Global Trend

India Is Coming

In the past five years, more than 100 information technology and scientific firms have opened R&D labs in India. Leading companies are drawn to India because it is home to some of the world’s brightest minds and sharpest innovators.

India churns out 300,000 IT engineering graduates a year ? six times as many as America produces.

In 1999, India’s IT industry contributed 1.3 percent of the country’s gross domestic product. Last year, it more than doubled to 3 percent, with $16 billion in sales, 75 percent of it to overseas customers. By 2008, India’s annual sales from IT are expected to exceed $50 billion.

Sales of IT services by Infosys, India’s first publicly listed billion-dollar IT company, have increased 800 percent in five years. Its corporate training facility is the largest in the world, with 4,000 students enrolled at a time.

But the outlook for India’s economy is not all positive. Several recent articles in New Scientist and The Economist reveal a number of contradictory facts about India. It has a population of more than 1 billion people and the world’s 11th largest economy. However, its population includes more than 25 percent of the world’s poorest people, and hundreds of millions of Indians lack a steady supply of electricity. And while India has nearly 300 universities that trained more than 3.2 million science students last year alone, nearly 40 percent of adults are illiterate.

The country’s economy has grown at an average rate of 6 percent per year since 1991, when India opened itself to the global economy. During that time, its average GDP per person, adjusted for purchasing power, has doubled. Since 1978, it has reduced the percentage of its citizens who are living below the poverty threshold from 50 percent to 25 percent.

Yet, there is still a broad gap between India’s haves and have-nots ? between those who are highly educated and those who are illiterate. Only 6.4 percent of Indians earned more than $7,500 in 2002, while 73.5 percent made less than $2,000.

To connect its vast population, India is also building a wireless infrastructure. Last year, the number of cell phones surpassed the number of land-lines. In less than four years, ownership of mobile phones has grown from zero to 45 million. Another 1.5 million to 2 million Indians are joining wireless services every month, and within the next three years, 200 million are expected to have cell phones, according to New Scientist.

Even so, that would represent only one-fifth of India’s population. For the poorest Indians, a $50 handset is an unattainable luxury ? at least, for now. The situation could be much different when Nokia follows through on its plan to open a factory in India to make cheap cell phones.

Compared to China, a similarly poor, heavily populated country that has also embraced global trade relatively recently, India has not fared as well economically. China’s economy is growing at 10 percent annually, compared to India’s 6 percent growth rate. And foreign companies have plowed $500 billion in investments into China since 1980, compared to less than $50 billion into India. Last year alone, China received $60 billion in foreign direct investment, 12 times more than India received.

As the Economist notes, India also trails far behind China in the amount of money it is investing in itself. China invests about 40 percent of GDP, compared to about 25 percent for India. As a result, China is far ahead of India in building infrastructure essential to business development, from electricity to roads to airports.

That’s why China’s cost of electricity is 40 percent lower than India’s ? and why India’s power is so unreliable that three of every five manufacturing firms use their own generators.

India is hampered by a fiscal deficit, which hovers at 10 percent of GDP, so it can’t afford massive infrastructure projects. A problem is that it’s common, among the poor and the prosperous, to use India’s booming black market to evade taxes. Many Indians pay cash for houses and cars, so the seller doesn’t have to declare the income. Despite a decade and a half in which the economy has grown, India is raising a smaller percentage of GDP in taxes than it did in the late 1980s.

But India does hold two major advantages over China that demand our attention: the age and the education of its population.

India’s average age is 26, compared to China’s average age of 33. China’s “one-child” policy prevented the births of 300 million babies over the past 30 years ? many of which would have been in the country’s workforce now, or in the future. Within 20 years, the number of Chinese people of working age will shrink, and the number of elderly will rise. According to the United Nations Population Fund in Beijing, “There will be more dependents and at the same time fewer workers to support them.”

By contrast, India’s population is growing at 1.6 percent each year, twice as fast as China. If this pace continues, as expected, India will pass China as the country with the world’s largest population by 2035.

India’s middle class is also better educated and, unlike the Chinese, many of them are fluent in English. Its millions of science students and IT graduates are coveted by companies worldwide, and Indian companies are keeping more of them from going overseas. IT firms based in India hire about 1,000 graduates of technical colleges every month.

Looking ahead, we offer three forecasts:

First, as India’s economy continues to grow at 6 percent annually, the demand for certain consumer products will make India an attractive market for U.S. companies. For example, sales of cars are growing at 20 percent each year. And the market for personal computers in India is still in its infancy. Forrester Research estimates that PC sales will increase by 37 percent a year until 2010, for total sales of 80 million machines.

Second, for the next five to 10 years, India will not pose an urgent threat to the U.S. economy. One limitation to India’s economic growth is that it lags other developed countries in using the patent system. Indian companies are only now beginning to file their own patents, after decades of neglecting to do so, and the country’s tradition of failing to recognize foreign companies’ patents has discouraged foreign companies from supplying technologies or pursuing joint ventures with Indian companies. A second limitation is that its bureaucracy discourages entrepreneurs from starting businesses. It takes three months to get the permits to start a business in India; even China is faster, at 41 days. Another obstacle is the lack of substantial foreign investment flows into the country. India’s inadequate infrastructure is one reason why foreign companies are reluctant to build there. Another reason is that, in some cases, India doesn’t want them to come: It does not allow foreign investment in sectors like retailing, and it limits foreigners to a minority share in other businesses such as insurance and the media.

Third, by 2050, India will have one of the largest economies in the world if it continues to focus on technology and science. Goldman Sachs expects India’s economy to grow by 5 percent a year until 2050 and rank third, behind only China and the United States. However, one reason the firm cited for the steady growth is that India’s current level of poverty gives it plenty of room to grow. Also, because its population is expected to continue to swell over the next four decades, India will still have a lower GDP per capita than China, Russia, and Brazil.

References List :
1. New Scientist, February 19, 2005, “India Is Coming: The Next Knowledge Superpower.” ⓒ Copyright 2005 by Reed Business Information Ltd. All rights reserved.2. The Economist, March 5, 2005, “A Survey of India and China.” ⓒ Copyright 2005 by The Philadelphia Inquirer. All rights reserved.