India may be in the midst of an expansion that would position it
as one of the three largest economies in the world. The challenges
to sustained, rapid Indian growth are being broadly understated,
though, especially during the national election season. India's
young population is a clear long-term economic strength and
projected population growth over the next two decades will all but
guarantee a decent rate of economic growth. "Decent," however, does
not translate into a meteoric rise up world rankings, nor will
it satisfy voters' very high expectations.
To meet these expectations, India must use its burgeoning
labor force properly. This makes basic education and training
needs even more pressing. There is already a pronounced shortage of
adequately skilled workers. In addition, constant state
interference curbs property rights and places firms and industries
at a competitive disadvantage, suppressing employment.
The new Indian government, and the next several governments,
should therefore make education and liberalization the highest
economic priorities, even above clearly needed infrastructure
development. Otherwise, the oncoming demographic wave will lead to
large-scale underemployment, rather than innovation and rapid
growth. Political parties will be blamed for a flawed development
agenda rather than credited for leading India to the economic
A strong India is important to America for many reasons. First,
a vibrant Indian economy would benefit the U.S. and all of Asia.
Second, India is an indispensable partner in security issues
in South Asia. Third, its political example is a model for the
universality of democratic values--an appeal that constitutes
America's greatest foreign policy strength. India's rise is a new
dynamic factor in a geostrategic equation most prominently
Although the U.S. plays a smallish role in the Indian economy,
it can do more to help India fulfill its promise, benefiting the
U.S. in the process. The Bush Administration established a sound
diplomatic and institutional basis for extending the
The Obama Administration should build on this by using the
U.S.-India Education Foundation--or a new organization--to assist
India with basic education and training for its expanding
labor force. In addition, U.S. government agencies should offer to
assist their Indian counterparts in identifying the elements of
market-oriented reform most effective for unleashing the Indian
economy. The private sectors in both countries should be core
participants in these discussions, which should focus on efficient
use of capital and other resources to complement labor abundance to
achieve sustained rapid growth.
Two Possible Futures
In 1998, China had the seventh largest economy in the world,
less than one-eighth the size of the U.S. economy. In 2008, it had
the world's third-largest economy, one-fourth the size of the U.S.
economy and still closing. American policymakers were caught
largely unaware by the speed of China's ascent onto the world
India could be next. In 2008, India had the world's 12th largest
economy, less than 1/12th the size of the U.S. economy. From 2003
to 2007, the Indian economy grew at an average annual rate of 8.9
percent. The global financial shock has slowed the rate of
expansion, but it may not slow India's rise up global rankings. If
India continues to outperform, it could become the
eighth-largest economy as soon as 2011. Adjusting for purchasing
power, India recently passed Germany for fourth in the world. It
could conceivably pass Japan in 2013.
Many Indians seem to be taking this for granted, expecting the
economy to resume and sustain its high-speed trajectory after the
global financial crisis eases. They assume 2011 to 2026 will simply
replicate the impressive results of the reform era 1992- 2007,
with nearly 8 percent annual growth in real terms. Yet during the
crisis, pre-reform statist policies have again become vogue
and pre-reform economic performance has been forgotten. If
India reverts to statist development, real GDP growth would revert
to something like the 3.7 percent annual gains of 1951-1980. This
would generate a much different profile.
Changing demographics could function as either an engine for
sustained 8 percent growth or a brake holding growth below 4
percent. Many factors determine economic growth, but in the long
term, policy and business cycle fluctuations fade away and human
capital becomes predominant. This will be especially true for India,
where a much larger labor force can dramatically affect development
positively or negatively, depending on the level of education and
One quarter of India's 1.1 billion people are under the age of
15, more than half are under age 25, and more than two-thirds are
under age 35. Almost 90 million people--more than the
combined labor forces ofBritain, France, and Italy--are
expected to join the workforce by 2013. By 2025, India's population
is projected to overtake China's population, and the expansion will
be concentrated among people of working age. In less than 20 years,
the population could increase by as many as 370 million, with
four-fifths of the increase between 15 and 59 years old. This
will give India the largest national workforce on the planet and by
far the youngest age profile among the large economies.
The explosion in the Indian workforce is typically
presented as marvelously good news, all but guaranteeing rapid
growth for a full generation. To some extent, this is true.
More workers inevitably add to production, consumption, saving, and
GDP. However, in the not too distant past, the challenge of
productively employing that many people would have been viewed as
Demographic expansion will not automatically bring large net
benefits. Many tens of millions of jobs that genuinely contribute
to the economy will need to be created. One assessment estimates
that a successful year for the economy requires 7 percent real
growth and creation of a staggering 15 million new positions. If job
creation is impeded or workers are ill-prepared, the
demographic blessing will become a curse, leaving tens of millions
underemployed and reducing to a crawl the improvement in per
capita measurements of economic well-being.
Agriculture clearly illustrates both the possibilities and
the perils of demographic expansion. Finding genuine
employment in industry or services for more than 60 million
redundant agriculture laborers would boost GDP by one-fourth
in just five years and far more over the course of their
working lives. Yet agriculture is able to absorb less than 15
percent of the additional workers expected through 2013. If
additional employment cannot be found, the government will need to
spend massive and increasing sums to support the rural poor. This
is a daunting prospect given the precarious state of
government finances both now and over much of the past five
Without both training and job creation, demographic trends
could spoil what should be causes for celebration. For example,
higher agricultural productivity will raise farm incomes and
reduce rural poverty, but also reduce the number of workers that
can be usefully employed in agriculture. This will add still more
workers to the lines of those seeking non-agricultural positions.
Rural incomes could stagnate or tens of millions of unprepared
workers could flock to cities unprepared to employ them, creating
gigantic slums and straining municipal and state governments both
fiscally and politically.
India can avoid this future. Indeed, it can create a different
future, featuring a powerful and unique role in the global economy
played by a large, young, well-trained, and productive workforce.
The keys are to prepare those workers and to implement market
reforms that will generate high-quality positions for
Perhaps the single biggest obstacle to long-term prosperity is
the education system. India will have the world's largest unskilled
labor force for an indefinite period. Better education would
raise productivity, encourage rural-urban migration, reduce
underemployment in agriculture, and boost manufacturing and
exports. The state's ability to accomplish this is in doubt,
however. Partial deregulation in education, especially primary
education, is crucial if India is to compete broadly at the
Making Demographics Work. Poor primary and secondary
education has led to a growing "workforce" that is often
unqualified to work. Each instance of an unfilled or poorly filled
job equates to lost economic growth. For each job that goes
unfilled or is filled by an unqualified worker, some productivity
is lost, potential wages are unpaid, and some consumer spending
does not occur. Such losses weaken the positive connection between
the demographic boom and faster growth.
While higher education receives the most attention,
significantly improving primary and secondary education is
essential to tapping the potential of the growing workforce. The
majority of the forthcoming influx of workers will likely be poorly
educated. Between 2009 and 2013, 58 million secondary school
dropouts could join the workforce. Sharpening the challenge,
60 percent of the new working-age population is concentrated in
five of the poorer states. Their access to education may be severely
limited, especially if they remain in rural areas.
In addition to shortages in capacity, even high-quality schools
and institutions are often failing to teach the skills needed in a
rapidly developing economy. Two elements are at work. The economy
has changed rapidly, featuring a thriving services sector and
multinational conglomerates of many stripes. Many educational
institutions have not kept pace with developments. This otherwise
common occurrence has more serious implications given the oncoming
Further, there is a pronounced lack of communication
between education institutions and industry, and this is recognized
by the central government. The Parliamentary Standing Committee on
Human Resource Development reports that employability of students
graduating even from the growing number of technical
institutes is "a matter of serious concern." Educational
institutions and industry need to open a dialogue to ensure that
extra resources applied to training workers are not wasted.
A significant skills deficit is building. Health care is just
one example. Because of the growing population and spreading
affluence, India will need 300,000 more doctors and 600,000 more
nurses by 2012. The medical education system presently can produce
only 31,000 professionals annually.
The market response to shortage is higher prices, in this case
higher wages for the wide variety of professions in which the
numbers of properly educated or trained workers are inadequate. If
wages are suppressed in any field, it reduces the individual's
incentive to seek the education or training that would benefit the
economy as a whole. However, wildly rising wages hurt
competitiveness. Indian companies must often pay
developed-world salaries to attract and retain skilled
workers. The solution to this dilemma is a larger
supply of qualified workers, which requires more and better
education and training.
More and Improved Schools and Teachers. Until now,
attention has focused on technology and the need for the most
highly trained labor. However, technology cannot absorb
tens of millions of additional unskilled workers. They can only be
accommodated with basic education oriented toward broader
manufacturing--an area that is sorely lacking.
India's literacy rate is only 64 percent, and there are no
compulsory education requirements. This compares poorly with
China's literacy rate of 90 percent and nine years of
compulsory education. A study by ASER, a nongovernmental
organization, found that half of 10-year-olds in village schools
could not read at the six-year-old level. These shortfalls persist
despite large increases in education spending. Between fiscal year
(FY) 2003 and FY 2007, the budget for the
Department of School Education and Literacy, which oversees primary
and secondary education as well as adult literacy programs, grew by
almost 400 percent.
Although it has been unsuccessful, the government continues
to focus on spending more on public education. An additional
$4 billion has already been allocated toward a goal of universal
access to secondary education by 2020, up from barely half
enrollment in 2005. Initially, most of the money will go toward
school construction. While certainly worthwhile, this by
itself will only spread the failings of the education system
farther and wider.
Existing schools have performed disastrously poorly. According
to the World Bank, 25 percent of teachers are "absent from work,"
and only 50 percent actually attempt to teach while at school.
Yet only 1 of every 3,000 head teachers has ever fired a teacher
for absenteeism. There are significant rents, particularly
in terms of job assignments, in local oversight of education.
Local schools' failure to teach reading and arithmetic obviously
hinders villagers from moving beyond agriculture, which is
absolutely necessary for the flood of new workers to lead more
productive, rewarding lives.Primary education is clearly
insufficient. Sixty percent of the population is still
employed in agriculture, and there are no signs of an ongoing,
large-scale movement into manufacturing.
To ensure that students receive a basic skill set, India must
ensure that teachers show up and teach. The federal government
should move teacher accountability to state and local
governments--a reform that has already proven effective where it
has been tried. For example, Bihar, one of India's poorest
states, cut teacher absences in half by making teachers locally
Increasing the number of workers with basic skills will also
increase the number able and interested in pursuing higher
education, assisting with labor needs in technology. Only 7 percent
of the college-age population reaches college, half the
number in some other Asian countries. Often only the
wealthy have access to college. In the short term, the service
sector will account for the majority of new jobs created,
further increasing demand for skilled workers.
While the federal government has had notable successes
elsewhere, it has failed in education. The literacy rate and
teacher performance make that clear. "This time we'll get it right"
is not an adequate response to demographic change that could make
or break India's emergence as a global economic power. There must
be some deregulation.
Instead, the government actively restricts private education.
Opening a private institution requires years of fighting with the
infamous Indian bureaucracy--a price the economy cannot afford if new workers are
to lift the economy higher. The private sector
must be allowed to share what is an increasingly heavy education
burden. Four avenues show promise.
Evidence suggests that the very poor are better served by
extremely low-cost private education. Schools with very little
funding, provided almost entirely by poor parents unsatisfied with
the government's options, have sprouted and fare well in
comparison to much better funded public schools. This kind of
innovation may not be very extensive and is certainly not
sufficient on its own, but it could play an expanding role as
demographics sharpen the education challenge.
Firms must also be permitted, even encouraged, to provide more
far-ranging technical education for the tens of millions of school
dropouts who could contribute more to the economy. The government
needs to remove regulatory restrictions and, to the extent
affordable, provide tax credits to those companies that prove
For the longer term, the government should shift resources away
from spreading dysfunctional public schools toward a voucher system
that would enable the poor to attend private schools,
encouraging them to spread. Compared to current plans and
results, this would provide better quality and cost less.
As a final, auxiliary step, the government should make it easier
for foreign education institutions to meet India's needs. Foreign
institutions interested in collaborating with Indian institutions
or opening Indian campuses are often blocked. In higher
education, especially, foreign participation could broaden
Liberalization Is Indispensable
While education is the most important factor in determining
India's economic future, economic liberalization is also
critical. Among other things, enhancing property rights, promoting
competition, lowering transaction costs, and otherwise reducing
state intervention would create employment opportunities and
sustain high growth.
India's recent, rapid GDP growth is the result of two waves of
market-oriented reform in 1991 and, roughly, 2002. The first wave
was a startling innovative break with India's socialist past,
which had yielded chronic underperformance. The second wave quickly
generated not only growth, but improved budget and payments
The present crisis clouds the future of reform. The second wave
began to stall in 2005 against entrenched state interests. The
state role has since been trumpeted as a vital shield against the
crisis. In fact, liberalization brought India the success it
enjoyed prior to the crisis, and liberalization will keep it on the
path to becoming one of the world's largest economies.
There are many possible roads forward. Foreign observers usually
focus on trade and investment reforms, which would be valuable.
However, internal economic reforms would be still more
valuable, especially a subset that would cost almost nothing to
implement. Their starting point is stronger property rights,
particularly control over corporate-specific assets.
Free Growth: Internal Liberalization. The high level of
entrepreneurial capability in India has long been recognized.
This entrepreneurship has been unleashed to some extent,
stimulating growth. A higher proportion of private investment in
gross fixed capital formation has been strongly correlated with
faster growth periods over the past 15 to 20 years. Continued rapid
capital formation will be even more important over the next 15 to
20 years to enable the economy to make full use of the rapidly
growing labor force. Unsurprisingly, private investment has
been very sensitive to reform efforts.
Regrettably, entrepreneurs are severely restricted, and the
government shows little sign of loosening the restrictions. Firms
often have limited control of their own assets and behavior due to
pervasive government intrusion. Government intrusions range from
changing directors on airline boards to barring all but the
smallest textile-makers from certain product lines.
Violations of personal and corporate intellectual property are
certainly not government policy, but preventing them is not a
domestic priority. External pressure from the World Trade
Organization (WTO) and the U.S. has been necessary to enhance
regulation and enforcement, despite the acknowledged importance of
the technology sector.
Foreign companies, in particular, face barriers to ownership and
even the basic right to compete with local firms. An especially
harmful restriction allows foreigners only to invest in
single-brand retail stores, meaning even partial ownership of
supermarkets, department stores, or any other multi-product store
is prohibited. This has left consumers underserved, harming
agriculture and other sectors that could supply a larger retail
Liberalization efforts have often been blocked by internal
government bickering, preserving not only quantitative restrictions
on behavior, but also an environment of uncertainty.
New rules announced in February 2009 will considerably
simplify foreign investment, if unaltered, but they are only a
small step forward. They were still greeted with political
Limitations on the control of private companies extend well
beyond foreign firms. The state infringes on the most fundamental
business decisions concerning the size and growth of all
companies, making India one of the most difficult places in
the world to do business. The most glaring example is a law
that requires firms with more than 100 employees to obtain
government approval to fire anyone. Thus, hiring becomes
nearly irreversible, deterring firms from expanding.
At the micro level, firms cannot possibly operate at anything
approaching peak efficiency with such a draconian limitation of
their most important resource. Essentially, every firm in the
economy contributes less than it could. At the macro level, facing
two decades of expansion of an already vast workforce, labor-market
flexibility must be greatly enhanced for the economy to sustain
high growth rates.
Directly connected to labor-market flexibility is economic
integration among Indian states--the flows of goods, capital, and
people across state borders. While certain metropolitan areas
generate much growth, policy is set at the state level, and state
policies inhibit the movement of people, goods, and money. For
example, for some goods, companies must pay an exit tax when moving
goods out of one state and a separate entrance tax when moving them
into another state. For capital, the tax on securities transactions
is set by individual states, acting as a barrier to bond market
integration. The result is perverse: During the
reforms of the 1990s, the economic performance of individual
Indian states does not appear to be positively correlated with each
other and may actually be negatively correlated. The barriers
between states do not appear to have fallen in the 1990s and may
even have risen.
Just as greater integration in the world economy would benefit
India as a whole, greater integration among Indian states would
benefit all participants. Perhaps more relevant, integration among
Indian states should not provoke nationalist objections or be as
vulnerable to claims of the rich coercing the poor. Knocking down
economic barriers between states is another element of
liberalization that would speed growth considerably, but require no
The federal government is not much more helpful than the
states. India suffers from the problems of public ownership that
exists in all economies with pervasive state sectors. Huge
corporations, such as the largest energy enterprise ONGC, "belong
to the people." In practice, this means that no one has final
responsibility. Any movement toward privatizing even a few of these
firms would spur growth at no cost.
Of course, promoting growth by limiting the scope of government
can save large sums. The government distorts competition--the
major driver for growth in the medium term--with subsidies across
nearly all sectors, especially in agriculture. Explicit subsidies
totaled more than $25 billion in FY 2009, five times more than in
FY 2001. These subsidies will cost at least as much in the current
fiscal year. Other subsidies, particularly in energy, are not
included in government balance sheets.
Extending Outward. The last major reform priority is
trade. While a successful Doha Round of trade negotiations among
countries of the WTO would be a valuable development globally,
progress at Doha is just one of several options available to India.
Delhi's rejection of Doha terms, while regrettable, should not
be permitted to morph into a broad rejection of trade
Open trade is vital to encouraging competition, extending it
both internally and externally. The magnitude of the effect is
determined by how important trade is in an economy, and here there
are misconceptions. While India is typically portrayed as
relatively isolated from the global economy, trade volume equaled
35 percent of GDP in FY 2008, two-thirds higher than a decade
earlier. For example, this is a notably
higher portion than in the U.S. economy. Indian exports are
labor-intensive, tied directly or indirectly to nearly 150 million
Beyond trade, outsourced services have been the spearpoint of
the economic advance. The government recognizes this, pressing
to clear the way for further outsourcing. In the past decade, the
ratio of combined trade and capital flows to GDP has more than
doubled from 0.47 to 1.15. External liberalization thus promises
very considerable gains.
This makes recent Indian trade policy self-defeating, perhaps
dangerously so. Delhi is gaming world trading rules. Shortly after
pledging to fight protectionism at the autumn 2008 G-20 meetings,
India imposed new import taxes on steel, pig iron, and crude
soybean oil. It scrapped the soybean oil tax in March 2009 before
the bureaucratic wheels of trade complaints could begin to turn.
Similar action was taken and then retracted on Chinese toys.
This kind of temporary discrimination may have short-term
benefits for certain interests, but is exceptionally unwise for a
country that depends on trade. The World Bank ranks India first in
the number of new anti-dumping measures imposed in 2008 at a
full 25. In the absence of clear WTO authority,
which India is actively undermining, these measures are far more
likely to provoke retaliation regardless of their ostensible
legitimacy. Retaliation could cost a great number of Indian
Where trade has been liberalized, the results speak for
themselves. Goods trade, where there is more government
interference, is running a widening deficit. In contrast,
India is a modest net exporter of services, and such exports lead
the economy both in terms of technology and high-income
employment. Services have thrived on greater
transparency and fewer subsidies than are provided in the
agriculture and manufacturing sectors.
Infrastructure: Who Should Lead?
Next in priority is infrastructure. It is often the first issue
mentioned by analysts and businessmen. The need for better and more
extensive infrastructure is not in doubt, but the state's
ability to provide infrastructure is very much in doubt. The
federal and state governments have proven incapable of identifying
and implementing projects that create true public goods, and
additional funding is highly unlikely to remedy the situation.
A superior option would be to reduce the pro-state and
anti-foreign bias by allowing domestic and foreign private
companies to identify projects with commercial, rather than
political, value. Private-public partnerships offer some
promise in this regard, but the track record indicates the public
side will still mishandle project selection and implementation
guidelines. The private sector must, therefore, lead or the pattern
of ineffective spending will continue.
Inadequate power supply and transport capacity clearly constrain
economic growth. The higher costs of doing business caused by weak
infrastructure hurt all firms, including agriculture firms,
encouraging capital to leave for greener pastures. The Indian
Council for Research on International Economic Relations estimates
that since the 1990s reforms, industries that rely more heavily on
infrastructure have grown 10 percent less than those that are
less dependent. When asked in the World Bank's Investment Climate
Survey for the "single most important obstacle" to expansion, 36
percent of firm managers cited infrastructure.
Power. Within infrastructure, managers cited
electricity as the largest issue, and government
intervention is at the heart of the problem. Many states
provide heavily subsidized, even free, power to rural
customers for political reasons. This has dubious net benefits
and either forestalls production of power plants or makes them
Economic growth is rapidly increasing the strain on the power
supply as businesses and households significantly increase power
usage. Demand for power is expanding by 11 percent annually, but
infrastructure has not kept pace. Power output rose 7.2 percent in
2006, but only 6.6 percent in 2007. The ensuing deficit between
demand and supply often leaves 10 percentof demand unfulfilled and
up to 15 percent during peak usage.
With such a substantial deficit, rationing is the only option.
Firms then must either go without or fill the gap themselves. The
World Bank found that manufacturing firms are losing an average of
8 percent of annual sales due to power cuts. India would
benefit greatly from economies of scale if private power
companies could be formed rather than leaving individual firms
forced to produce their own ad hoc.
Transport. The other major constraint on the economy is
transport. Rail transport is in fairly good shape. Indian Railways
actually generates an annual cash surplus, a global rarity. The
system has experienced an impressive turnaround over the past five
years, and plans are in place to upgrade track speed and modernize
customer service. There are flaws, including the tariff and subsidy
system, which overcharges freight shipments to subsidize passenger
Roads are a major barrier to commerce. Forty percent of the
600,000 villages are not connected to roads. India's size and dispersed
population make road and rail links more important than for most
economies. Only 38 percent of the population lives within 100
kilometers (km) of the coast or navigable waters, compared to 90
percent in Japan and the European Union. As in power, not only is
the supply of roads inadequate, but road construction is
flagging. In 2007, the national road-building program added
only 800 km of roads, versus 2,500 km in 2005.
Some cities suffer obvious efficiency losses. In Bangalore,
roads are so appallingly congested that workers can sit in traffic
four hours per day. Rush-hour speeds in urban areas often drop to
10 km per hour due to congestion.
Rural infrastructure improvement would be still more valuable.
Infrastructure weakness pushes the price of farm goods higher even
as it reduces the return to farmers. Good roads to cities would
allow villagers to transport crops to market more easily. Along
with agricultural storage facilities, transportation would be
a great boon to rural income. Permitting greater foreign
ownership in retail would encourage private investment in related
infrastructure, such as cold storage for farm goods heading to
In addition, transport difficulties inhibit the development of
nascent rural industry. Better road and rail would allow firms to
diversify factory locations. This would permit significant
portions of the 60 percent of the workers employed in agriculture
to move into more productive employment in manufacturing.
Such movement will be an absolute necessity during the demographic
wave. However, rural infrastructure projects, especially in
agriculture, do not have the profile valued by national and
local political figures.
Port infrastructure is the last crucial area holding back
economic expansion. In the 1990s, port traffic more than doubled as
India opened to external trade. In FY 2004, ports handled 521
million tons of traffic. They are expected to process 900 million
tons per year by FY 2011.
Improvement and expansion of ports have not matched increased
use. The main port in Mumbai handles 60 percent of India's
container traffic, but has only nine berths for cargo vessels,
compared with Singapore's 40 berths. In addition, exporters
lose an average of 15 days waiting for products to clear customs.
This increases costs unnecessarily and discourages trade growth.
Poor port infrastructure is obscuring India's true place in
the global economy. The extra time required to move goods is
essentially a tax on all port traffic that disrupts supply
chains. The poor quality of ports acts as a tax
on every import and export, hurting competitiveness and
Government Is Not the Answer.State control over
infrastructure has produced this outcome. The federal government
talks endlessly of infrastructure development, but as with so many
of its projects, the actual results are poor. The government
has reported average cost overruns of 40 percent in more than 100
current large infrastructure projects. The delays are worse.
"[I]mportant social sector infrastructure projects" have been
delayed by more than five years. Some transport projects have been
delayed eight years.
Expecting more federal spending to solve infrastructure
problems is irrational. Yet restrictions continue to severely
limit the ability of private entities to participate. For example,
under the jurisdiction of the federal government, the Port Trust of
India runs 11 of 12 major but inadequate ports. Restrictions on
private infrastructure activity range from caps on the number of
projects for individual companies to frequent rule changes in the
middle of project bids and the endless project approval process.
Restrictions extend to foreign assistance. While capital needs
for infrastructure are colossal, external commercial borrowing is
capped at $500 million per year. If debt is undesirable,
then raising foreign ownership limits in financials from 26
percent to 49 percent would retain domestic control and bring in
billions more that could then be used to finance infrastructure
India's illiberal labor laws particularly hinder infrastructure
improvement. Successful infrastructure developers require the
flexibility to hire large numbers of workers for the fixed
durations of projects, as is common in construction. The rule that
companies with more than 100 employees must secure government
permission to reduce their workforce obviously discourages
engineering and construction companies from hiring, so as to avoid
paying for a large workforce when the number of active projects is
Elsewhere, the problem is not bad laws, but poor enforcement.
For example, electricity is commonly stolen, and the thieves
are rarely caught. Astonishingly, in a environment of constant
shortage, companies are paid for only about half of the power
they generate. In this context, the lack of adequate
investment is not surprising.
The overarching problem is intrinsic to government-led
infrastructure development. If the goal is to encourage long-term
economic growth, projects with the greatest long-term commercial
return should be chosen. The state has demonstrated neither the
incentive nor the capacity to identify and implement such
projects on a regular basis.
The private sector is ready and willing to lead when government
restrictions are removed. In 2007, $15 billion was pledged for
power-related projects in special economic zones, and $5 billion
was directed toward special purpose vehicles, a new method for
attracting private investment for infrastructure. One estimate
suggests that streamlining project regulations would increase
foreign direct investment in manufacturing, including
infrastructure, from $3.4 billion in 2007 to $12 billion by 2013.
What the U.S. Should Do
Notwithstanding the potential for foreign investment in
infrastructure, the U.S. has played a relatively unimportant role
in the Indian economy. If education and internal liberalization are
properly emphasized, India's economic development and growth will
surge, but the U.S. role could still remain minor. This would be a
mistake on America's part.
The U.S. has significant interests in encouraging and assisting
India's economic success. Most mechanisms to do this are
already in place, but require reorientation and perhaps a
kick-start. Institutional ties expanded in 2002 and again in 2005.
The U.S. and India already have more than 20 bilateral
dialogues, of which about one-third deal primarily with
economic issues. The changes in the leadership of both
countries can be an opportunity to build on previous successes.
The chief initial obstacle is a lack of U.S. government
focus on primary and secondary education in bilateral relations and
Indian sensitivity in this matter. If and when bilateral
cooperation in primary and secondary education can be achieved, the
emphasis can then shift to traditional economic concerns. While the
notion of a strategic economic dialogue has been tainted by the
lack of concrete results from the U.S.-China strategic dialogue,
U.S.-India economic relations would ideally grow in importance
and scope to the point that an overarching framework would be
necessary to address issues of growing importance ranging from
agriculture to visas.
The existing U.S. role, what America has to offer, and the
important opportunity to maximize India's economic potential argue
for policy initiatives in education and market reform.
Specifically, the U.S. and India should:
Create a U.S.-India education organization--or modify the
U.S.-India Education Foundation-- to emphasize primary and
secondary education to develop skills in the most workers. Elements
of the dialogue should include curriculum development and
other best practices, but also cooperation in seeking
financial assistance. Through this organization, the U.S.
government should coordinate with the Ministry of Human Resource
Development to introduce U.S. education associations,
institutes, and foundations to private Indian education
Establish an educators forum in concert with this bilateral
education organization, paralleling the existing U.S.-India CEO
Forum on the business side.
Emphasize voucher and micro-lending programs to assist in
establishing or improving private schools where public schools
have not flourished.
Use the Private Sector Advisory Group, an adjunct to the U.S.
Trade Representative's U.S.-India Trade Policy Forum, as a forum
for the private sectors to make recommendations to both governments
on enhancing property rights, competition, and other elements of a
Use the U.S.-India CEO Forum in a similar role, focused on
removing restrictions on industry and competition. One important
shared goal of the two should be to continue progress on a
comprehensive U.S.-India Bilateral Investment Treaty (BIT),
especially with regard to the tax issues being reexamined in the
American model BIT.
Initiate an expanded dialogue between the Indian Ministry of
Labour and Employment and the U.S. government on liberalizing labor
regulations in a manner consistent with Indian political
Conduct bilateral consultations on sharpening the commercial
aspects of infrastructure programs, if both federal
governments insist on heavy spending on infrastructure. The U.S.
Departments of Transportation and Treasury have already taken small
steps in this direction.
Invigorate the U.S. Department of Commerce's U.S.-India
Commercial Dialogue by including the U.S. Trade Representative. The
dialogue should be reoriented toward identifying principal
trade and logistical barriers, with Indian accession to the WTO's
government procurement agreement as one goal.
Revive the Economic Dialogue involving the U.S. National
Economic Council and the Indian Planning Commission as an
overarching framework for bilateral economic relations. This
framework could be upgraded as the economic relationship matures,
eventually encompassing advanced discussion for a BIT and
preliminary discussion of a free trade agreement. It should
eventually include the U.S. Department of Homeland Security, the
Indian Ministries of Labour, Tourism, and Overseas Indian
Affairs, and regular discussion of long-term visa access for Indian
There is a mismatch between the general assessment of
India's economic strengths and weaknesses and generally prescribed
policies. Better infrastructure is certainly a priority, but
touting the advantages of a very young and rapidly growing
workforce immediately points to the primacy of basic education. In
addition, state intervention in the economy often directly or
indirectly discourages employment. Most market reforms would cost
federal and local governments almost nothing, while producing
While these are sensitive areas, they are also areas in which
the U.S. can be quite helpful. The improved U.S.-India relationship
has created a conducive setting for America to reach out to an
important and rising ally.
Derek Scissors, Ph.D., is Research Fellow in
Asia Economic Policy in the Asian Studies Center at The
Heritage Foundation. Michelle Kaffenberger is former Production
Coordinator and Administrative Assistant in the Kathryn and Shelby
Cullom Davis Institute for International Studies at The Heritage
Karl, "Three Events Tell a Tale of Two
Confederation of Indian Industry and Boston
Consulting Group, "India's Demographic Dilemma."
"Information Technology in India: Gravity's
Pull," The Economist, December 13, 2007, and "Asia's Skills
Shortage: Capturing Talent," The Economist, August 18,
U.S. Department of State, "Background Notes:
India," January 2009, at http://www.state.gov/r/pa/ei/bgn/3454.htm
(April 22, 2009); U.S. Department of State, "Background Notes:
China," January 2009, at http://www.state.gov/r/pa/ei/bgn/18902.htm
(April 22, 2009); and "Creaking, Groaning," The
Economist, December 11, 2008, at http://www.economist
(April 22, 2009).
The Indian government's fiscal year runs from
April to March and is typically identified by the beginning and
ending calendar year (for example, 2003-2004). For simplicity, only
the beginning year will be provided in this paper.
Government of India, Ministry of Finance,
Expenditure Budget, 2003-2004, Vol. 2, pp. 113-114, at /static/reportimages/F5C0F9D7324586E381620AFB43D3F0F8.pdf
(April 22, 2009), and Expenditure Budget, 2007-2008, Vol. 2,
pp. 132-134, at /static/reportimages/F5C0F9D7324586E381620AFB43D3F0F8.pdf
(April 22, 2009).
The World Bank, "Teachers Skipping Work," at
22, 2009). As reported by parents in Hyderabad, only one of six
classes assigned to an individual teacher is taught. Jay Mathews,
"The Hidden Flaws in China and India Schools," The Washington
Post, January 23, 2009, at http://www.washingtonpost.com/
(April 22, 2009).
"Creaking, Groaning," The
Karl, "Three Events Tell a Tale of Two
"India Faces Huge Manpower Crunch,"
The situation is worse for private
universities in particular. They must partner with often stagnant
public universities and cannot record profits. "Creaking,
Groaning," The Economist.
James Tooley, The Beautiful Tree: A
Personal Journey into How the World's Poorest People Are Educating
Themselves (Washington, D.C.: Cato Institute, 2009).
Rediff.com, "It's Absolutely Easy to Turn
Around Air-India," interview with S. P. Varma and K. R. Singh,
October 24, 2000, at http://in.rediff.com/money/2000/oct/24air.htm
(April 22, 2009), and T. Thomas, "Can India Dress the World?"
Rediff.com, August 26, 2005, at http://in.rediff.com/money/2005/aug/26guest.htm
(April 22, 2009).
Tanuja Garde, "India's Intellectual Property
Regime," Center on Democracy, Development, and the Rule of Law
Working Paper No. 99, February 2009, at http://iis-db.stanford.edu/pubs/22419/No_99_Garde_
Indiasintellectualproperty.pdf (April 22, 2009), and Manik
Mehta, "When Will India Put Intellectual Property Protection in
Place?" World Trade> Magazine, July 1, 2004, at http://www.worldtrademag.com/Articles/Feature_Article
/fb66cf5149af7010VgnVCM100000f932a8c0 (April 22,
The World Bank ranks India 122nd out of 181
countries on this measure, a prohibitively poor result for a
country with aspirations to global economic leadership. World Bank
Group, "Economy Rankings," at http://www.doingbusiness.org/economyrankings
(April 22, 2009).
Press Trust of India, "Subsidy Bill Soars to
Record Levels in 2008-09," The Economic Times, February 16,
2009, at http://economictimes.indiatimes
.com/articleshow/4138966.cms (April 22, 2009), and "What's
Holding India Back?" The Economist, March 6, 2008, at http://www.economist.com
/opinion/displayStory.cfm?Story_ID=10808493 (May 6,
"Govt Levies 5% Import Duty on Steel
Products," Business Standard, November 18, 2008, at http://www.business-standard.com/India/
storypage.php?autono=49732&tp=on (April 22, 2009);
Pratik Parija and Thomas Kutty Abraham, "India Scraps 20% Import
Duty on Crude Soybean Oil," Bloomberg, March 19, 2009,
news?pid=20601012&sid=a2vARdFcNKzk (April 22, 2009);
and Reuters, "India Eases Ban on China Toys, Wants Safety Stamp,"
Yahoo Finance, March 2, 2009, at http://uk.biz.yahoo.com/02032009/323/india-eases-ban-china
-toys-wants-safety-stamp.html (April 22, 2009).
Oxford Analytica, "India: Energy Shortfalls
Put Growth at Risk," June 19, 2008, p. 15.
"India's Economy," The Economist.
James Lamont, "India Goes Ahead with Railway
Investment," Financial Times, February 13, 2009, at http://www.ft.com/cms/s/0/e93dedae
-f9ea-11dd-9daa-000077b07658.html (May 6, 2009), and The
World Bank, "India Transport Sector," at http://go.worldbank.org/FUE8JM6E40 (May 6,
The World Bank, "India Transport Sector."
"Creaking, Groaning," The
Airports also need improvement. The number of
air passengers has grown 30 percent annually for the past two
years, causing significant capacity Issues for airports. "Creaking,
Groaning," The Economist.
In addition to building Infrastructure, the
government has proven inadequate in other tasks. The expiration of
the Multi-Fibre Arrangement offered unprecedented opportunity in
textiles, but three years after the Scheme for Integrated Textile
Parks was launched, only three of 40 approved projects had been
completed. Eleven projects are less than 40 percent complete and
another eight are less than 60 percent complete. The original
estimate called for completion of at least 25 projects by the end
of 2007-2008. The government now expects to complete only 10 by
spring 2009. Praveen Kumar Singh, "Three Years On, Only 40 SITP
Projects Take Off," The Financial Express, December 4, 2008,
-projects-take-off/394041/0 (April 22, 2009).
In August 2008, the government limited
individual companies to bidding for only 15 highway projects and
permitted a bidder to be short-listed for only eight. This inhibits
the development of economies of scale. As a result, by November,
firms had already withdrawn more bids than required because the
projects were no longer commercially viable. The federal government
wants to improve Infrastructure, and private firms want to help,
but such restrictions discourage them from doing so. Manika Gupta,
"Bidders Withdraw from Highway Projects," The Times of
India, November 17, 2008, at http://timesofindia.indiatimes.com/Business/
(May 6, 2009).
The Economist Intelligence Unit, "On the
Kapoor, "India Has 'Exciting Growth
Potential' But Must Work Harder."
"India's Economy," The
One possibility is Infrastructure zones along
the lines of existing special economic zones. "India Pushes Anew
for Special Economic Zones," The Economist, July 9,
2007, at http://www.economist.com/displaystory.cfm
?story_id=9462984 (May 6, 2009). Rather than a massive,
inevitably wasteful government splurge on Infrastructure, the
government could designate zones where the private sector would
lead under a much lower regulatory burden. This would boost private
Infrastructure development in the zones while still permitting the
government a heavy hand in projects elsewhere. Private
identification and implementation of Infrastructure projects would
contribute more efficiently to long-term sustainable growth, and
the government would save considerable money.