An Indian century?


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A casual observer, glancing at India’s macro-economic situation, would see little evidence of a nation in the throes of profound change.

But look at the micro-economy and an entirely different picture emerges: one of quickening structural transformation reshaping India’s business world and markets, and with them the lives of millions of people. The number of milestones passed in the past 12 months shows how far this process has advanced.

Infosys Technologies, a software exporter, became the first Indian company to list on a US stock market. It was joined by ICICI, the first Indian financial institution to undergo a US audit, and Satyam Infoway, an internet service provider.

Reliance Petroleum commissioned India’s first private sector oil refinery, one of the biggest in the world. Essar Steel became the first Indian company to default on an international debt issue. Private sector fund managers overtook Unit Trust of India, the public sector fund manager, in terms of sales for the first time.

The number of acquisitions hit an all-time high. Zee Telefilms, a media company, bought out joint venture partner Star Television in India’s biggest media deal. Tata Tea tabled a record bid for a foreign company, Tetley Tea. Lafarge, the French company, became the first multinational to enter India’s cement industry.

Ranbaxy and Dr Reddy’s Laboratories led India’s pharmaceutical industry into a new era, when they licensed the first products of their research to foreign companies. And software exports hit a new record, while the sector’s market capitalisation crossed Rs 100,000 crore: the highest valuation ever placed on an Indian industry.

The rapidity and extent of change is captured on India’s stock markets, where the list of India’s top private sector companies by market capitalisation reveals the churning that has taken place. An entire generation of family-owned industrial conglomerates has sunk into decline, while new investor-friendly businesses in sunrise sectors have burst into prominence.

Industrial turmoil has shattered the monopoly on commercial wealth held by the great business dynasties in Mumbai and Calcutta. Self-made entrepreneurs now pack the list of India’s richest men: Azim Premji of Wipro, N.R.Narayana Murthy of Infosys Technologies, Subhash Chandra of Zee Telefilms, Shiv Nadar of niit, Anji Reddy of Dr Reddy’s and Dhirubhai Ambani of Reliance Industries.

Ratan Tata of Tata Sons and Kumarmangalam Birla of Aditya Birla, two of India’s two great industrial houses, are fighting to adapt their empires to competitive markets. Many lesser dynasties are already at the brink of commercial extinction.

Krishna Guha in Financial Times


A CENTURY ago, the United States emerged as the world’s most powerful economy. Riding on the back of the boom in sunrise sectors like railroads, steel and oil, the US economy grew by a sustained annual average of 6 per cent, from about 1870 to 1900, and emerged a global superpower. The 20th century dawned as the American century, and stayed that way.

The hundred years or so before 1870 had been a British century, starting with the industrial revolution: steam power, the textile revolution, steel making, and later railroads. For a quarter of a millennium before that, the Renaissance had spread knowledge and innovation across Europe.

Most of these seminal changes passed India by, except that it experienced the backwash through colonialism. At the start of the Renaissance, Babar was descending on India. The Mughals rose in stature, wealth and fame, but was there an Indian century at any stage in the half-millennium since?



The most likely period is the 17th century – which is before the depredations of colonialism, and at the height of the splendour of Shah Jahan. India was then the land of fortune and fantasy, of fabled wealth and Mecca-like status for European traders in search of spices and fine cloth. As Bernier noted, ‘Gold and silver, after circulating in every other quarter of the globe, came at length to be swallowed Hindustan.’ Abraham Eraly says in The Lives and Times of the Great Mughals that the revenue of the king of England at the end of the 17th century was only about one-seventeenth of Akbar’s revenue. Indeed, India’s share of world GDP then was about one-fourth – only marginally less than that of Europe, and about the same as China’s.

But, and this is the more relevant point, these great riches had little impact on the lives of ordinary people. In Shah Jahan’s time, 61.5 per cent of the total revenue of 220 million rupees was arrogated by just 655 individuals. And the revenue was between a third and half of national income. In other words, about a quarter of national income went to 655 people, out of a total population of 120 million.

Whether it was the Mughal empire, or the Vijaynagar empire earlier, or any other period, great riches accumulated at the top while the majority lived in abject poverty, ignorance and disease. Just one famine in Shah Jahan’s time killed three million people in the Deccan and Gujarat; the equivalent percentage of the population today would be 25 million people, or the entire population of Punjab. And famines were not rare occurrences: another two million died, for instance, during a famine in Aurangzeb’s reign. That’s the equivalent of the population of Haryana, in today’s terms. By way of famine relief, Shah Jahan spent sums equal to a tenth of Mumtaz Mahal’s annual pin money. As Eraly says, the people were poor, the country was poor, only the emperor and the amirs were rich. So a Mughal century, perhaps, but not an Indian one.



But in many ways at the time, the sun at least shone on India. It set in the 19th century. Around 1815, when Napoleon was meeting his Waterloo, if the economic historians are to be believed, India accounted for about a sixth of global industrial production. By the end of the century, this was down to about one-fortieth or less. Colonialism had taken its toll, and continued to do so. In the first half of the 20th century, GDP was virtually stagnant. There was no growth, even as the population explosion was set off around 1920.

A wasted half-millennium then. But what if we go further back in time, to what India was like 1000 years ago? What was it like in the country, at the end of the last millennium? Here’s the most appropriate description, from the Oxford historian Felipe Fernandez-Armesto’s acclaimed Millennium: A History of our Last Thousand Years. ‘India has been the Cinderella civilisation of our millennium: beautiful, gifted, destined for greatness, but relegated to the backstairs by those domineering sisters from Islam and Christendom. A history of the first millennium of our era would have to give India enormous weight: the subcontinent housed a single civilisation, characterised by elements of common culture, coterminous with its geographical limits; the achievements it produced in art, science, literature and philosophy were exported, with a moulding impact, to China and Islam; and it was a civilisation in expansion, creating its own colonial New World in south-east Asia.

‘With bewildering suddenness, at about the turn of the millennium, the inspiration seemed to dry up, the vision to turn inward, and the coherence to dissolve. Whereas earlier generations of Muslim scholars had looked to India with eager reverence, Al-Beruni, turning in the 1020s to glean further learning from the same source, was disappointed by what he saw. Hindu science, he found, "presumed on the ignorance of the people". Political dissolution accompanied the cultural decline. The large states which had filled most of the subcontinent in uneasy equilibrium since the early ninth century collapsed under the strain of mutual emulation and the impact of invaders and insurgents. The rich temples of northern India became the prey of opportunistic raiders from Afghanistan.’



The smash and grab raiders were followed by those seeking settled conquest. And India’s long night began. When power began to shift from the Mediterranean to the Atlantic, half a millennium ago, India was a fabled land but with riches at the top for the mostly alien ruling class. It was a flawed, brittle society without inner structural strength, and collapse was perhaps inevitable in the face of the colonial challenge. Now, another half a millennium later, as power begins to shift across oceans yet again (to the Pacific, this time), India is once more the Cinderella-civilisation: full of promise, but coming off second best in comparison with more alluring sisters even among the so-called emerging markets (China is the most obvious example).

It need not be that way. In some senses, the American century has been a century of preparation for India. The first five decades saw the successful fight for freedom. The next three saw muddled thinking in a society grappling with illiteracy (8 per cent female literacy at the time of Independence), poor life expectancy (32 years, at Independence), rapid population growth (2.2 per cent annually) and poor capital accumulation (10 per cent savings rate at the start of the first five year plan). All this plus Fabian socialism, masquerading increasingly as statism, kept growth rates down to 3.5 per cent for three decades. It would have been unreasonable to expect Tiger performance, given all the constraints. But some foundations were laid, including in agriculture.



The next two decades have seen a change of gear: growth has averaged 5.5 per cent. More important, the numbers below the poverty line have dropped from more than half of the population to about a third; literacy and life expectancy have climbed; the population growth rate has dropped to 1.6 per cent. By a finance ministry calculation, India has already been the sixth fastest growing economy over the past two decades.

Over the half-century as a whole, per capita income has grown at 2 per cent a year. Now there is likely to be another gear shift: per capita income can grow 5 per cent annually (6.5 per cent GDP growth, and 1.5 per cent population growth). The basis for these numbers is that the investment rate in the economy is now around 28 per cent. At an incremental capital-output ratio (or ICOR) of about 4, this should be able to sustain an annual GDP growth rate of 7 per cent. If you factor in infrastructural constraints, and assume some loss of economic activity on that account, it is reasonable to conclude that the likely growth rate will be 6.5 per cent.

The significance of per capita income growing annually by 5 per cent should not be underestimated; because, what it means is that the absolute increase in income levels over the next decade will match that achieved in the last five decades.



Yet, if the headlines have ignored India, it is because the bridesmaid does not get mention in the presence of the bride. The bride is China, of course. Nothing is happening in India compared to the scale of development taking place even today in China: roads, buildings, telecommunications, airports, hotels, trade, investment. By any yardstick, China is doing more than twice as much as India is in terms of infrastructure development; China’s foreign trade is more than four times India’s. It attracts many times more foreign investment than India does. It is simply in another league.

But if the United States became the most powerful economy in the world following three decades of 6 per cent annual growth, and if China has already arrived as a counterpoise to the US, following two decades of 8 per cent growth, how much would it take for India to set off an economic earthquake?

The answer is that if India can indeed accelerate to 6.5 per cent growth, and sustain that for a decade or two, the plate tectonics of global economic power will certainly shift. Consider some possibilities.

India’s full-fledged consuming class could multiply rapidly in size, in little more than a decade, if per capita income were to increase at 5 per cent annually. The National Council of Applied Economic Research (NCAER) estimates that there were 4.5 million households in the high-income category (those buying cars, white goods, brown goods, et al), back in 1994-95. This is expected to grow to 13.2 million households in another two years, and then nearly double to 23.2 million in another five years, i.e. 2006-07. This means a full-fledged middle class of over 100 million people, compared to barely 20 million five years ago.

Think of the demand this would set off for everything from cars to houses, and for the goods to put into those houses – and the scale at which consumer goods are produced today will soon look puny.

One income category lower, among the middle classes, the numbers will climb from 70 million households to 140 million, between 1994-95 and 2006-07. That’s 700 million people consuming soaps, toothpastes, shoes, clothing, and so on, not to speak of the more basic consumer durables. What this also means is that the low-income category shrinks in size, from 86 million households to 36 million. These numbers spell a consumption explosion round the corner. And that means rapid growth.



Consider, then, the possibility that the overwhelming majority of the population may be literate in a decade or so from now. Across the world, a dramatic increase in literacy has allowed people to get off the land, to seek a better life in towns and cities. The United States, for instance, was a country of rural inhabitants at the time of its civil war, in 1860. One of the great transitions of the 20th century, which passed India by, was the dramatic decline in the peasantry, i.e. people living off the land. Among all the countries in the world today, perhaps India and China stand out as having hundreds of millions of people still living on the land.

Yet, India already has the largest urban population in the world, with some two dozen cities having a population of at least a million. But what if the urban population were to double in size in little more than a decade, even as income levels rise faster than ever before? The explosion in demand for housing, transport and entertainment would be seismic in scale.



What could fuel and sustain this kind of growth? One answer is the knowledge industry. India missed the industrial revolution for a couple of centuries, and was a late bloomer in the agricultural sweepstakes. Even today, Indian agriculture is held back by a series of counter-productive policies that deny Indian farmers the opportunity to access world markets.

But in the knowledge business, India finds that it has innate competitive advantages: knowledge of English; easy mastery of mathematics; a broad base of sound educational institutions, including centres of excellence; a vast population that can feed a burgeoning industry with graduate fodder on a scale that keeps wage costs competitive; an entrepreneurial instinct that will now be nurtured by a nascent venture capital industry; linkages with success stories in silicon valley; and fire in the belly, following the saturation media coverage of the early success stories. Role models can be a powerful engine of growth. And so, ten years from now, software exports alone could be equal to the country’s total exports today.

Software can be India’s oil.

What could be India’s banana peel? The short answer is the government. Any and everything that the government touches is a disaster story. Over-extended and under-performing, it will neither do its job properly nor get out of the way. It is, and has been for some time, the biggest parasite on the system. Whether it is preventing airport deaths because of defective escalators, or controlling organised crime in the cities, or ensuring attendance and teaching in government schools, or preventing wholesale leakage of funds and materials meant for anti-poverty programmes, or ensuring the minimum sanitation in hospitals, or keeping MIG fighter-aircraft from crashing every fortnight, or maintaining a proper statistical system so that the economy can be tracked accurately, or controlling the fiscal deficit,’s a long list of abject failures. Many of these, including the deficit, are system threatening and known to be so; but the system seems unable to get to grips with solutions; in many areas, no one is even trying.



In the economic sphere, the government borrows at 12 per cent and invests to get a return of 2 per cent. Because the government is borrowing at 12 per cent, no one can borrow at less; so it crowds out productive investment. Policy-making in almost every infrastructure sector is still a mess, nearly a decade after attention first focused on this. Corruption has become endemic (the father of the dead child at Delhi airport had to pay a Rs 3000 bribe to get the post mortem report).

But socially, stratification is becoming less rigid as the backward groups get more assertive. Women are still to win substantive emancipation, but their energies too are being released now in a way that was not there before (primarily through the spread of education, and their joining the workforce in greater numbers in the urban centres). Competition among the states will intensify, creating a virtuous cycle, as the lead taken by a couple of young chief ministers is followed up by others. Governments will also perhaps become more responsive and closer to the people, as the tools of the information age are used to engineer a more open government: land records from a computer kiosk, instead of bribing the patwari, to take one instance. Finally, the structural composition of the population will change. Today, 40 per cent of the population is under 20 years of age, and predominantly dependent and unproductive. As the birth rate declines further, the percentage of the population that is in the productive age bracket will increase.

These underlying changes in society are at least as significant as striking oil. Their combined impact within the over-all framework of an open, democratic and increasingly participative system, can be such as to make it possible for India to challenge what otherwise promises to be Chinese dominance of Asia. Too many people are still navel-gazing for this to have even entered the national consciousness.



Also, if Mughal society was structurally weak because of skewed reward systems, and if colonial India was bleeding to benefit an alien master, contemporary India faces some stern tests in nation-building. Kashmir is the most obvious example. The tension between secularism and majoritarianism is another.

But having admitted all this, it is hard to see why India should not be able to achieve 6.5 per cent annual GDP growth in the next decade, and even more in the decade to follow. It is equally hard to see how these growth rates, sustained over a long period, will not substantially abolish the scourge of absolute poverty from a land which has been a by-word for such poverty for centuries. It isn’t taking a great risk, therefore, to forecast that the next couple of decades should certainly belong to India. After that, the century?