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September 30, 2010

Despite Commonwealth Games Problems, The Economist remains optimistic about India's economic future

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India’s GDP is expected to grow by 8.5% this year, and could grow even faster. Chetan Ahya and Tanvee Gupta of Morgan Stanley, an investment bank, predict that India’s growth will start to outpace China’s within three to five years. China will rumble along at 8% rather than double digits; India will rack up successive years of 9-10%. For the next 20-25 years, India will grow faster than any other large country, they expect. Other long-range forecasters paint a similar picture.

In India's favor:
* Its dependency ratio—the proportion of children and old people to working-age adults—is one of the best in the world and will remain so for a generation. India’s economy will benefit from this “demographic dividend”, which has powered many of Asia’s economic miracles

* The second reason for optimism is India’s much-derided democracy. India’s individualistic brand of capitalism may also be more robust than China’s state-directed sort.

* Indian capitalism is driven by millions of entrepreneurs all furiously doing their own thing.

In China's favor:
* China’s leaders make rational decisions that balance the needs of all citizens over the long term. This has led to rapid, sustained growth that has lifted hundreds of millions of people out of poverty. When its technocrats decide to dam a river, build a road or move a village, the dam goes up, the road goes down and the village disappears. The displaced villagers may be compensated, but they are not allowed to stand in the way of progress.



If India keeps growing as fast as it is now, it will change the world. Optimists predict that it will be the next China, only friendlier and more democratic.

Pessimists retort that such forecasts are over-spiced. They point out that India has a lot of catching up to do. China’s economy is four times bigger, so that even if India starts to grow faster, it will not overtake China for a long, long time. And they add that Indian businesses face several bottlenecks on the uneven road to growth. The most obvious of these bottlenecks is lousy infrastructure. Indian roads are awful.

India’s economy will grow fivefold in the next 20 years, predicts McKinsey, a consultancy. The urban population will double from the 2001 census figure of 290m to perhaps 590m by 2030. McKinsey reckons that merely to keep pace, the country must spend $1.2 trillion on urban infrastructure, or at eight times today’s rate. Per person, China’s capital spending on cities is roughly seven times greater than India’s.

The other worrying bottleneck is a shortage of skills. The workforce may be young and growing, but 40% are illiterate and another 40% failed to complete school. The Boston Consulting Group sees a shortfall of 200,000 engineers, 400,000 other graduates and 150,000 vocationally trained workers in the coming years. Meanwhile, there are 62m surplus workers in agriculture, most of them barely skilled.

India’s best universities—the Indian Institutes of Technology—are world class, but there are only 16 of them. Many universities turn out graduates who are good at exams but unaccustomed to thinking about real-world problems. Employers train them for months, at great expense. Then they are ruthlessly poached by rivals.

Public schools are a mess. Supplies disappear. Teachers do not turn up, and even the worst are unsackable: as civil servants, their jobs are constitutionally protected. India’s adult literacy rate is only 66%; China’s is 93%. Nearly half of children under five are malnourished, which makes it hard for their brains to develop properly. A government scheme to deliver cheap grain to the poor is a national disgrace: two-thirds of the grain is stolen or adulterated.


There are also corruption and instability problems.

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