A special report on India

An elephant, not a tiger

Dec 11th 2008 From The Economist print edition

For all its chaos, bureaucracy and occasional violence, India has had a remarkably successful past few years. James Astill (interviewed here) asks how it will cope with an economic downturn

Reuters EARLY next year, perhaps in April, Indias coalition government will face the judgment of 700m voters. Being mostly poor, they will not be happy. Recent months, moreover, have brought particular hardships: high inflation, a patchy monsoon, a slowing economy and vanishing jobs. In a worrying time, the terrorist attacks in Mumbai on November 26th-29th came as a particularly harsh blow. They gave the world images of India that jarred with the shining message of its recent progress. For three days Indias most cosmopolitan city and aspirant international financial centre echoed with gunfire. Amid the slaughter wrought by just ten well-organised assassins many individual Indians acted heroically. Yet the institutional response, as so often, was poor. Properly trained troops took over nine hours to arrive at the scene. Most of the 170-plus victims died during that time. The Congress party, which leads Indias ruling coalition and runs Maharashtra, the state of which Mumbai is the capital, is likely to suffer for this. To make amends, Congress sacked the interior minister, and Maharashtras chief minister. The government, led by Manmohan Singh (pictured above), has also raised a crythough not, thankfully, its fistsagainst Pakistan, whence the terrorists probably came. Yet for most poor Indians terrorism remains a small part of their troubles. To deal with those, Sonia Gandhi, Congresss leader, will reissue a lot of unkept promises when the election

campaign begins: to bring everyone electricity, piped water, schools and jobs. She will say little about what this government has actually done: there hasnt been much. At the same time Mrs Gandhi and her prime minister, Mr Singh, have presided over the biggest investment-led boom in Indias history. In the past five years the economy has grown at an average annual rate of 8.8% (see chart 1). Services, which contribute more than half of GDP, have grown fastest, above all Indias computer-services companies. Infosys, TCS and Wipro are now world-famous names. But Indian manufacturing has also done well. Its impressive run culminated in January with the launch by Tata Motors of an ultra-cheap family car, the Nano.

A world of fewer opportunities

India is now facing harder times. Its stockmarket has been sliding all year. As global credit has dried up, even Tata Motors, one of Indias best companies, has been struggling to lay its hand on capital. Indias economy is slowing rapidly and confidence is fragile. Previously soaring foreign investment in the country is expected to dip. Nobody yet knows how serious the slowdown will be, but in theory a recession in the rich world should hurt India less than other emerging markets: exports amount to only about 22% of Indias GDP, against 37% of Chinas. Diplomatically, India has also started to matter more. The US-India nuclear co-operation agreement, which was approved by Americas Congress in October, was the clearest sign of this: to let India in from the nuclear cold, the developed world has made an exception to the counter-proliferation regime. Mr Singh can take much credit for this. A courteous and scholarly former finance minister who launched reforms in 1991 that unshackled Indias mixed economy, he has been an effective envoy for India.

At home, often stymied by his coalitions leftist allies, he has done much less well. But, among his few successes, he can claim that India, the worlds fourth-biggest emitter of greenhouse gases, has started to get serious about climate change. It refuses to consider cutting its carbon emissions, arguing that they are still very low per Indian. But guided by Mr Singh, Indias bureaucracy has at least accepted that, being hot, poor and agrarian, India will be badly hit by climate change. That makes Indias main priority, reducing poverty through rapid economic growth, even more urgent. According to the World Bank, in 2005 some 456m Indians, or 42% of the population, lived below the poverty line. In 1981, by the same measure, the numbers were 420m and 60% respectively. The governments own estimates are lower. But everyone agrees that poverty in India is falling much too slowly. Pick another wretched statistic: there are plenty of them. India has 60m chronically malnourished children, 40% of the worlds total. In 2006 some 2.1m children died in India, more than five times the number in China. To make a serious dent in poverty, India needs to keep up economic growth of around 8% a year. In the medium term that should not be too difficult. More impressive even than the success of Indias best companies is the zest for business shown by millions of Indians in dusty bazaars and slum-shack factories. They are truly entrepreneurs. It is no coincidence, as is often noted, that Indians have prospered everywhere outside India.

But Indias task remains daunting. Some 65% of Indians live on agriculture, which accounts for less than 18% of GDP. Shifting them to more productive livelihoodsand so reducing povertywould be hard even if the number of people of working age was not growing so fast. Roughly 14m Indians are now being added to the labour market each year, and that number is rising. Half of Indias people are under 25 and 40% under 18 (see chart 2). They cannot all work for Infosys. Indeed, because of Indias historic underinvestment in education, many are not obviously skilled at anything. By one estimate, which may be optimistic, only 20% of job-seekers have had any sort of vocational training. If India cannot find employment for this lot, poverty will not be reduced and India may face serious instability. Its democracy will be no defence. India is already worryingly violent. A Maoist insurgency in eastern India, which Mr Singh has called the greatest internal security challenge we have ever faced, is an obvious ill omen. Where it is spreading, in poor, agrarian and broken places, the invisible threads that bind India, in the phrase of Nehru, its first prime minister, are almost non-existent. In recent years India has been creating more jobs than the gloomier scenarios suggested. Between 2000 and 2005 its rate of employment growth doubled, to 2.6% a year. But that is still insufficient, and there are also fears about the quality of jobs being created. To escape throttling labour laws, Indian entrepreneurs tend to keep their operations small: 87% of manufacturing jobs are with companies that employ fewer than ten people. These tend to be both less productive than jobs in bigger companies and less protected by the law. If India is to sustain a growth rate of 8% or higher, as it aims to do, it will need to manage four potential constraints. The most pressing, its rotten infrastructure and the dreadful quality of its education, are, alas, not new. But the governments response has long been inadequate, and with Indias burst of high growth these two problems have become more urgent than ever. Indias current rulers, the mahouts to an elephantine state, seem at least to understand this. But their efforts to end these troubles remain unconvincing. Indias other big constraints, its cumbersome labour and land laws, should be easier to fix. But there is depressingly little sign that this will happen soon.

India is getting stronger, but its problems are also growing. In the end, the pattern of its progress suggests, it will succeed. But it may be a long and painful grind.