HERS TO LOSE : Indias huge opportunities and challenges in the twenty-first century

Some excerpts from the book Inspite of the Gods: Strange Rise of Modern India by Edward Luce

Whenever events in India appear to be on the verge of falling apart, I often remind myself of what I was once taught about the behaviour of bees. If you were to be transported inside a swarm, it would appear to be anarchic, with individual bees buzzing around in every different direction. But if you stood back and observed the swarm as a whole, it would be going in one direction. In the last thirty years India has been through a nineteen month spell of autocracy, it has lost two leaders of the NehruGandhi family to assassination, it has faced separatist movements in Punjab, Kashmir, Assam and elsewhere, and it has switched from a closed economic regime to an open(ish) economy. It has moved from secular government to Hindu nationalist government and back again, it has gone from single-party rule to twenty-four-party rule, from anti-nuclear to nuclear, from undeclared border wars with Pakistan to a lengthy peace process. It has also moved from virtual bankruptcy to a lengthy boom. By any normal barometer, India appears to be highly unpredictable. These are Indias headlines of the last thirty years. But if you turn to the statistics buried deep in the inside pages you get a strikingly different impression. T. N. Ninan, one of the countrys most respected editors, calls India the one per cent society. Whichever indicator you choose, whether it is economic or social, India is improving at a rate of roughly 1 per cent a year. For example, Indias poverty rate is declining at about 1 per cent a year: in 1991 it was 35 per cent; by 2000 it was 26 per cent. It has probably continued to decline at roughly the same rate since then. Or take Indias literacy rate: in 1991 it was 52 per cent; by 2001 it was 65 per cent. Or life expectancy: in 1991 the average Indian would live until the age of fifty-eight; by 2001 that had risen to sixty-five years. Roughly the same congruence emerges from its international rankings. Indias human development index, which is compiled by the United Nations Development Programme, went from 0.254 in 1970 to 0.602 in 2005, which translates into an annual improvement of about 1 per cent. To judge, by the living conditions of ordinary Indians and not by the drama of national events, the country is moving forward on a remarkably stable trajectory. Many friends of India wish the country would accelerate its rate of progress. An improvement of 1 per cent a year is fine if you already have a developed economy, but when almost 300 million people continue to live in absolute poverty, it is painfully slow. Unfortunately, though, Indias fragmented political culture makes it very difficult for governments to take decisive action that would convert India into a 2 per cent society, like neighbouring China. Yet, on Indias plus side it would take very large-scale disaster or war to halt or reverse its steady progress.

If intentions can be ascribed to nation states, you could say India has given a higher priority to stability than it has to efficiency. In many ways the opposite could be said of China. Myron Weiner once said that India moved slowly because it was diverse. That also meant it was relatively stable. If something goes wrong in one part of the country, it does not necessarily spread to other areas as it would in a more homogeneous society, like Chinas. What is it that keeps India stable? After independence, many foreign observers predicted the country would not last for long in its existing form. Because of its profound social, linguistic, religious and ethnic diversities, India would inevitably break up into separate nation states. One authoritative book from the early sixties, India: The Most Dangerous Decades, which dwelt on Indias separatist threats, was very widely cited.5 but India has not dissolved. Nor does it seem likely to. Another widespread expectation was that India would not remain a democracy for long. The assumption then, as now, was that democracy was not compatible with absolute poverty or with majority illiteracy. Again, this view has been belied by events. There are many reasons why these two expectations proved unfounded. Perhaps the most important reason why India has remained intact as a country is because it is a democracy: and perhaps the most important reason why India has remained a democracy is because it is so diverse. Far from endangering democracy, Indias pluralism makes democracy essential. A related but more insidious assumption is that China is growing faster than India because it is authoritarian. This view is held by some western and Asian commentators. I am certainly not alone in having ethical reservations about posing questions to which the only answer is dictatorship. But I also think the debate is misleading. India went through a period of autocracy under Indira Gandhi that turned out to be damaging to the countrys social stability and to its economic prosperity. The autocratic tendencies of Congress under Indira Gandhi strengthened the forces of regionalism in Indian politics and stoked separatist insurgencies on Indias national borders that brought its national integrity into question. That India remains in one piece owes much to the fact that Gandhi restored the system of federal democracy, which has provided a peaceful outlet to most of the countrys regional tendencies. There is a better answer to those, who argue that India suffers from a lack of autocracy: Pakistan. . . The contrast between India and China is also selective. Although China has much better economic and social indicators than India, this arguably has little to do with their contrasting political systems. The Indian state of Kerala, which is as democratic as any other, has a life expectancy of seventy-four and a literacy rate over 90 per cent, compared to seventy years and 90 per cent for China. There is absolutely nothing to indicate that any of Chinas policies are inconsistent with greater democracy, said Sen. At a more important level, India challenges us to provide a clear definition of what we mean by development, which is usually taken to mean economic prosperity and little else. Should it not also mean giving people significant choices in how they express themselves and conduct their lives? If the

answer is yes then democracy should be seen as a development goal in itself. On this measure, India is ahead of China. Clearly India will have to find better ways of ensuring that its democracy delivers a fairer economic deal to its people. . . The reforms of 1991 have benefited India. If carried out sequentially, further liberalisation would lead to higher growth rates and would bring greater benefits. But Indias free market liberalisers cannot simply wish away the state. Nor should they want to. Without a more meritocratic and just state, Indias economy will suffer. To thrive, Indias businesses need good infrastructure, a literate and healthy workforce, a sustainable environment and the promise of law and order. Very little of this can be accomplished by the private sector on its own. The division in India, and elsewhere, is too often between those who believe the state should dominate all aspects of life and those who believe it should play virtually no role beyond defence and law and order. As we shall see, it is in the interests of all people, rich or, poor, right wing or left wing, for India to develop a more responsive and modern state. In what follows we will look at four critical problems that India faces in the coming years and decades: first, the challenge of lifting 300 million people out of absolute poverty and of providing the remainder with a more secure standard of living; second, overcoming the dangers of rapid environmental degradation, which, at the human level, is poisoning Indias air and water supply and which at the global level will increasingly add to climate change; third, heading off the spectre of an HI VAids epidemic, which, if untackled, could derail Indias upbeat economic projections; finally, protecting and strengthening Indias system of liberal democracy, which, along with the talents of its people, is the most precious asset the country possesses. Then we will look at Indias extraordinary potential to rise over the coming decades. But in order to exploit its opportunities fully, India will have to tackle its problems more directly. Overcoming them would tax the powers and resources of an efficient and forward-thinking state. In its present condition, there is a considerable question mark over Indias state. In 1900 the worlds population was 1.6 billion. By 2050, India alone is projected to hit that figure, having overtaken China as the worlds most populous nation by 2032. The various United Nations scenarios for Indias population plateau range between 1.3 billion and 1.9 billion people.1 There is a forecasting margin of error amounting to 600 million people. The more rapidly India can overcome poverty, the more likely it is that its population will stabilise nearer one billion than two billion people. Perhaps the key determinants of how quickly the nation will be able to eradicate mass poverty are whether it can establish a better economic climate for its farmers and create more jobs in manufacturing and services. India lifted its agricultural yields drastically in the 1970s and 1980s. But in the last fifteen years its yield growth for cereals has tapered off. India does not necessarily require another generation of miracle rice or wheat to achieve a second green revolution, although new seed technology would help. At the moment the countrys average yield per hectare is roughly half that of China. To catch up with its

neighbour, a series of long-overdue reforms must be implemented. But this is easier said than done. Rural land holdings must be consolidated by the creation of a market for voluntary land sales . . . . But most Indian states make it compulsory for farmers to sell their produce to government-appointed middlemen who drive their buying prices down and their selling prices up and pocket much of the difference. Indias farmers should be allowed to sell to whom they choose. Liberalising Indias retail sector, which would bring investments into cold-storage facilities and new agribusinesses, would also stimulate more rapid change. But the government must do more than abolish agricultural price controls if it wants to boost rural prosperity. The state must also play a more direct role. The most obvious deficiency is in Indias dismal rural infrastructure, both physical and social. More all-weather roads must be built io link villages to towns, and Indias primary and secondary education system has to be reformed to ensure that teachers turn up and do their jobs. The same applies to village health centres, which as often as not are dilapidated hulks stripped (by employees or local residents) of their equipment. Fewer than half of all Indian births are assisted by trained midwives or doctors, compared to 97 per cent in China. The - problem is neither money nor technology. It is the efficiency of government. In order to encourage farmers to grow other crops, New Delhi should overhaul its regressive system of food subsidies. As India grows richer, people are spending proportionately more on vegetables and proteins and less on basic cereals. But almost all of Indias agricultural subsidies go to wheat and rice farmers. Diversifying the public incentive system to encourage more horticulture, vegetable, fish and chicken farming, which have greater export potential, would give a large income boost to Indias impoverished villagers. Wheat and rice are also heavily water- intensive, and India can ill afford to continue wasting the fickle offerings of its rain gods. Furthermore, crop diversification would employ more people: vegetable farming employs fifteen times more people per hectare than rice or wheat. The government should deliver reliable electricity and clean water to all its villages. Providing these resources free of charge to select categories of people (mostly rich farmers), makes it uneconomic to provide them to anyone else. If utilities are allowed to charge customers for what they use, there is an incentive to supply them. There muse also be better incentives for farmers to collect rainwater. More than 70 per cent of Indias rainfall runs off into the sea. 14 In the cities charging the poor for water would ensure that the poor would receive it. Giving it to them for free means they will continue to get either sewage or nothing. In practice, the poor pay private water suppliers a multiple of what it would cost the state to deliver. The other half of Indias poverty challenge is to create nonagricultural employment for many more people. Indias workforce is expanding at roughly ten million people every year, but only about five million new jobs are created each year. Some new employment can be created by reforming agriculture, but not nearly enough. To stray into economic jargon for a moment, Indias unreformed farming sector -- as it exists now -- has a zero or even a negative employment elasticity of

growth. This means that improvements to agricultural productivity entail less, not more, labour. Indias service sector could take up some of the slack, particularly if the country can do more to boost its tourist industry, which remains surprisingly small considering the unparalleled wealth of things to see and experience in India. However, there is no substitute for creating a larger and more labour-intensive manufacturing sector. This does not have to be polluting, because India possesses the technology and capital to develop in a cleaner fashion than countries that industrialised earlier. Nor does it have to be socially disruptive. Production, particularly in food processing and textiles, can take place in the small towns of provincial India, especially if the roads are paved and refrigeration is provided. We have already glimpsed Indias aptitude in the garment and fashion sector, and the precision and value the countrys entrepreneurs can add to auto-components and pharmaceuticals. But, these cutting-edge sectors mostly employ graduates. The rest of Indias labour force must be given better education and more vocational training if they are to become employable. The government must also remove the obstacles that inhibit investors, from putting more money into the economy. Indian managers spend 15 per cent of their time dealing with government inspectors, which is almost double that of China. Indian companies also spend far too much time filling in complicated tax forms and dealing with venal customs officers. Although New Delhi has taken steps to simplify its tax code, India still arguably has the most complicated tax system in the world.17 In some parts of India octroi -- a tax levied on the passage of goods from one state to another -- costs more to administer than it generates. Corruption is the only possible explanation for why it has been kept in place. Creating better infrastructure, particularly ports, roads, railway lines and electricity supply, is also indispensable for the development of manufacturing. The infrastructure projects themselves would significantly boost employment. Indias government is stuck in chronic fiscal deficit. It needs all the capital it can get from domestic and foreign private sources to upgrade its infrastructure. New Delhi has pledged by 2009 to open up Indias banking sector to full competition. Finance houses such as Citibank and Standard Chartered have already picked up significant business from the growing middle classes. Giving them and Indias growing number of impressive and internationally competitive private banks better access to the poorly managed stateowned rural bank network would significantly boost the countrys ability to translate savings into investment, which would generate more capital to invest in better infrastructure. New Delhi has also taken steps partially to open its insurance sector to foreign investors. Less than 10 per cent of the population has life insurance. The more people who can be insured, the more capital there is to invest. India has nothing to fear from further financial liberalisation. Finally, India must reform its labour laws. This would not be anti-poor, as many have argued. If it is impossible to fire someone, you are much less likely to hire him in the first place. India has just ten million trade union members, of whom only 1.37 million are considered to be active in their unions. But in the name of the poor the unions exercise a veto on reform of the very labour regulations that contribute to keeping most of Indias 470-million-strong workfotce locked out of the formal economy. India should acknowledge that on this issue the countrys unions, like its

business lobbies, are just another vested interest who speak for their members, not for the poor. The second large challenge is to prevent wholesale environmental degradation. Understandably, Indians get irritable when western nations lecture them on protecting their forests or reducing carbon-dioxide emissions when the west is responsible for most of the worlds environmental deterioration. India accounts for only 4 per cent of global carbon-dioxide emissions but has almost 17 per cent of the worlds population.9 Clearly on a per capita basis, the citizens of the US, Europe and other rich nations generate much more pollution and derive much greater benefit from doing so. But this situation is changing. Many of the richer nations are taking steps to promote energy efficiency and introduce cleaner fuels. Indias share of the responsibility for global warming will escalate rapidly. No solution to climate change will be credible without the participation of India and China (led, of course, by the United States, the worlds biggest polluter). The west, and particularly the US, should take a stronger lead in offering India and the rest of the developing world financial incentives to embark on a cleaner path of development. For its part, India must get over its resentment of western double standards and acknowledge that Indians will be disproportionately harmed by the climate change which a majority of scientists are now predicting. India should not cut off its nose to spite its face. Indians already face acute quality-of-life issues that are related to their environment. Fewer than 2 per cent of Indians own their own vehicles. (The comparable figure is 60 per cent for the United States.20) Yet Indias cities are already clogged with traffic. In 2004, for the first time, more than a million private vehicles were sold in one year in India. That number will rise sharply. By 2030, India is projected to have 200 million vehicles, public and private, compared to 40 million in Quite apart from urban air quality, or more mundane issues such as parking space, it is hard to imagme a road-building programme that could keep up with vehicle demand. An India with five times as many vehicles as today (and rising) is a vision of purgatory. There are many areas, such as telecoms (in which mobile phones are booming without the fixed-line service having improved much), where India has leapfrogged a stage of development by exploiting new technology. It could leapfrog the classic stage of traffic gridlock by planning now for cleaner and more efficient urban transport systems. Several projects, such as the Delhi Metro, point the way forward. Every Indian city needs a Delhi Metro, in spite of the high capital costs and subsidies that are involved in such mass-transit projects. Furthermore, India should upgrade its 63,000-kilometre rail network - the second most extensive in the world which has the capacity to transport goods and people around the country in a much less polluting and more economically efficient way than roads. At the moment, the opposite is happening. Indian Railways overcharge freight users in order to subsidise passengers, and the high tariffs push freight on to the roads, which clogs them up. A similar problem exists in the power-generating sector. Indias state power boards high electricity charges make it difficult for small businesses to survive, since they have to buy their own highly polluting diesel generators.

The quality of air and water in India is declining as rapidly as the economy is improving (without being factored in as a cost). It is estimated that an eighth of the countrys premature deaths are caused by air pollution. Several hundred thousand children die every year from dirty water. Retreating to the past is not a solution, as some of Indias environmental activists seem to believe. In the villages people die young of respiratory diseases because they lack electricity or access to gas. The climate and the topography of the village make it impractical to burn cow dung or wood outdoors, so they light their fire indoors, which gradually destroys their lungs. Only about half of Indias village households have a power connection. Likewise, most waterborne diseases are caused by lack of modern sanitation. Even if it were technically possible to retreat to a prosperous rural idyll cut off from the modern world, it is too late because India simply has too many people. The lessons on electricity tariffs also apply to irrigation for Indias farmers. As we have seen, only rich farmers can afford to pump water from the ground leaving everyone else with less water, and accelerating soil deterioration by increasing salinity levels. Many Indians still believe utilities should be provided for free or at a nominal cost. But somebody, somewhere, always pays. India also needs to strengthen its system of parliamentary and local democracy. Preventing criminals from standing in elections would be a start. But India must also find ways of raising the calibre of politicians in general. The quality of debate and scrutiny in Indias Lok Sabha (parliament) is remarkably poor for a nation that has so many eloquent talkers and sharp intellects. The quality of Indian parliamentarians has declined markedly over the last generation, which has taken its toll on the quality of public reasoning. In the 1950s parliament met on average for between 120 and 138 days a year. The average today is between 70 and 80 days a year. This contrasts with the UK, where the House of Commons meets for 170 days a year, and the United States, where Congress meets for 150 days a year. Indian politicians often profess a passionate commitment to a subject or a cause and then do not bother to show up for the debate, the committee process or even the final vote. The Speaker of Indias parliament frequently has to adjourn proceedings because MPs are unable to maintain discipline. India is a paradox: it has an impressive democracy that is peopled, for the most part, by unimpressive politicians. Finally, India could better protect its internal system of liberal democracy by improving relations with its immediate neighbours, none of which has been able to maintain democracy for long, and most of which are highly prone to instability. . . Most of this chapter has focused on the challenges India faces in the coming years if it is to continue to ascend the international rankings. They are Herculean. But equally, its advantages are colossal. India never lacks for scale. In spite of the pressures of population density; Indias clearest advantage over China and other developing countries is its demographic profile. From 2010, Chinas dependency ratio -- the proportion of the working-age population to the rest -- will start to deteriorate. In contrast, Indias dependency ratio will continue to improve until the 2040s. In the next twenty years the proportion of dependants to workers will fall from 60 per cent

of the population to 50 per cent. This will give Indias economy a large demographic dividend. It is commonplace to say a nations future lies in its youth. But Indias future also lies in its youthfulness. The higher the proportion of the population that is of working age, the higher the rate of savings in the economy. A higher savings rate boosts investment, which lifts economic growth in a virtuous circle that for India stretches almost as far as the eye can see. Already Indias savings rate is improving -from about 18 per cent of gross domestic product in 1990 to 26 per cent in 2006. This is still well below Chinas savings rate of more than 40 per cent, but Chinas rate is falling, while Indias is rising. India is also improving its economic efficiency. It has achieved between 6 and 8 per cent GDP growth with a savings rate of between a fifth and a quarter of national income. Growth in China has been comparatively expensive. Furthermore, India has accomplished high growth without any of the tools of an autocratic state. No government in a democracy can impose compulsory saving on its population -- as happened in much of East Asia -- and hope to be re-elected. Equally, no government in a democracy is in a position to impose family planning, as China has done with its one-child policy. Indias growth potential is even more striking if you consider how much has been achieved with so little. It lacks the modem infrastructure projects that have helped propel China forward. It lacks foreign direct investment, which at $5 billion in 2005 was one-tenth the amount that China attracted. And it lacks universal literacy. Yet its economy is still growing rapidly. Imagine what India could achieve if it drastically improved its infrastructure or raised the quality of elementary education. India also possesses institutional advantages that have convinced some people that the Indian tortoise will eventually overtake the Chinese hare. As Indias economy develops, these soft advantages, such as an independent judiciary and a free media, are likely to generate ever-greater returns. Many investors are deterred by the countrys bureaucracy, but none fear that they would be subjected to the arbitrary controls on freedom of speech that Yahoo, Google and Rupert Murdochs News Corporation, have suffered in China. India can also draw on a deep well of intellectual capital. One in four business start-ups in Silicon Valley are launched by non-resident Indians. Almost half of Americas annual H1B visas are awarded to Indians. More than a hundred multinational companies have research and development centres in India, compared to just thirty-three in China. None of these expectations of Indias growing economic strengths can be taken for granted, which is why so much of this chapter has focused on the problems rather than the opportunities that confront the country in the coming years. India has in the past demonstrated a tendency to shoot itself in the foot. As the joke goes, India never misses an opportunity to miss an opportunity. It is also suffering from a premature spirit of triumphalism, believing it is destined to achieve greatness in the twenty-first century without having to do very much to assist the process. Much of this self-confidence stems from the countrys sheer weight of numbers. The nations elites assess India purely in terms of its economic size, rather than comparing the standard of living of its people with those in other countries. Surpassing the overall size of Japans economy is all very well, but Japan would still have only a tenth of Indias population, and virtually nobody living in poverty. A nation should surely be judged by how it treats its people, not by how many people it

has. Which brings us to one final challenge that India must overcome in the near future: the complacency of its privileged classes. The key to overcoming the problems outlined earlier lies in injecting a much greater sense of urgency into the mindsets of Indias politico-bureaucratic elites. This will come only if Indias electorate at large is more alert to the countrys challenges and can transmit greater pressure through the ballot box to reform the state. India is not on autopilot to greatness. But it would take an incompetent pilot to crash the plane. As Vijay Kelkar, one of Indias wisest economists, has written: The twenty- first century is Indias to lose.