Emerging markets typically grow by developing low technology, labour-intensive manufacturing exports. By contrast, much of India’s growth has stemmed from the technology sector and the export of services.
However, in a populous country such as India – which adds about 17m people to its workforce annually – manufacturing is still key to increasing employment and creating sustainability.
A large percentage of Indians lack the skills to participate in the service economy and continue to be employed in low-skilled, rural occupations. The software industry is estimated to have added 250,000 employees in 2005-06 and forecast to add 900,000 more by March 2008, which would bring the sector’s total workforce to just 2.2m.
It is vital that India opens more world-class higher learning institutions. China will soon have a large workforce of educated, English-speaking workers, thereby eroding one of India’s main competitive advantages in building a services-based economy.
Currently there are about 300 universities and 15,000 colleges in India. More than 250 of these universities provide computer-related education. Together, Indian schools produce more than 350,000 engineering graduates and 3.1m English speakers each year.
In the context of global mobility, it is important to recognise the Indian educational system – particularly in the area of information technology – as a significant contributor to the average Indian’s ability to work alongside experts in the west.
India’s economic development is also severely constrained by weak infrastructure. Five years ago India invested $18bn in its power and transport infrastructure, about 6 per cent of gross domestic product. China invested $128bn the same year, or about 20 per cent of GDP.
Highways, which move about 70 per cent of goods in India, account for only about 2 per cent of the country’s 3.32m kilometres of roads. It takes an average of 85 hours to unload and reload a ship at India’s major ports, 10 times longer than in Hong Kong or Singapore, according to government figures.
The Indian government estimates that $320bn needs to be invested in its infrastructure if current economic growth is to be sustained.
The challenge will be to secure funding at competitive rates. For example, of the $4.3bn capital investment required to upgrade India’s railway network, just one quarter will come from government. The remainder has to come from the private sector.
One of the easier ways to boost infrastructure development and spending may be to simplify further India’s burdensome regulatory environment.
Despite economic reforms in the 1990s, India has some of the world’s most restrictive labour laws, which serve to discourage corporate growth and new employment. For example, companies with more than 100 employees require government permission to dismiss workers. The easy movement of human capital both round the country and within industry sectors to meet demand is critical if India is to capitalise on its young, educated workforce and expand the economy.
Yet with the economy growing 8 per cent a year, many question whether it is necessary to tinker further with what already appears to be a sufficiently winning formula.
International experience has shown that countries that become complacent about continuing reforms when growth rates are high ultimately constrain their future success.
As more sectors of the Indian economy open up, they will need to compete in the local and global capital markets to obtain the financing necessary to drive their growth.
To make themselves more attractive to investors, both domestic and foreign, Indian companies need to focus on the business basics: world-class governance, identifying and managing risk, and fostering an environment that encourages innovation.
India’s future is boundless and the economy will continue to grow if it implements a systematic and planned approach to economic development. By taking action, the country can further develop an innovative economic model that will propel it as an economic powerhouse into the next century.
The author is Asia Pacific chief executive of Deloitte