Flawed beauty in the Indian economy

To many commentators the Indian economy has recently bloomed into a flawless beauty comparable to Aishwarya Rai, Bollywood’s top star, pictured on the front cover. For them this is not an Indian summer, to be followed by the cold air of winter, but an eternal beauty in the full-blown Shakespearean sense. They are truly besotted.

Under such circumstances Sunil Jagtiani, reporting from Mumbai, does an important service in questioning what he calls the “new Indian narrative” in this week’s cover story (see page 20). While acknowledging the importance of recent developments in India, he also points to the country’s significant weaknesses.

On the positive side is India’s economic growth rate of 6-8% a year over the past 15 years, compared with 3-5% previously. Several independent forecasters broadly agree that the trend rate of growth is about 6.5%.

Such growth has enormous implications for a country of – it should be remembered – almost 1.1 billion people. If it can be sustained it means that India could be transformed within decades from a predominantly rural economy to a modern industrial one.

India’s diplomatic weight is already rising in line with its growing economy. Manmohan Singh, India’s prime minister, was last month given the honour of a state visit to America. It was only the fifth time that George W Bush has hosted such a visit. No doubt Bush was partly motivated by a desire to create a counterweight to China, but the visit still signalled recognition of India’s increasing importance.

Nevertheless, it should be remembered that India has still got a long way to go before it is developed. At present it is still classified by the World Bank as a poor nation alongside the likes of Somalia and Sudan. A quarter of the population still lives in abject poverty and 40% are illiterate, including 52% of women. Despite the rapid development of recent years, over 600 million people remain in rural areas.

To be fair to fund managers, some have publicly stated a note of caution. Sanjiv Duggal of HSBC points out there are still likely to be obstacles along the way. Vijay Tohani of First State says the excitement about India may have gone too far. Other experts, such as Professor Kaushik Basu of Cornell University, take a similar line.

Although India still has a long way to go to become developed, it would be wrong to deny its achievements. Its development is not as dramatic as China’s, but it has still meant more prosperous lives for hundreds of millions of people. The comparison with Aishwarya Rai may be overdone – India still has flaws – but its successes should not be denigrated.