Young, restless and on the move

Is India changing, if not shining for everybody yet? At a very general level, the answer must be both yes and no. A country, just like an individual, is always changing in one way or another. So, the question is really about the ways in which India is changing, and how fast. And what are the implications of these changes for the future?

In the early Nineties, when India had embarked on the path of economic liberalization, P. Chidambaram, at a seminar, suggested that to get the answer to the question, “Has liberalization come to stay ?”, one should go home and ask one’s children. Whether you like it or not, they have already decided that they would go for liberalization. We cannot stop it. For, the biggest change that is taking place in India is in the demographic profile of the country, and because of it, in the areas of productivity, lifestyle and mindset of the new generation.

Consider the much-hyped BRIC (Brazil, Russia, India, China) report by Goldman Sachs. It predicts that in dollar terms, India would be the country with the third largest gross domestic product — at official exchange rate — in the world in the next 50 years. In other words, India will overtake countries like Japan, Germany and the United Kingdom in terms of its GDP.

Two important changes are emphasized in this projection. One, the percentage of people in the working-age group would be higher in India than in most of the developed countries over the next 30 to 50 years. This is because the growth rate of India’s population has come down significantly in recent years. Right now, the bulge in the population (owing to higher growth rates earlier) is concentrated below the working-age group (15 to 60 years). In the coming years, this bulge would be spreading, but these people would still be in the working-age bracket, contributing to the GDP.

In the developed countries, population increases at a much lower rate. A deviation in the pattern was noticed during the “baby boom” right after World War II. Because of this, a large percentage of the population in these countries would now be past the working-age. Moreover, rising longevity means that these retired people would live longer than their predecessors. All these would lead to a higher percentage of the population not contributing to the current output, living on the output produced by the current workers. Even China may face a labour shortage in the coming decades because of the belated effect of the strict one-child norm imposed by the state. So, India may be more favourably placed in terms of the age-composition of its population. This scenario is broadly supported by other research studies on India as well.

The second favourable factor is the rising value of the Indian rupee which the BRIC report believes will continue. Thus, a given Indian GDP in rupees would mean an increasing GDP when measured in dollar terms, if the rupee continues its upward journey vis-à-vis the dollar. Here, we are not talking of GDP in terms of the so-called purchasing-power-parity exchange rate. According to the PPP exchange rate, the value of the Indian rupee today is several times the official exchange rate. It is mainly because services, such as haircuts, are particularly cheap in India. Suppose, the official exchange rate is Rs 45 to a dollar. But the same basket of goods and services costs $1 in the United States of America and Rs 9 in India. In such a case, the PPP exchange rate would be Rs 9 to a dollar. The use of the PPP exchange rate, instead of the official exchange rate, would inflate India’s dollar GDP five-fold. Having the third highest GDP (after China and the US) in terms of official exchange rate is clearly a much bigger achievement.

Now, several caveats are in order. First, India’s third position in the world would be in terms of total GDP. In per capita income, India would still be much below the developed countries. According to the BRIC report, in 2050, India’s per capita dollar income would be only half of what the US per capita income is today. This is despite the projection that from 2020, the growth in per capita income in India would be the highest, compared to all other BRIC nations and G-6 developed countries. The BRIC report implicitly assumes that the working-age population would be productively employed. But that would not automatically happen. It would need acquiring and upgrading of skills in a competitive world. How can we be so sure of this when even now, almost half the population of India cannot complete primary education?

Consider another recent research study, originating closer home. This is the National Council of Applied Economic Research’s Market Information Survey of Households. This survey throws up a number of interesting facts. Whereas only 14 per cent of households belonged to the upper-middle income range (annual income above Rs 90,000, or monthly income Rs 7,500 at 2001-02 prices) in 1989-90, this percentage has doubled to 28 per cent in 2001-02.

Over the same period, the percentage of households in the low-income category (annual income below Rs 45,000) has fallen from 59 per cent to 35 per cent. Although this is not the same thing as poverty ratios, it corroborates the impression that there has been a significant upward mobility of households from low to higher income categories.

The NCAER projects (using a detailed macro-model and some plausible assumptions about growth rates in different sectors) that the percentage of households belonging to the low-income category would be about 16 per cent and that in the upper-middle income category would be more than 48 per cent in 2009-10. Another interesting fact is that the share of rural households (around 71 per cent of total households) has not changed over the past decade. This means that the process of urbanization and its associated changes are yet to take place on a significant scale.

Notwithstanding the positive picture of the country projected by several research studies, the comparison with China seems unavoidable. But observers feel that there is a significant difference in the growth patterns of the two economies. In China, the near-double-digit growth has so far been fuelled mainly by high investment expenditure. In India, it is largely consumption-driven. As a result, it is possible for the savings ratio in India to go down in future. If that happens, then (much like the US) India’s high growth would need to be sustained by foreign savings or foreign capital inflows. This should not be a problem, provided there is a significant improvement in India’s physical (power, transport, communication) and social (education, health, sanitation, legal and general administration) infrastructure to create the necessary investment climate.

No doubt there are great opportunities awaiting the Indian economy. China’s growth rate and its corresponding attractiveness to foreign investors may go down earlier than India’s. There is a saying in investment circles that you should invest in an emerging economy when the first international airport is built, and you should exit when the second airport comes up. That is a signal of over-investment. China may reach the second airport stage soon. India is likely to approach that stage much later.