India’s long-term growth potential and the implications for Australia

Ben Ralston, an economist at Australian Treaury alerts me to this paper.

The Central bank of Australia keeps telling us  about the importance of China to Aus economy (RBA even opened an office in China). Here is an Indian flavor as well.

The paper suggests India has strong growth prospects. Demographics is in place with a much younger age population compared to other countries. The authors point two challenges with this – food security and education. Growing incomes would demand higher food and need higher productivity. To realise  demographic dividend, education and training takes center stage. Surprisingly it says education is a challenge India is winning:

The number of people between the ages of 5 and 14 in India is roughly 250 million.Putting aside higher education, even ensuring that enough people are provided with basic primary school education is a challenge, but it is a challenge India is winning.  According to census data, literacy rates have been improving. In 2001 literacy rates were roughly 65 per cent, while the 2011 census shows that the literacy rate is 74 per cent.  Unfortunately this higher literacy rate is yet to flow through significantly to labour market participation rates, with India’s participation rate comparing unfavourably to China (Chart 5).

One reason for the low participation rates and lack of formal job creation is the myriad of labour laws that inhibit market flexibility and act as deterrents to growth in the formal sector. In 2007 the OECD noted that employment in firms with more than 10 employees accounted for around 3¾ per cent of total employment. This was lower than any OECD country and suggests India is failing to take advantage of its abundance of labour.

A major reason for this is that manufacturing plants with 100 employees or more require government permission to lay off just one worker. There is also the plethora of state and federal laws that combine to make the system quite complex. In addition, the legal system adds to the difficulty. In one case where an employee was caught sleeping at work and consequently dismissed, it took over 20 years for the courts to make a final decision regarding the legality of the dismissal.

Barring these issues, literacy levels itself are questionable. The writer of this blog has been part of some surveys done to understand literacy, education, healthcare issues and the responses are pretty bad. Class 5 people not able to answer Class2/3 questions. This was pointed by Pratham as well. Quality of literacy/education is a serious issue.

Just a while ago anyone was called a literate in India who was able to sign his name. It was assumed that people who could sign their name knew basics of reading and writing. This was abused by officials and we had cases of people being taught to sign without understanding what is being written. So someone’s name could be Ashok but could be signing his name as Hari as Hari was simpler to sign.

Challenges are far more than imagined.

Back to the paper. The paper talks about reforms in land acquisition, capital, corruption, red tapeism etc. Not going into them.

What about implications for Australia?

The relationship has already grown with trade linkages increasing manifold. The story is same as China’s. As India has grown demand for resources has growmn. Aus rich in resources have exported these to India:

India’s strong growth has already seen Australia’s merchandise trade exports to India rise by nearly 800 per cent from 2000 to 2010. Put differently, this has added around $14.6 billion to Australia’s annual merchandise exports and seen India rise from 14th to 4th most important merchandise export destination. The strengthening trade relationship over the last 10 years has been largely the result of the growth in the Indian economy and its demand for resources. However, as growth in India continues and the middle class expands many more opportunities will open up.

India’s growing economy is leading to increased demand for energy commodities, such as natural gas and coal, and mineral commodities like gold and copper ore.

For example, coal exports to India for 2010 were around $6.8 billion, up from $2.6 billion in 2006. India is also expected to be a large customer of the $43 billion Gorgon gas project in Western Australia. Gold is also a very important export to India. Australia’s gold exports to India have risen from $3.6 billion in 2006 to be in excess of $5.3 billion 2010. India’s growth has  also seen Australia’s copper ore and concentrates exports rise to nearly $1.4 billion

Other areas where Aussies can benefit is:

  • Agriculture- help raise yields of Indian agri goods
  • Infrastructure provision – partner with Indian firms and Govt to increase infra in country)
  • Education – Allowing more Indians to pursue higher education in Australia. Just a point here, Australia was seen as a great destination for education as competition is lesser compared to US/UK univs and quality decent. The racial attacks against Indians have badly dented this.
  • Tourism: Many Indians still travel to Aus. as visiting their family members. As India grows it could be plainly for holidays which means more spending.
Nice round-up. There is less doubt that India has huge growth potential. However, to realize it will be a huge huge challenge. The numbers are very large here and the political environment is highly fractured. It needs a huge revamp of institutions and strongly committed policymakers. Just having economic prospects are not enough. There is a lot that goes into background to make it happen and most of that lot is missing in India as of now. Aussie economy should base its projections accordingly..

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