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This is intended to be the first in a series of articles in this paper. As a start, I thought I would put down my views on the current state of the Indian economy so that readers can filter my future views against this backdrop. Last year, the Indian economy grew in excess of 8%. Is this growth sustainable, or is it merely an agriculture-driven statistical anomaly? Let’s delve a little into the past and look at the current drivers of the Indian economy.

The reform process in India started in the early 90’s, really more out of compulsion than conviction. However, since then India has had many governments and each has carried forward the reform agenda. Progress over this period has been quite remarkable. Importantly, politicians and bureaucrats have gained experience in policy formulation. Going forward, multiple factors will drive the Indian economy to a higher growth path. These are:

First, has been the rise of the Indian consumer. All Indians want a continuation of the process that has led to an explosion in choice and quality: financial services, automobiles, apparel, entertainment and telecom. Politicians have finally woken up to this new-found consumer assertiveness. Any government that is unable to satisfy this upswell of consumerism will be committing political hara-kiri.

Second, in the aftermath of the first phase of the reform process when industrial activity was largely de-licensed, huge surplus capacities were created. This was premised on what was touted as a middle class of 100 to 300 million. The creation of sizeable over-capacity led to poor industrial activity, reduced investments and the creation of NPAs in the financial sector. Only now, is this overhang being worked out of the system and there are incipient but strong signs of the creation of sizeable new capacities.

• A point of inflexion has been reached in India’s economic development
• Sector by sector reforms are needed for sustainable economic growth

Third, while the services sector has been on a high growth path from the mid 90’s, Indian manufacturers have always suffered from a lack of self-confidence. Part of this was rooted in the inefficiencies of the Indian economy such as the high cost of capital, infrastructure costs, systemic leakages, etc. Part of it was because of operating in an environment that had been protected for decades. With the continuous reduction in tariffs all through the last decade, Indian industry was forced to focus on cutting costs, restructuring and rationalisation.

Fourth, many fast growing clusters in the Indian economy have reached a size where they are beginning to impact economic growth. The software and BPO sectors are such examples and growth rates are expected to continue to be high given the likelihood that western offshoring is still in the early adoption phase. Pharma is yet another such exciting sector. Another interesting cluster is that of automobile components.

Hopefully, examples like this will further strengthen the case for reform. And when taken together, it is possible to conclude that India stands at the cusp of something really exhilarating and exciting in the years to come. The hard part of reform — the conversion of hearts and minds of the populace, industry, media and the political class has been achieved. That is why this time it is fundamentally different from others when similar high rates of growth were achieved.

To my mind, we have reached a point of inflexion in India’s economic development. The need now is sector by sector reform to put in place building blocks that lead India to a sustainably higher growth path. The key will be to transform the infrastructure in such a way that it does not lead to financial sector imbalances. In different parts of the country, there are long stretches of highway being built. One wonders why this could not have happened decades earlier. Such infrastructure development will lead to multiple tertiary benefits to the economy.

When the aviation, ports, power, retailing and financial services sectors really get opened up we will witness the kind of boom we are seeing today in the telecom sector. What we need is an “in-the-trenches” approach to further liberalising these key sectors of the economy. Fortunately, consumers, business people and politicians are all realising that the path ahead needs to be a deepening of reforms. I am confident that when we look back ten years on to this point in India’s history, we will be amazed at the scale of progress that has been achieved, and the magnitude of positive change in people’s lives. And ultimately, that is what matters most.

Source: The Financial Express