Issue 56 Vol III, January 31, 2008

A N A L Y S I S

For whom this prosperous India?
Vinod Anand and Ch. Paramaiah

Economists and various studies conducted across the globe envisage India and China to rule the world in the 21st century. For over a century the United States has been the largest economy in the world but major developments have taken place in the world economy since then, leading to the shift of focus from America  and the rich countries of Europe to the two Asian giants-India and China.

For the year 2006-2007 India's GDP grew at an impressive 9.2 per cent. The share of different sectors of the economy in India's GDP is as follows: Agriculture - 18.5 per cent, Industry - 26.4 per cent, and Services - 55.1 per cent. The fact that the service sector now accounts for more than half the GDP is a milestone in India's economic history and takes it closer to the fundamentals of a developed economy. Over the past four years India’s GDP growth has clocked up an average annual pace of more than 8%, compared with around 6% in the 1980s and 1990s and a measly 3.5% during the three decades before 1980. India seems to be reaping the rewards of reforms that were made in the early 1990s. By 2025 the India's economy is projected to be about 60 per cent the size of the US economy. India, which is now the fourth largest economy in terms of purchasing power parity, will overtake Japan and become third major economic power within the coming 10 years.

According to the economic data for the financial year 2006-07, agriculture accounts for 18% of India's GDP. From a nation dependent on food imports to feed its population, India today is not only self-sufficient in grain production but also has a substantial food reserve. The progress made by agriculture in the last four decades has been one of the biggest success stories of free India.  The inflation rate is only a bit higher than the target of three per cent set by the Reserve Bank of India.

There has been a surplus in India's BOP in both current and capital accounts. The main driver behind India's current account surplus has been invisible inflows, particularly private transfers comprising remittances, along with software service exports. The surplus in both accounts since 2002, have resulted in accumulation in the foreign exchange reserves of the country. The trend is consistent with that of most economies of developing Asia, particularly East Asian economies. A strong BOP position in recent years has resulted in a steady accumulation of foreign exchange reserves. The level of foreign exchange reserves are around US $200 billion. The capital inflows, current account surplus and the valuation gains arising from appreciation of the major non-US dollar global currencies against US dollar contributed to such a rise in forex reserves.

Money Supply (M3) has grown by a robust 22.5 per cent (year-on-year) as of October 26, 2007 compared to 18.4 per cent last year. The annual inflation rate in terms of WPI was 2.97 per cent for the week ended October 29, 2007 as compared to 5.35 per cent a year ago. Fiscal deficit and revenue deficit have decreased by 6.1 per cent and 11.8 per cent during April-September 2007-08 over the corresponding period last year.

The domestic savings rate or the ratio of gross savings to GDP up at 32.4 per cent in 2005-06 and Gross domestic investment rate at 33.8 per cent in 2005-06, currently GDP investment ratio is 35% which is in line with other developed nations. Exports grew by 18.5 per cent in dollar terms during April-September 2007. Imports increased by 25.5 per cent in April-September 2007.

The Fiscal Responsibility and Budget Management Act in India has resulted a declining deficits both in the center and state levels. Some deficit indicators are expected to decline by 0.7-0.9 Percent of GDP for the year 2006-07. The Fiscal Deficit in India has declined in the recent times. The Tax Collections of the Government has increased, particularly the taxes such as Income Tax, Corporation Tax and the Service Tax.

India is tremendously progressing in the field of Science and Technology. It has the third largest scientific and technical manpower in the world. The Council of Scientific and Industrial Research runs 40 research laboratories that have made some significant achievements. In the field of Missile Launch Technology, India is among the top five nations of the world. It is heartening to note that it has recently launched the first commercial satellite.

India has less income inequality than China or America. But it has much more poverty. Some 260 million  people still live on the equivalent of less than $1 a day. Half of all children under five are malnourished. Better infrastructure and education are needed to make the rural poor more mobile so they have an escape route. In this way, better infrastructure and improved public services can not only increase growth, but also spread the rewards.

India was the fourth-largest recipient of FDI during 2005-06 and was instrumental in FDI inflows to South Asia surging by 126 per cent, amounting to US$ 22 billion in 2006, reveals UNCTAD’s World Investment Report. In India FDI equity flows were US$ 5.5 billion in 2005-06, it increased almost three times to US$ 15.7 billion in 2006-07, representing a growth rate of 184 per cent. In fact, calculating the total FDI inflows into India by international best practices places the total inflow at US$ 19,531 million. This huge inflow of FDI has in turn reversed the past trend, with FDI inflows overtaking the portfolio investment inflows by almost US$ 5.6 billion in 2006-07, according to the RBI’s report on International Investment Position. Cumulative FDI inflows during the period August 1991 to July 2007 amounted to US$ 60,242 million. Between 2001-02 and 2006-07, inflows increased by about two and a half times.

The biggest danger of today's rampant economic optimism is that it could breed complacency about the need for reforms. That would be a sure recipe for a future slowdown. India needs faster growth to create more jobs for its expanding population and to make it easier to relieve poverty. On the supply side, the indications are not too good. Crude oil prices touched an all-time high in 2007 and are expected to stay high in the coming year.  One of the obstacles to growth in manufacturing is India's labour laws, which are among the most restrictive in the world. The big problem is the dreadful quality of public services, from education and health to the provision of water. Half of urban households lack drinking water within the home; one quarter have no access to a toilet, either public or private. Many public services in cities have worsened in recent years.

India needs to improve its HDI rank, as at 127 it is way below many other developing countries' performance. The UPA government is committed to furthering economic reforms and developing basic infrastructure to improve lives of the rural poor and boost economic performance. Government had reduced its controls on foreign trade and investment in some areas and has indicated more liberalization in civil aviation, telecom and insurance sector in the future.

Since independence Indian economy has thrived hard for improving its pace of development. Notably in the past few years the cities in India have undergone tremendous infrastructure up gradation but the situation in not similar in most part of rural India. Similarly in the realm of health and education and other human development indicators India's performance has been far from satisfactory, showing a wide range of regional inequalities with urban areas getting most of the benefits. In order to attain the status that currently only a few countries in the world enjoy and to provide a more egalitarian society to its mounting population, appropriate measures need to be taken. Currently Indian economy is facing these challenges.

India needs to invest 3-4% more of its GDP on infrastructure to sustain 8% growth. Reforms need to be accelerated in all sectors. Difficult issues such as rationalizing user fees for services need to be faced. The country’s consolidated fiscal deficit has been persistently large for many years. While recent efforts to tackle the deficit have paid off in substantial progress, it remains a continuing concern. India’s existing labor regulations - among the most restrictive and complex in the world - protect only the insiders, the small number of workers who are already working in the organized sector, while hobbling the creation of manufacturing jobs for the tens of millions unemployed or working in poor quality jobs.

In terms of what we have written above, there is no doubt that India is almost a booming economy, but the big question is for whom? The plight of the common masses remains almost the same. The trickle-down effect does not work, the percolation effect is fully absent. There is still abject poverty, and the extent of poverty below the poverty line is still severe. Other equity issues are also serious. The so-called policy makers should divert their attention on the lot of the proletariat. Once this is done, India will become a SUPER power. Let us wish the county well.

Both the authors are presently placed at the National University of Lesotho in Southern Africa

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Bhutan: pangs of new-fangled democracy
Micky Sharma

AS the rest of the world ushered in 2008 with all sorts of antics, in India’s unassuming north-east corner the small Himalayan kingdom of Bhutan took a big step towards democracy. After almost a decade of limbo over the proposed move to replace absolute monarchy with a democracy, the country had taken the first big step by electing its upper house of representatives on 1 January 2008. The kingdom of nearly seven hundred thousand people finally elected its first national council.

But before the world could take notice and applaud the efforts of a monarchy of over a hundred years initiating a democratic process, four near-simultaneous blasts ripped the silent relief people were experiencing in the country. Although there were no casualties reported, some people suffered splinter injuries. The very fact that the first step has been greeted with such a ‘bang’ makes the journey to follow, even more arduous then it seemed earlier.

Bhutan’s King Jigme Singye Wangchuck has made efforts to bring in democracy at the right time, while trying to gauge if his countrymen were ready to embrace what many are calling the cable TV culture. Although reluctantly, but the people of Bhutan have made up their mind about going to polling booths, as ‘directed’ by the king, as they still believe that the monarchy still knows what’s best for them.

The king had earlier, in December 2006, renounced his throne and handed it over to his son, Jigme Khesar Namgyel Wangchuck to let him get a feel of monarchy before the country went into over drive for completing the democratic process. A move that showed a rare case of novelty where the royals were initiating the democratic process, albeit with excessive caution.

While the blame for the serial-blasts of January 20 has not been claimed by anyone, the local police are pointing fingers at the disgruntled Nepalese-speaking ‘refugees’, who have not been given the right to vote under the new democratic set up being made. This is the sore point of the whole process that is going on in Bhutan, and also one that holds the potential to derail, the good work of the previous decade.

Many refugees who had fled Bhutan in early 1980’s are mostly Nepali-speaking people and are now housed in seven United Nations Office of the High Commissioner for Refugees (UNHCR) camps in Nepal and other parts of western Nepal. These people were made to leave the country by force after they protested a law which cancelled their citizenship. Most of them were living in the southern part of the country and had to flee to Nepal to avoid further ire of the locals as well as the government. The issue has been raised time and again by the Nepal government with Bhutanese authorities but not a single refugee has returned to what these people still believe to be their own country.

The country goes to polls for its lower house on March 24th, and the threat of another attack looms large. But what should concern the people running the show in Bhutan is that the very set up of their democracy will be based on the alleged violation of basic rights to all the Nepalese-speaking people who are being denied any kind of representation under the new system.

India, Bhutan’s friendliest neighbour and biggest aid donor, has kept out of the dispute deeming it to be a bilateral matter between Nepal and Bhutan. While diplomatically and politically also that is the correct middle path to take, but on humanitarian grounds India has failed the hopes and expectations of both its neighbours. Over the years India has minimized its role in the day to day affairs of Bhutan, but this affair carries a test for all established democracies. To expect Bhutan, where democracy has not even reached its nascent stages, is a folly on India’s part. Being the big and friendly neighbour India needs to pass the words of wisdom, which have kept it together in the last 60 years, to Bhutan. For keeping people together is not a good way to run a democracy, but rather the only way.

“We have become not a melting pot but a beautiful mosaic. Different people, different beliefs, different yearnings, different dreams.” — Jimmy Carter

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Testing times ahead for Sri Lanka
Micky Sharma

THE end to the ceasefire between the Sri Lankan government and the LTTE has unruffled more than a few feathers in not just Asia, but throughout the world. The little time of peace that the island nation saw, after the 2002 peace accord, has now finally come to an end, which is bound to create more instability in the area. Sri Lankan President Mahinda Rajapaksa’s recent claim of ensuring peace in the country is somehow not accompanied by a feeling of relief.

Firstly Rajapaksa had said that within a year there will be peace in his country, with or without the LTTE chief V Prabhakaran. It is really hard to find compassion in the statement and to say the least it sounds like a subtle war-cry. In his efforts to eliminate, or rather more effectively curb the militant outfit, Rajapaksa has already started the process of cosying up to India. In a recent interview he had claimed that if the Sri Lankan armed forces are able to capture Prabhakaran, he would be handed over to the Indian authorities to be tried in the Rajeev Gandhi assassination case. And the icing on the cake was definitely his announcement that twenty years after the IPKF’s (Indian Peacekeeping Force) mission in Sri Lanka, as an acknowledgement of their contribution his government was building a memorial for Indian soldiers which would be ready by February 2008. He also said the LTTE could have been wiped out if the Indian troops had not withdrawn at that time due to political compulsions. The reason for building the memorial as stated by Rajapaksa was that the people of Sri Lanka had not shown enough ‘gratitude’ towards the sacrifice of the IPKF soldiers. He also defended this decision saying that it was not an unpopular move with the masses in Sri Lanka, although the LTTE might not like it.

If his recent statements are anything to go by, then India should be listening with as much attention as possible, for this gesture might carry more expectation than gratitude.

In the days Rajapaksa refers to, India was a different country, with a very different political atmosphere. Hence, Rajeev Gandhi could imagine sending Indian forces to Sri Lanka to fight tamils. But in today’s political environment, where regional parties from south India play Kingmakers, it is impossible for the government to even contemplate such a move. Keeping aside the political and ‘southern’ ramifications, even in other parts of the country, such a move would be considered a horrendous mistake. There is a certain role that India is expected to play when it comes turmoil in the southern neighbourhood, but the exact definition of that role might take some thinking. There are lessons that India has probably learnt when it comes to tackling terror, and foremost amongst them has to be that military might is a way of bringing someone to a position of negotiation, but its not the negotiation itself.

The intentions of the Sri Lankan President are noble as he hopes to bring peace to the country, but he has to look at the country as a whole. He can ill-afford to ignore the parts controlled by the LTTE, as a solution to this doesn’t lie in dividing opinions further, but rather driving home the point that all thoughts and feelings need to be combined to bring long-lasting peace to the country. Saying that “We are ready to talk”, or “We will give them a proposal, they either leave it or take it” wouldn’t help anyone. The All Party Representative Committee has also asked the government to devolve more powers to the minority tamil community, to ensure that they too can enjoy the benefits of devolution. But the government has reiterated its stand that it would wipe out the LTTE first, and then go on with the devolution process. While India’s role in all this looks minimal, and it should stay that way, the least it can tell the Sri Lankan government is that if swords precede words, the only possible outcome will be more casualties.

It is clear that the way to heal society of its violence and lack of love is to replace the pyramid of domination with the circle of equality and respect. — Manitonquat

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