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India's Rise to Economic Stardom

With India’s economy humming along at 7.6 percent and faster, and a demographic bulge of young people set to explode onto the workforce, it should be easy for India to head towards economic stardom, writes Edward Luce in his book “In Spite of the Gods: The Strange Rise of Modern India.”

Edward Luce, the former South Asia bureau chief of the “Financial Times” writes in his book “In Spite of the Gods: The Strange Rise of Modern India” that India’s high-octane growth is capital-intensive, fueled largely by the growth in services like IT and high-end manufacturing. He points out that India’s lopsided growth does not hold out enough promise of jobs for unskilled people at a time when nearly 10 million Indians enter the labor force every year.

He says a resurgence of India pride is definitely good after decades of post-Colonial lack of confidence, but he tells Uttara Choudhury in New York that there are too many signs of an overconfidence that looks like hubris. Yet, Luce says it will take willful government delinquency to throw the Indian economy off its promising trajectory.

You have been accused of being "too gloomy" about the Indian manufacturing sector's ability to drive the economy, like it has in neighbouring China. Do you think India really has dim prospects on the manufacturing front?

I don’t understate India’s manufacturing potential. So, if that was a criticism it might be based on a misreading. We really get back here to the social nature of India’s growth. India has had very real successes in the sector over the past few years, but they are not spreading their benefits in terms of employment or in terms of wealth distribution to a wide enough group of people.

Compare the number of Indians employed in the formal manufacturing sector with that in China. There is a multiple difference 7 million in India and 100 million in China. India’s services sector is just not going to be able to employ that many Indians. It is going to be able to generate lots of revenues as it already is but to soak up India’s surplus labour force, it would be desirable to see labour-intensive, relatively low, value-added manufacturing.

Your book warns that India suffers from "a premature spirit of triumphalism, believing it is destined to achieve greatness in the 21st century without having to do very much to assist the process.'' Will smugness then be India's undoing?

“…it would be desirable to see labour-intensive, relatively low, value-added manufacturing.”

Self-confidence is definitely a good thing. If you have a choice between the post-colonial lack of self-confidence that we have seen in the past or this, I would choose this. But there is such a thing as over confidence that can have material consequences.

It is not just an aesthetic criticism I am making about mood music.  The fear I have is that there is an idea that India is on this sort of preset timetable and very little could disrupt it towards greatness. That really reinforces I think a broadly elitist complacency about pushing the sorts of reforms you need to ensure the sustainability of this growth. There is a huge need for investments in education and infrastructure. You don’t grow at eight percent without hitting bottlenecks unless you anticipate those bottlenecks and try and free them up in advance.

Eight or nine percent growth could very easily result in overheating and a collapse in growth. If we want to see nine percent growth in India five years from now, we need to see the investments now in ports, roads, airports and the railway system. Triumphalism detracts from the really essential pressure that ought to be applied on the government to get things moving more rapidly. That’s one element. The other is that it does cause people to overlook the inequality gap and treat it like it doesn’t matter.

Are you saying that the “India shining story” while not a myth is overblown and runs the risk of being punctured? Or do you believe India will be able to compete in a globalizing world and match China in economic weight?

“I have no doubt about India’s final destination. It is really a question of the speed of getting there.”

Nations are very abstract entities in an economic sense. So when you say can India compete? I think there are lots of sectors in the Indian economy that are already competing brilliantly on the global stage. And, there are more sectors today than there were two years ago and there were more two years ago than there were ten years before that. So the situation improves all the time. There is no doubt about it India can be a global economic powerhouse.

At the moment India accounts for 1.0 percent of global trade. It ought to be 16 percent. Hopefully, we are on a trajectory towards achieving that, but whether it takes 10 or 50 years is the question. It should take 10, but I fear some of the triumphalism will mean it might take 50. The difference between 10 and 50 is two generations.

I have no doubt about India’s final destination. It is really a question of the speed of getting there.

Has the growth of India's economy only exaggerated its inherent anomalies?

“It is fashionable to focus on infrastructure and it is right that people do. But I would really say it is the quality of elementary education that in the long-run matters the most.”

There are two ways of answering that question. One is to focus on growth in equality in India. The second question, therefore, would be, is it widening at the expense of the poor? I think the answer to that is, no. The rate of poverty is falling but it is not falling nearly as fast as the economy is growing.

Equally, employment growth is only 2.5 percent annually. It is not a labour-intensive growth pattern that India is in. So, in some ways it does sharpen the focus on I wouldn’t call it anomalies but the character of India’s growth story. It is capital-intensive and not labour-intensive.

I would certainly hope that it sharpens the focus on policy measures to remedy this gap to include many more Indians in the growth story. That would, of course, entail focusing on more investments in the agriculture sector principally and also making it more attractive for manufacturing companies to employ people.

What is the most overlooked development when it comes to India?

Edward Luce, the former South Asia bureau chief of the “Financial Times” is the author of "In Spite of the Gods: The Strange Rise of Modern India."

It is fashionable to focus on infrastructure and it is right that people do. But I would really say it is the quality of elementary education that in the long-run matters the most. Most of the Indian people, particularly in the villages are really not well-equipped without full literacy. You can build roads quite quickly but building a generation of educated people is something that takes longer and requires a more sustained sort of institutional competence.

Can you expand on some of the ideas behind your wry book title?

The real title, the one I submitted and argued and failed to win is the subtitle, “The Strange Rise of Modern India.” I would still be happy if that was solely the title but both publishers Little Brown and Doubleday wanted something punchier. Rather than wait for them to impose something like elephants and maharajas on me, I chose something punchy but not particularly meaningful.

As a rising economic star, if India does settle in as a world power, how do you expect it to behave?

“India has had very real successes in the (manufacturing) sector over the past few years, but they are not spreading their benefits in terms of employment or in terms of wealth distribution to a wide enough group of people.

I can understand the resentment of India’s neighbours. Just by the nature of India’s size, whatever India does, it generates suspicions. These are inevitable frictions but they don’t portend an India that is going to swallow up other people’s territory or use military coercion to achieve diplomatic ends. This is not the way India is configured.

India’s rise is going to create more export markets for other countries, more trade. It is no accident that American portfolio investors, the mutual funds in Boston and the great university endowments are eyeing India. If you look at India’s return on equity over the last few years it has been phenomenal.

As it regains serious self-confidence I would hope that India exhibits regional statesmanship and starts opening up its markets, even if it does so unilaterally to its neighbor. Currently, only 5.0 percent of India’s trade is with its neighbours that is an amazing distortion when you consider that India’s overall trade in goods and services is well above $100 billion.

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