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If wishes were horses...

India isn't on the road to becoming an 'economic superpower'. It's far from it.
Hindustan Times | By Rakshit Pandey
UPDATED ON MAR 01, 2012 11:42 PM IST

We live in times of hysteria and hyperbole, especially regarding the economic future of Asia's emerging giants. This is particularly true for India since it tends to escape the critical scrutiny China draws due to its opaqueness and authoritarianism. India, on the other hand, continues to be seen as the democratic, transparent, sustainable economic model of the future.

Global leaders, economic experts and corporate titans continue to wax eloquent about its emergence on the global economic platform. Its own policymakers also tend to act as if India's emergence as a global power is indeed its second 'tryst with destiny' - and not an outcome of explicit policy actions on their part. As a result, it's become as unfashionable to talk about the massive challenges that lie ahead as it is unpardonable to suggest the improbability of India being able to surmount them. However, it still pays to step back and ask why it may yet fall short of economic glory.

India's model of growth and development is unprecedented. It started with a large and rapidly growing services sector and is now attempting to reinvigorate its manufacturing base. This is precisely the reverse of the usual transition process where economies use a large manufacturing base to propel themselves into the services sector. In fact, there isn't a single comparative example of a nation that has even attempted India's 'reverse transition'.

Global powers rise and fall with the ebb and flow in their manufacturing sector - irrespective of time and geography. This doesn't bode well for India whose share of global manufacturing has been virtually stagnant, increasing from 1.2% to 2% over the last 40 years. China's share of global output has risen from 4% in 1990 to 20% in 2010 - almost concurrent to its rise in global economic stature.

India's productivity is also abysmal by global standards. Manufacturing in the US, for instance, produces a value of output per hour worked of $51.2, as opposed to $10.9 in China and just $0.8 in India. Consequently, India's manufacturing sector still only provides 12% of its GDP and 15% of its employment. Unless India's manufacturing capabilities dramatically improve, it will remain on the wrong side of history.

According to demographic projections, India alone will contribute two-thirds of the entire global increase in labour over the next 15 years. Total available labour in India will, in fact, be larger than that of China and the US put together. A large surplus of labour is usually perceived as very good news - often referred to as India's 'demographic dividend'.

However, to effectively utilise this 'dividend', India needs to find a way to provide education followed by vocational training and finally jobs on an unprecedented scale - more than 100 million additional jobs in the next decade compared to the less than 20 million created in the previous one. Otherwise, the 'demographic dividend' will very quickly become the 'demographic tax' - a large surplus of skill-less and job-less population.

Usually economies can leverage their fastest growing sectors to contribute to such job creation efforts. Unfortunately, India's largest and fastest growing sector, the services sector, can't provide these jobs. Service sectors by definition are based on high value but low employment structures. They are not designed to generate mass employment since they don't offer any significant backward linkages to other sectors. Even at its peak, the outsourcing sector employed only about 0.2% of India's population. Even at its current breakneck growth rate, it would take another 50 years before outsourcing can offer the same number of jobs as agriculture does today.

And assuming that the current service sector growth rate will continue is a heroic assumption in itself. Any competitive advantage based on cost alone tends to be ephemeral. We have already begun to see a gradual shift away from India to lower cost countries such as Philippines and Vietnam. So while IT services and outsourcing are shining examples of India's contribution to global economics, they are unlikely to be able to feed, clothe or employ India's teeming masses. These sectors are not the workhorses that can take India into economic 'superpowerdom'.

India might still be able to achieve the truly unprecedented - a ride to global 'superpower' status without creating jobs and without any significant contribution from its manufacturing sector. But the point is that we shouldn't bet on it. Or worse, behave as if it's an assured outcome.

Rakshit Pandey works in a New York-based global investment firm. The views expressed by the author are personal.

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