Start of a new era for India?

[Harold F. Schiffman]

Start of a new era for India?
MANOJ PANT

[ FRIDAY, APRIL 07, 2006 12:00:27 AM]

In this column last month (ET, Feb 14) I had argued that the two great
success stories of the last half of the previous decade the East-Asian
Tigers and China had as much to do with historical circumstances as with
active government policy of development. At best, one can argue that the
government policy in these countries was only a necessary, not sufficient,
condition to create the economic miracles we now know of. Where does India
stand today and is the historic India-US nuclear agreement a cause or an
effect of historical changes? What we now know is that throughout the last
decade Indias trade has grown at well above growth rates of GDP.
Consequently, the ratio of total trade to GDP at around 35% is
significantly higher than the 10% or so in 1991.

To put it in another way, every third rupee earned in the generation of
Indias income is via import or export of something. Indias fortunes are
today linked with the global economy as never before. Even more
remarkable, Indias foreign exchange reserves are today so comfortable that
economists are worried about what to do with them!  Surely, the first time
this has happened in Indias post-independence history. What began this
inflow of foreign exchange? Ask a banker and he will point a finger at
inflow of foreign portfolio funds by FIIs.  Yet, this inflow of FII funds
is an effect not cause of Indias growth experience. The real starting
point was the software revolution in India which began around the
mid-nineties.

As we now know, it all began with the Y2K phenomena which led to a lot of
back office computer work getting outsourced to India as computer
manufacturers tried to update their hardware to account for the new
millennium calendar. Why the focus on India? For the simple reason that
among low labour cost areas India was the only one which could service the
largely English-based computers. The other factor was the availability of
a large pool of reasonably educated graduates. Consider these two factors
in turn. At no time has the Indian government actually promoted the use of
English.  This has happened by default. There was no other way to placate
the historically non-Hindi speaking population of the South but to make
both English and Hindi the official languages. In fact, in the large
states of the cow belt the policy of state governments has been to
actively promote Hindi as the main medium of instruction. In non-Hindi
speaking states the policy has been to promote the use of the regional
language over English.

This historical accident by which India has emerged as a large pool of an
English speaking labour is today the only factor that gives it a natural
advantage over China. This should last for at least another ten years.
What about the pool of university educated labour? Before giving too much
credit to the education policy it is useful to remember that its main
objective since the mid-sixties has been to use state run higher education
institutions to keep the growing middle class youth off the streets! In
fact, the growing pool of educated unemployed has been a constant headache
for most governments. Not surprisingly, the manufacturing sector talks
today of the irrelevance of higher education and the shortage of skilled
labour! Yet, this artificially fostered pool of graduates has been a
godsend for the ever expanding IT- based companies.

So the basis for explosive growth of the software sector had little to do
with governmental planning and more with the changing international
technology of communication. Yet the service export sector is now the most
important forex earner on the current account, a space which used to
belong to tourism exports and inward remittances from the Gulf.
Internationally, Indias IT services constitute a new method by which
companies in the US battle to keep up their competitiveness in the face of
technological competition from other OECD countries. What we are
witnessing today then is the relocation of a large part of operations of
the Silicon valley ( where the IT revolution began) from California to
Bangalore and other parts of India.

The choice of India is natural, given that the prime movers of the Silicon
valley phenomena were NRIs. In one sense, what the Hong Kong Chinese were
to Chinas manufacturing sector, the Silicon valley Indians are to Indias
IT sector. This new-found relevance of India to the US companies is at
least as important in explaining the recent US foreign policy initiatives
as the so called Chinese factor. The question. Is India ready to seize its
moment in history?

(The author is professor, School of International Studies, JNU)

http://economictimes.indiatimes.com/articleshow/msid-1480585,curpg-2.cms