India’s next breakthrough starts now

Last year, journalist Swaminathan Aiyar wrote a cheerful essay entitled “The Elephant that Became a Tiger”. It was a snub to The Economist which had referred to India as “the Caged Elephant” in a briefing published in 1991. That year, a bold and visionary Manmohan Singh, then Finance Minister, oversaw the dismantling of the infamous Licence Raj and set the economy on a new path. Today, one wonders about the Tiger’s condition.

Until recently, double-digit growth seemed within reach. India’s vibrant private sector, favourable demographic trends, knack for innovation and emerging class of corporate giants promised to carry the country to new heights. There have been successes: in the past decade, India averaged 8% growth to become the world’s 10th largest economy. It also achieved significant socio-economic progress, lifting millions out of poverty.

Today, that double-figure target remains elusive. Last July, Montek Singh Ahluwalia, India’s Planning Commission Deputy Chairman, warned that sustaining 8% growth would require “major efforts”. In early October, the IMF released its World Economic Outlook in which it predicts India will not achieve 8% in the foreseeable future.

The inflection is partly down to the slowdown in the global economy, of course, but it is also down to India’s lack of progress in adapting to the changes and challenges brought about by years of brisk development.

As Mr Ahluwalia himself summed up, growth is not a “God-given right”. Since 1979, The Global Competitiveness Report has assessed the determinants of productivity. They include governance, macroeconomic management, education, infrastructure, market efficiency, technological adoption, market size, business sophistication and innovation. In the 2012-2013 edition, published in September, India ranks 59th, having lost 10 places since 2009. It now trails China, Brazil and South Africa by a significant margin.

What’s to blame? According to the World Economic Forum’s Executive Opinion Survey 2012, infrastructure remains the most problematic factor for doing business in India. As a rule of thumb, supply of infrastructure should grow as a minimum at the same rate as the economy. The rule does not hold for India, where according to the Ministry of Road Transport and Highways, traffic grew by 9.9% annually between 2001 and 2011 compared to a 3.4% expansion of the road network.

The report highlights other weaknesses that prevent India from fulfilling its potential, such as low educational standards, a persisting gender gap, excess red tape, corruption, poor public finances and costly and ineffective subsidies.

The good news is there is plenty of upside for India if it does improve its competitiveness. In particular, it will help to rebalance the economy and move it up the value chain. Manufacturing accounts for less than 14% of India’s output. Agriculture represents 17% and employs 50% of the workforce. This low productivity locks workers into low wages and subsistence livelihoods. Services account for 56% of the economy, but most of the jobs are still low-skilled. The growth of white-collar jobs is held back by a widening skills gap, which an improved educational system would help bridge.

By investing in these areas, the “missing middle” will enjoy better prospects while the half of the population which is entering or will soon enter the workforce, not to mention the third that lives in extreme poverty today, will have something immeasurably more powerful: hope.

Mr Singh once famously said: “Our system is slow to move but I am confident that once decisions are taken, they are going to be far more durable.” It is a claim that is consistent with the theme of this week’s World Economic Forum on India, “From Deliberation to Transformation.” The time for transformation certainly is now.

Author: Thierry Geiger is Economist and Associate Director at the World Economic Forum. He leads the competitiveness practice for Asia and is a co-author of The Global Competitiveness Report.

 Image: Traffic moves at busy intersection in New Delhi REUTERS/Adnan Abidi