy away from investing in the power grid BSE 0.26 %. Irregular electricity holds back investments in factories.
India's panoply of regulations, including inflexible labour laws, discourages companies from expanding. As they grow, large Indian businesses prefer to substitute machines for unskilled labour. During China's three-decade boom (1978-2010), manufacturing accounted for about 34 per cent of China's economy. In India, this number peaked at 17 per cent in 1995 and is now around 14 per cent.
In fairness, poverty has sharply declined over the last three decades, to about 20 per cent from around 50 per cent. But since the greatest beneficiaries were the highly skilled and talented, the Indian public has demanded that growth be more inclusive. Democratic and competitive politics have compelled politicians to address this challenge, and revenues from buoyant growth provided the means to do so.
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