Speech at AIMS Annual Convention 2007

Back to the Future : the re-emergence of India

There is a tide in the affairs of men,

Which, taken at the flood, leads on to fortune;

Omitted, all the voyage of their life

Is bound in shallows and in miseries.

William Shakespeare, Julius Caesar

Until Vasco Da Gama discovered the sea route to India in the late 15^th Century, China and India contributed nearly 75% of the combined world output. Even in the middle of the 18^th century, India produced 25% of the world output. By 1900, this figure fell to below 2%. Despite the accelerated growth of China in the last two decades followed by the India growth story, the two countries combined contribute less than 20% of the world output today.

Many factors contributed to the steady decline. China and India could not ride the waves of industrial revolution. The imperialist powers used their armed might to keep colonies under their political rule and practised commercial dominance. And the shares of India and China of the world output declined. But that is history.

The new wave of globalization now provides an opportunity to China and India to re-emerge as economic and geo-political forces .China has already used the battering ram of low cost manufacturing to penetrate the world markets with great force. India has leveraged its demographic advantage and its knowledge capital successfully. It has used the digital portability of its workforce to make jobs travel across telecom wires. But that is only the beginning.

35% of the world’s population living in China and India are now poised to re-emerge and re-capture lost ground. According to the now-famous Global Economics Paper 99 of Goldman Sachs popularly known as the BRIC report, in less than 40 years the economies of Brazil, Russia, India and China (BRIC) will be larger than G6 in dollar terms and by 2025 about 50% of G6.Brazil and Russia will emerge as dominant suppliers of raw materials while China and India will emerge as dominant suppliers of manufactured goods and services.

Turning to India, India is firing on all four cylinders : global sourcing, investments in infrastructure, increase in domestic consumption and manufacturing in selected sectors.

Global sourcing of IT/KPO and auto ancillaries alone are expected to add $ 30 billion every year. Investments in infrastructure by some estimates may be as much as $ 50 billion a year. We have a $1 trillion economy moving at a 9% clip.

All the signs look good for but there are dark clouds too.

Lets look at the bright side first. India has a one-in-lifetime chance of reaping the demographic dividend. Japan and Western Europe and, to a lesser extent North America have graying populations with resultant consequences of high healthcare costs and dwindling labor pools. India is on the cusp of a demographic transformation. In a population of roughly 1.1 billion the average age of the population will move from 22 years in 2001 to 39 years in 2026.In the next four decades India will be the only country in the world with the productive population (15-59) increasing during 2007 to 2050.Even China, due to the one child policy, will see a decline in the working population during this period. By 2025,a 500 million middle-class will have a spending power of $2.8 trillion per year.

But one must be mindful of the dark clouds and not be blinded by the resplendent sun of the growth story in the manufacturing and services sectors. The agriculture and rural sector is growing only at 3%.With over 60% of the population directly or indirectly dependent on agriculture –the human dimension of the problem and a vibrant democracy present before us the most complex challenges. How would we accelerate the rate of growth in agriculture? How will we transition people engaged in agriculture to the manufacturing sector without causing severe pain, displacement and pauperization?

How will all the wealth being created trickle down and not just gush up to a small section? How will we take on the massive challenge of spreading education, training and re-tooling people? How will we tackle the tough issues of urbanization without degradation of city life, growth preserving the environment and the problems associated with inequity and corruption.

If we are not able to evolve a model of inclusive and sustainable growth , all our electronic spreadsheets and econometric models will meander and fail. The prosperity of India cannot be measured alone by the fact that in 2006 High Net-worth Individuals (HNIs) had assets close to $260 billion and that the equity and real estate markets are exploding. We have starvation deaths in villages. The rise of the Maoist movement is not an infantile disorder but a manifestation of the desperation of the dispossessed economic underclass.

In a diverse, large country like India with many religions, languages, castes, classes, income levels and regions - our unity is a delicate and fragile one –never mind what the Airtel TV ads say. Disparities, lack of opportunities, unfairness, autocratic and unreasonable use of brute state power, corruption and abject poverty may be some of triggers that may derail the growth engines. We must tackle these issues head on, otherwise they will come to haunt us soon.

C K Prahlad’s theory of making wealth from the bottom of the pyramid is a good business strategy in developing countries like India. But our policies and leadership thinking must be targeted to narrow the base of the pyramid as much as we can------- inverting it eventually. Our focus should be on creating real wealth at the bottom of our pyramid as we work hard to transform its shape radically.

The race of re-emergence is not a 100 metre sprint. It is a long marathon .We must evolve an inclusive and sustainable growth strategy.Perseverance on the right track will be our mantra for success.