India stands at a turning point in its economic growth and turnaround and one false might prove costly. It needs to move cautiously, but with a sense of bravado and courage carefully thinking out its moves and the consequences to follow.

A Goldman Sachs Economic Research Global Economics Paper points out that the workforce in India will by 2020 be equivalent of the combined working population of France, Germany, Italy and the UK. Just imagine. Around 140 million will migrate to Indian cities in another 12 years as opportunities explode.

If political parties can set aside their narrow agendas and all work together as growth of the country and the prosperity of its people should be common agendas, it would not be so difficult. For instance, caught in a pincer with the global rise of oil prices, a BJP or for that matter, a left government would have had no choice but to raise prices at home. But when Dr. Manmohan Singh does it, they all rally to score a brownie point and whip up public sentiment and see if it could translate into votes in the coming election.

In the recent study, Goldman Sachs and Co. economists Jim O�Neill and Tushar Poddar have detailed out ten things India needs to do to achieve a per capita GDP of at least $20,000 (Rs 8.58 lakh today) by 2050 (from less than $1,000 now) if India is to achieve its 2050 potential. Poddar and O�Neill say that by undertaking required reforms, India can still reach its target in another 42 years by increasing its annual growth potential by 2.8 per cent.

Goldman Sachs is a global investment banking, securities and investment management firm. It is a financial advisor to some of the biggest governments, firms and families. The bank presently ranks India 110 out of 181 countries using 13 variables to define an economy�s productivity and growth sustainability. India scores less that Brazil, Russia, China.

The ten things that Goldman Sachs thinks India should do is:

1. Improve governance.

This is one of the serious areas that need to see change as it overarches all the other problems. It is only with better governance, delivery systems and effective implementation that India will be able to educate its citizens, build infrastructure, increase agricultural productivity and distribute fruits of economic growth.

There has to be a system of accountability of politicians to the voters worked out. In mid June, one of the news items that raised hopes of something like this happening is when voters recalled three of their representatives in a city corporation in Madhya Pradesh, as they were unsatisfied with their performance. Only then will politicians know that their future is dependent on the promises they deliver. Citizens must organize to demand better services and not let political posts be used to access jobs or contracts. Politics is not seen as a means to improve services but to cater to caste and communal needs.

Presently, the role of the state is blurred as a regulator and a service provider. It is like the umpire who is also the player and so delivery gets affected. Then as the citizens do not finance the service providers directly, they cannot hold them to account. Reform is the answer and it could come in the shape of Public-private partnerships. Allowing the private sector in areas such as health, primary education, infrastructure, water supply and transport would solve several problems.

Decentralizing public services empowering citizens could be a way out with the government as regulator.

The report said that the Right To Information Act passed in 2005 was a step in the right direction as it allowed a citizen get access to official data. It called for e-governance that would increase transparency and reduce transaction costs. It is only �reform champions� in the administration who can successfully lead and manage governance reforms, it said.

Some observers feel that India�s governance problems have their root in democracy, but it is actually only a well-functioning democracy that would give their citizens more voice in evaluating the quality of services they receive, make governments and service providers accountable and citizens to pay directly for services rendered. Economic growth in fact increased expectations of better health care, education and better governance.

2. Raise educational achievement

Outside India, many think that education is the country�s biggest achievement as they see the best from India working in their countries. But the reality is that India has more uneducated people than any other country in the world. If India does not ensure basic elementary and secondary education to its millions, it will be virtually impossible to achieve its dream potential.

Government figures show that 94 per cent of India�s population lives within one kilometer of a primary school and 84 per cent had upper primary schools within a distance of three kilometers. But the harsh reality is that only 80 per cent of those between 6-14 years go to school and from that many drop out. Many schools have only one teacher and one classroom and too many children. Female children are few and literacy rates are as low as 61 per cent.

According to Pratham, a NGO involved in primary education, half the 200 million primary school age children are unable to read or write. Eleven out of 100 children don�t enter school, another 35 drop out before completing 4-5 years of schooling, and another 30 drop out before reaching class eight. Less than half of those remaining finish their senior school.

Pratham has between 200,000 and 250,000 volunteers. It recently launched an initiative called �Read India�, which aims to teach children to read fluently in 4-16 weeks. The goal is to impact about 100mn children by 2009, and they claim more than 21mn have already benefited.

3. Increase Quality and Quantity of Universities

Those seeking higher education in India is likely to grow from the present 10 million by three or four times in another 12 years. The National Knowledge Commission has proposed an increase in the number of universities from the present 350 to 1,500 by 2016.

It has also proposed an increase in the 18-24 age group to be educated to university level from 7% to 15%. Though 2.5 million graduates pass out every year, India is starved of talent. This will only get more acute as population soars. India will have an additional population as big as the United States by 2016.

Indian universities will have to pick up the best practices with leading universities, open up education to reputed private players and reward those who are showing an inclination towards bringing in excellence and punish those who are converting it into a commercial proposition.

Sensing the incredible growth prospects for Indian higher education, leading foreign universities are eager to �expand� into India, either by developing an Indian campus or tying up with local entities that already exist.

4. Control inflation

This is crucial. The report recommended greater independence for t he Reserve Bank of India. It would help if its one billion plus population know that macro economic stability for the RBI is dominated by the goal of keeping inflation low and stable. The report says that it is worthwhile to develop an official credible consumer price index. It must have a credible medium-term strategy for fiscal policy.

5. Introduce a Credible Fiscal Policy

India�s gross fiscal deficit remains one of the highest in the world. Government liabilities have been increasing at an alarming rate. The report predicted that it might accelerate above seven per cent due to the proposal to waive debt for farmers, hike in salary for government employees, fertilizer and oil subsidies and higher exemptions on income tax.
There is less expenditure on health, education and infrastructure. The bulk is on subsidies, which do not improve long-term growth potential. India�s central subsidy on food, oil and fertilizer is equivalent to the entire collection of income tax!

A fiscal policy that reduces the overall deficit to a sustainable level is critical for India. It would discipline the government and politicians, restrain populist spending, improve governance and make the fiscal deficit largely independent of political and election cycles. Currently, with such a high fiscal deficit, the government has no fiscal space to respond to high oil and commodity prices, without endangering its fiscal health, and a large increase in debt.

6. Liberalize Financial Markets

India�s financial sector remains small and underdeveloped. Holding 70 per cent of banking assets, the state still dominates the sector. As markets lack in corporate debt, currency and derivatives, there is lack of credit and low financial savings. Total credit, at 50% of GDP remains well below that of its Asian neighbors and especially compared with China. Consumer credit remains abysmally low at 11% of GDP compared with an Asian average of over 40% of GDP. Household savings tend to be in physical assets and gold, and risk diversification channels are not available.

To meet its growth potential, India needs to pursue financial reforms to channel savings effectively into investment, meet funding requirements for infrastructure and enhance financial stability. Savers need to have access to a broad range of financial instruments, while borrowers should be able to access local debt and equity. The report called for reforms in pension, insurance, bond market, banking,

7. Increase trade with neighbors.

Look at China. It is more open than India in terms of trade. The report said that India would do well to open up to trade with China, Pakistan and Bangladesh. Trade with the rest of the world has improved as lower tariff barriers was an incentive. Trade with China is presently low with India taking in just 1.93 per cent of China�s exports and just 1.46 per cent of its imports. Total trade of India with the US in 2007 was just $42 billion. The US trade with China in that period was $ 405 billion. India�s trade with China is just $ 37 billion. Political differences and disputes have been at the heart of the problem with trade not developing as it could with India�s neighbors. But as the rest of the world grows, India has to as a bigger power iron out differences and use trade and commerce to build new lasting ties.

8. Increase Agricultural Productivity

Increasing agricultural growth is critical for India to sustain high growth rates and move millions out of poverty. Currently, 60% of the labor force is employed in agriculture, which contributes less than 1% of overall growth. India�s agricultural yields are a fraction of those of its more dynamic Asian neighbors. For instance, rice yields are a third of China�s and half of Vietnam�s, the report points out. A lot of land is also being lost due to industrialization and urbanization apart from soil erosion due to intensive farming and environmental degradation. The key therefore is raising agricultural productivity with technological inputs. Public investment in agriculture has to be substantially increased. Currently subsidies are four times the investment figure and that does not enhance productivity. Investments have to be made in electricity, irrigation, rural roads and food grain storage.

9. Improve Infrastructure

India has a long way to travel on this road. Clogged airports, poor roads, power cuts, delays in construction of ports and other infrastructure, clearing exports through customs are all problem areas. Indian companies, the report points out, lose 30 days in obtaining an electricity connection, 15 days in clearing exports through customs and lose seven per cent of the value of their sales due to power outages. India�s growth will demand energy, transport, logistics and communication.

The Planning Commission estimates that India needs almost to double its ports, roads, power, airports and telecom in the next five years to sustain growth and that will require an additional $ 500 billion over the next five years. The report said that private investment was hesitant to enter the infrastructure area as there are frequent changes in regulatory policy in areas like telecom, roads and power which breeds uncertainty.

The report said that it is necessary to replicate India�s success stories. For instance, India in the last few years has built more than 3,600 miles of highways for the Golden Quadrilateral Highway project, whereas in the previous 50 years it had built only 300 miles. Another example was the Delhi Metro was completed earlier than envisaged. Then, there was the privatization of the telecom sector and its rapid growth and penetration that was enough to demonstrate that India could build infrastructure.

10. Improve Environmental Quality

As India grows, it is imperative to improve its environmental quality and work in sustainability. India should learn from other countries that destroyed their environment in the process of growing depleting its natural resources. India is under pressure with urbanization, industrialization and climate change pressures.

Environmental degradation affects the economy in several ways. For India the impact would come from declining agricultural areas and productivity due to soil erosion; reduced labour productivity from poor urban air quality, and the threat of toxic and chemical waste in the environment, among others.

In the next five years, India plans to add some 70,000 MW and will largely use coal that is damaging. The World Bank estimates that small and medium enterprises account for 70% of total industrial pollution, and are a major source of environmental degradation. The regulatory bodies need to be able to enforce pollution standards by having the requisite capacity, using credible threats and also make a greater use of economic incentives�offering carrots to those adopting new technology, and sticks to those polluting.

If not given the right priority, environmental sustainability has the potential to become India�s greatest challenge, the report said.

India has a long way to go

The Goldman Sachs report makes interesting reading. But it is also disturbing as India has really a very long arduous way to go. It is not going to be easy. To begin with, Indian political parties will have to put India first before their narrow personal and political interests if any of the ten areas have to be restructured to face tomorrow. Anyone in India knows that this is a tall order. India needs a new political order similar to the one in Singapore if it has to take the country to new heights that can climb in the world.       

September 7, 2008

Image under license with Gettyimages.com

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