Eight Myths About India
February 2, 2006
India was the star of the recent World Economic Forum in Davos, Switzerland (a world-gathering of movers and shakers that has become more fun since a few Hollywood icons decided to spice it up with their guilty consciences). The fuss over India has surprised many people who think China is the undisputed emerging nation. This seems the right occasion to address eight myths about India today:
1. INDIA HAS SLOWED DOWN. Although the economy is still growing at a rate of 7 percent per year, it has been fashionable to claim India’s free-market revolution has run its course. India is not slowing down. Just this week Dell announced it is setting up a huge manufacturing plant and its local subsidiary will increase its workforce by 50 percent.
2. INDIA’S ONLY CONTRIBUTION TO THE WORLD IS CALL-CENTERS, THANKS TO CHEAP LABOR. Back-office work is no longer the big thing in India’s ever-changing IT services. Indians are now creating technology, which is why companies like Microsoft are investing massively in Research & Development there, rather than outsourcing more call-centers. Other areas of the economy such as retail have been expanding at a spectacular pace. U.S. companies have been desperate to enter that market (estimated to be worth $250 billion), which until very recently was heavily protected.
3. INDIA IS CONSPIRING AGAINST THE U.S. BY LURING ITS CAPITAL AWAY. Actually, India is luring capital from all over the world, but specifically from Asia. Half of the capital behind the eye-popping growth of the Sensex share index in the past year is Japanese.
4. INDIA’S SPOTTY ECONOMIC GROWTH IS CIRCUMSCRIBED TO PLACES LIKE BANGALORE. In fact, the economic expansion is very decentralized. Many other cities, such as Madras and Hyderabad in the South, Mumbai and Pune in the West, New Delhi, Gurgaon, and Noida in the North, and even Calcutta in the East, have experienced a powerful expansion of economic activity. The retailing boom has been taking place primarily in cities such as Madras.
5. POVERTY HAS NOT BEEN REDUCED. It is fashionable to say that only a small minority has benefited from India’s globalization. Poverty is still high among India’s one billion people, but the real story is that at the end of the 1970s half the population was under the poverty line (as bureaucrats call it) and today less than one third is living in poverty. A majority of the population still works in agriculture and does not participate in the service sector boom, but that is the fault of draconian labor laws that are still holding back many investors from starting up more companies. India’s middle class (almost a quarter of a billion people) is the largest in the world.
6. THE FREE MARKET REIGNS IN INDIA. The socialist economy of the Nehru-Ghandi dynasty that governed the nation for decades has been transformed and reformed. Many sectors have been liberalized and/or privatized. But a close look at the many restrictions still in place indicates India has a long way to go and would do well to continue its reforms in order to achieve full development. Apart from labor laws, there are several restrictions. The banking sector is still dominated by government entities, foreign investors cannot hold majority stakes in major services like telecommunications, huge public spending is still soaking up a lot of the country’s savings at the expense of private investment, and tariffs are still in some cases as high as 25 percent.
7. DEMOCRACY HOLDS BACK ECONOMIC LIBERALIZATION. Correctly understood, democracy is a mechanism that helps to peacefully decide who governs and therefore holds accountable those in power. Although in the short run, dictatorships appear to be more stable environments for reform, progress ultimately depends on a trial-and-error process that only open discussion—the marketplace of ideas—can push forward. Yes, in some respects India’s democracy, where Hindu nationalists and some radical left-wing parties play an important part, has prevented some draconian measures of the sort taken by Chinese reformers. But a closed political environment is an impediment to long-term development—the reason that in countries such as Taiwan and South Korea, which had somewhat open economies and closed political systems, a transition to democracy eventually took place.
8. FREE MARKET REFORM HAD LITTLE TO DO WITH INDIA’S SUCCESS. India’s successful reforms started in the 1980s but grew exponentially after 1991. One huge factor in unleashing the torrent of entrepreneurship was the misleadingly named “New Industrial Policy” that did away with investment licensing and barriers to numerous companies that had been prevented from participating in various markets because of “anti-monopoly” legislation. Trade was slow to open up, especially in consumer goods, but in 2001 those restrictions were lifted too. The result has been a booming economy.
