The Telegraph
Since 1st March, 1999
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- The best way of improving standards of living is by paying less

Experience shapes expectations. When India became free, it had behind it almost a century of economic stagnation under British rule. Growth itself seemed a matter of high ambition. Everyone knew that industrial countries were rich, and that most agricultural countries were poor; so industry was supposed to be the path to riches. The first three plans tried to create growth by industrialization. The framework they chose was, however, pretty unfavourable. They started from the idea that growth needed investment, which they wrongly interpreted as meaning that investment would bring growth. Actually, a huge rise in investment brought little growth, because that investment was made by a government with no experience of producing anything. Unbalanced growth led to a chronic food shortage, and ended in the famine of 1966. There was growth in the first thirty years after independence, but it was unreliable: there was too much fluctuation from year to year. And since independence also stimulated population growth, the growth that took place brought little prosperity.

The 1970s saw a break in the ideological and conceptual fetters that imprisoned Indian economic policy. First, the US went off the gold standard, and made flexible exchange rates respectable. Then the oil crisis created a big hole in the balance of payments, and made import controls unworkable. So time was ripe for a break in policy; India would have emerged a rational nation then itself. But it struck black gold. Oil from Bombay High rescued it, and led to the break in the Hindu rate of growth: the growth rate quite suddenly rose to 5' per cent a year in the 1980s. But it was hothouse growth. It was buttressed by loans from abroad. The carapace of socialism finally crumbled with the payments crisis of 1991.

Two decades of rapid growth since then have raised our optimism about India's prospects. In 1980, India's gross national product in purchasing power parity was one-eighth of that of the US, the world's richest nation. Besides Japan and China, all the major European countries ' Britain, France, Italy, Germany and Russia ' had a larger GNP than India.

Faster growth in the 1980s advanced India's position in the league table. In 1992, the United States had a total gross national product of $6 trillion. Japan was next with 40 per cent of American GNP; China, with a third of American GNP, was fast catching up. Germany followed with a quarter of American GNP. India's GNP was a sixth of that of the US, and it was in the same league as France, Britain, Italy and Russia.

I asked myself at that time: if all the countries continued to grow as fast as they had between 1980 and 1992, what would be their order in 2004' The answer was that China would be catching up fast with the US with 85 per cent of America's GNP, pushing Japan, which would have a half of America's GNP, to the third position. Germany would be fourth, followed by India with a quarter of America's GNP. It would leave the European countries, Brazil and Korea far behind.

It is remarkable how the reforms carried out a decade ago have changed our position. We now have figures from the World Bank up to 2002, by when India had already displaced Germany as the fourth largest nation. With a quarter of the US GNP, India was within striking distance of Japan, which had a third of the US GNP. India's 2002 GNP was over twice that of Russia and Brazil, which had a higher GNP than India in 1980. The European countries had fallen far behind all major nations. What made a big difference to the order was that the 1990s were good for the US, and bad for Europe and Japan; that is why India and China rose so fast.

I am not sure that the World Bank's PPP figures are good for calculating growth rates. They measure different countries' GNPs at the same prices in a single year; but I doubt whether the prices stay constant across years. But if I assume that they do, then it will not be long before India catches up with Japan. If we project the growth rates of different countries' GNP between 1992 and 2002 to 2010, China will be second in 2010 with three-quarters of American GNP, and India third with over a third of American GNP ' China's GNP, which was only 28 per cent higher than India's in 1980, will be over twice India's. But India's GNP will be over twice Germany's, and over three times that of Italy and Brazil. Japan will be fourth with a quarter of American GNP.

These projections are bound to be wrong in some respects, because the US is growing much more slowly than in the 1990s, and growth has revived in Japan.

But unless India encounters a catastrophe, it is a matter of just a few years before India has the third largest GNP in the world. And unless China meets a catastrophe, it is almost certain that India will not have the second largest GNP in the world in a lifetime.

Four-fifths or more of GNP is consumed; so India will be the third biggest market for consumer goods. And for many goods consumed by the poor and the not-so-rich, India will be the largest market. Some of these may be foods that Indians are fond of, such as sugar and cooking oils. Some may be fast-moving consumer goods ' for instance, soap and detergents since Indians are rather fastidious about personal cleanliness. Some may cater to India's huge farming sector, such as tractors and diesel engines. Some may be cultural artifacts, such as replicas of Ganesha. Some may be goods of this age, such as luxury motorcycles and midget cars.

Who will provide these goods' At the moment, almost all the consumer goods are being supplied by Indian firms. The Indian market has made some of them giants of global dimension ' for instance, Hero Honda in two-wheelers, or Mahindras in tractors. But Indian producers are not listening too closely to C.K. Prahlad, who tells them to win big markets by producing cheaply. Chinese producers are listening to him: smuggled Chinese calculators, Diwali lights, spectacle frames already dominate the Indian market.

They would capture even more markets if it were not for the survival of the old socialist mindset ' that consumption is immoral, and that consuming imported goods is doubly immoral. Thus India continues to maintain high tariffs and import restrictions on consumer goods. The result is that we do not know what to import; so we import dollars and park them in Reserve Bank.

We are now big boys, or close to it. We should concentrate on what we are good at, whether it is software or fashion models or printing ink. We should recognize that the Chinese are much better at producing mass consumer goods; we should welcome them with open arms. Paying less is the best way of achieving higher standards of living.

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