Growing pains

Behind India's astonishing growth rate lies an economy that can do the impossible, but fumbles the m

For India's newspapers and television, the country's story is of a resurgent nation of 1.1 billion people taking its rightful place in the new world order. Daily headlines in the capital, New Delhi, highlight the runaway stock market, Bollywood's soft superpower and India's 36 dollar billionaires - more than in any other Asian nation.

Despite the exhausting hyperbole, what strikes most people when they arrive is the apparent functional chaos. Cattle roam the city's poshest avenues and ragged street children beg alongside foreign-made cars and glitzy malls.

The old idea of India, of a vast and ancient civilisation mired in righteous poverty, is being overshadowed by strikingly new images. The country's pharmaceutical companies are developing blockbusting drugs at a tenth of the cost of any western firm. Its software powerhouses are adding 15,000 jobs a year each to ensure that India becomes the world's IT department. But the success of the hi-tech sector is still to make an impact on the lives of the 360 million people who live on less than 50 pence a day.

There is little doubt that India is experiencing a rapid and sustained rise in living standards for the first time in centuries. Growth has averaged 8 per cent since 2003, second only to China. According to the investment bank Goldman Sachs, India's young population gives it the potential to grow faster than China in the long term.

For many Indians this is exhilarating stuff: in the 1970s the country threw out Coca-Cola and IBM and sealed itself off from the outside world. Heady stuff, but ultimately economic folly. Growth slowed to 1 per cent a year - at that rate it would have taken 70 years to double incomes. Tentative reforms began in the 1980s, but it took a balance-of-payments crisis in 1991 for the government to usher in unexpectedly brave changes. Today, India's outward-looking, hypercompetitive policies as well as the trend towards smaller families mean incomes will double in a decade.

Yet it will remain a poor country. Last month, government figures showed that malnutrition is endemic, with about 46 per cent of children aged three or younger underweight and almost 80 per cent anaemic. Less than 50 per cent of women can read or write their name. Only a third of homes have a toilet. The country is probably the world's largest Dickensian paradox - having both the best and the worst of times.

The puzzle is that India is economically confident, yet sunk in interminable poverty. This is because most Indians live in a vast rural, feudal darkness and only a lucky few are part of the shining new future. Services, essentially white-collar work, makes up more than half of national income. But this does not mean that tens of millions of Indians sit behind terminals talking to someone in New York or London. Information technology, the poster-boy industry of India's economy, employs just 1.5 million people - a mere drop in the labour pool of 470 million.

Even worse, only 35 million people in India have any sense of job security and 20 million of those work for the government. The rest of the working population - some 435 million people - are part of "the unorganised sector": toiling on the land, or driving a taxi, or running a chai stall, or working as menial household labour.

In India, growth has been largely jobless. Historically, dynamic economies have relied on industry to fuel growth. In China, this led to millions of people leaving the land to work in factories. But during the 1990s, industry actually shrank as a proportion of the Indian economy. There is rural migration, too, where the sons of tillers leave to eke out a precarious existence as security guards and drivers in the big cities.

The problem is reaching crisis point. Each year another ten million people enter the job market. To soak up the labour, India will have to build up its manufacturing sector quickly. This might sound like a return to the past - India's first prime minister, Jawaharlal Nehru, wanted his country to rush towards industrialisation.

But Nehru pursued a strategy that would build up the country's technological capacity, not employ people. He set about institutionalising innovation and spent money on a network of world-class science universities rather than universal primary education. Nehru built huge dams. He took pains to create an atomic industry and cultivate brilliant scientists.

In a sense, he laid the foundations for an idiot savant economy that can do the impossible but fumbles the mundane. India turns out more scientists than far wealthier China, but cannot get all its children to school. While the country's business houses prowl the world picking off weaker western companies, they cannot acquire land at home because villagers protest violently against forcible takeovers.

This disparity in productivity is India's greatest asset and liability. Workers in the private organised sector are ten times more productive than those in the "unorganised sector". The emphasis on capital-intensive growth has helped India achieve impressive results with fewer resources. It is estimated that in 2007, India will grow at 9 per cent - a fraction behind its larger northern neighbour. Remarkable, given that India is achieving this growth with just 50 per cent of China's investments and 10 per cent of China's foreign direct investment.

Hoping for a miracle

But the flipside is that while new management graduates in India are offered 10,000 rupees (£120) a day in salaries, cotton farmers struggle to make 10,000 rupees in a whole season. Crossing between these two worlds rarely happens because it requires workers with skills, education and opportunity. India will have to pour more money into health and education as well as create the kinds of industries that can offer the rural poor a chance out of poverty. It needs to change its labour laws - at the moment you need government permission to shut down a factory with 100 workers in it. Clearly this is a deterrent to setting up shop in India.

For the first 1,500 years of the past two millennia, India and China dominated the world economy. Then came the western industrial revolution, which propelled smaller and less populous nations to wealth and power. The Asian giants were overtaken first by Britain, then by the rest of Europe, and finally by the United States. But in the same way as commentators refer to the 1900s as the "American century", the 21st century is forecast to be Asian. If the scale and speed of growth can be maintained on both sides of the Himalayas, by 2050 Beijing and Delhi will be the capitals of the two richest nations on the planet.

It is worth being sceptical about such claims. Historically there is no precedent for such a transformation. Britain and America took a century each to achieve primacy and had far fewer people to deal with. India and China have a billion-plus people each. Both nations expect to maintain growth rates of near 10 per cent. "What these two countries propose," wrote Willem Buiter of the London School of Economics, "is growth on a scale that is more than 200 times larger than what the UK and US managed." Such events are not beyond the bounds of possibility, but they have never happened before.

Randeep Ramesh is the Guardian's south Asia correspondent

Tags:India