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India looks to accelerate growth

By CNN's Asia Business Editor Geoff Hiscock

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GRADUAL APPROACH
INDIA'S GROWTH
Recent GDP rates

1998-99: 6.5 percent
1999-00: 6.1 percent
2000-01: 4.4 percent
2001-02: 5.8 percent
2002-03: 4.0 percent
2003-04: 8.2 percent
2004-05: 6.4 percent (F)
India's financial year ends March 31

Source: Morgan Stanley
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MUMBAI, India (CNN) -- After the excitement of a 10 percent economic growth rate at the start of 2004, India's economy is settling back into a pattern that is predictable if vaguely unsatisfactory.

This year Asia's third largest economy will grow by at least 6 percent, according to the latest forecasts by the government.

In virtually every other country in the world, that would be a cause for celebration. But India's needs are more pressing.

Yes, say economic observers, 6 percent is good. But it is not enough if India is to find jobs for the millions of people who join the workforce every year.

India needs at least 7.5 percent to bridge the employment gap, according to experts such as Morgan Stanley's chief economist for India, Chetan Ahya.

Others have even higher goals.

Leading Mumbai businessman Adi Godrej, head of the Godrej Group, told CNN: "This country can and should grow at 10 percent year."

He says that with more reform, including in the labor market and an overhaul of the indirect tax structure, "10 percent gets to be realistic."

That rate is more than being achieved in hot sectors such as IT services, outsourcing, pharmaceuticals, health services, retailing and automotive, but there are woeful inadequacies in the overall picture.

The biggest deficiency is in physical infrastructure. In the key areas of roads, rail, ports, power and water, India lacks the prerequisites for sustained high growth.

Ahya told CNN that there are pockets of good performance in the economy.

He pointed to a "sea change" in telecommunications and IT infrastructure over the past five years that had created the right conditions for business process outsourcing, one of the areas where India's economic prospects are brightest.

But according to Ahya, two fundamental problems are holding back India's economic performance: its well-documented infrastructure shortcomings, and a savings rate that is way below that of Asia's other economic giant, China.

Ahya believes India needs to lift physical infrastructure spending from 6 percent of GDP now to at least 9 percent, or $65 billion a year. In 2002, he notes, China spent $260 billion on power, construction, transport, telecoms and real estate, compared with $31 billion in India.

He says that India's savings rate of 24 percent of gross domestic product (GDP), allied with a relatively low inflow of offshore investment money, puts a brake on capital formation and restricts GDP growth to about 6 percent.

Godrej agrees. He says while the private sector is saving well, the government is dis-saving.

"If we can change this, with the right policies we could get to 10 percent," he says.

High-growth strategy

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Pharmaceuticals is one sector where Indian companies are competing globally.
FACT BOX

INDIA AT A GLANCE

Area: 3.29 million square kilometers
Capital: New Delhi
Population:
1.06 billion
Pop. growth rate:
1.5 percent
Life expectancy:
63.6 years
Literacy rate:
65.4%
Currency:
Rupee (46.36=$1)
GDP: $600 billion
Per capita GDP:
$565
Economic growth rate:
6. 4% (2004FY forecast)
GDP share: Services 51%, industry 26.8%, agriculture 22.2%
Labor force: 375 million
Inflation rate: 4.0% (2003FY) Market capitalization: $230 billion Foreign currency reserves: $115 billion
President:
APJ Abdul Kalam
Prime Minister: Manmohan Singh Government: United Progressive Alliance (UPA)
Major religions:
Hinduism 81%, Islam 12%, Christianity 2%, Sikhism 2%.
Languages:
Hindi and 17 other official languages. English widely used in business
Main trade partners:
United States, EU, Japan, other Asia, UAE

Sources: Govt. of India, HSBC, Morgan Stanley

Another leading businessman, Tata Sons executive director R. Gopalakrishnan, is also an advocate of a high-growth strategy, arguing that India needs 9 to 10 percent a year to absorb labor and help reduce income disparities.

Gopalakrishnan, whose Tata Group is one of the mainstays of the Indian economy across sectors such as automotive, IT, resources, power and tourism, agrees that the government's savings rate has to be improved.

"We lose two to three percent of GDP through this," he told CNN.

Gopalakrishnan also wants the tax base widened -- something that will likely happen next year when the government is due to introduce a broad-based value-added tax.

Ahya's target is more restrained than these business sector advocates. Even so, he thinks the growth rate could rise to 7 percent-plus over the next 10 years, if India pushes through "big shift" reforms to cut its fiscal deficit and lifts savings for infrastructure investment.

These twin steps could make India a global competitor of China in manufacturing exports and create a "virtuous circle" that would see growth rates emulating the 1994-96 peak.

But first, India has to get the basics right. Ahya says the electricity sectors needs a "serious and immediate overhaul" to overcome losses in transmission and distribution which, combined with virtually free power for farmers, means there is no profitability in the business.

Unless this situation changes, he warns, there is no incentive to invest in the power sector.

Ahya says he is "cautiously optimistic" about India's prospects in the near term, but says it will require the Indian government to have the political will to make the changes.

He points to the contrast with China, where the central government has driven high-speed economic development through massive spending on infrastructure, embracing labor flexibility and foreign investment. For its part, India has followed a gradualist consensus approach that amounts to a "democracy tax" on economic progress.

10 years behind

Ahya says that India is about 10 to 13 years behind China in per capita GDP.

Long-term, it may be able to bridge the gap if it follows a program that includes developing its human capital; boosting its savings rate; increasing capital formation through foreign direct investment and privatization; kick-starting infrastructure investment; reforming the tax structure; improving labor flexibility; and decentralizing authority to encourage reform.

For now, the new government of Manmohan Singh has plenty of immediate challenges, including an inflation rate that is creeping up. Last month, wholesale price inflation came perilously close to 8 percent, driven by rising oil prices.

Even so, India has done enough recently to earn a revised ratings outlook.

Late last month, ratings agency Standard & Poor's revised its outlook on India's BB long-term foreign currency rating to positive from stable. It also upgraded the outlook on the BB+ long-term local currency rating from negative to stable.

But S&P warned India's high public debt weighed on its sovereign rating.

"The country's fiscal weakness is the worst among rated sovereigns, leaving it particularly vulnerable to economic cycles and any decline in growth rates," S&P said.


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