Info tech can't drive economic growth yet, and its education system faces great difficulties, but India is closer to catching China than many believe
India's 7.9% economic growth in the third quarter of 2009 vividly illustrates a dramatic transformation in the country's image, from a land of elephants and snake charmers to that of an IT powerhouse and an emerging economic giant. While both sets of perceptions are valid, they hide far more than they reveal. Indeed, when it comes to the Indian economy, what most people believe to be true contains more fiction than fact. We highlight below five common myths about India and discuss why the reality on the ground is quite different. Myth No.1: The information technology sector has been the primary driver of India's economic growth. India is indeed a global powerhouse in information technology and IT-enabled services. Yet the IT sector is little more than a tiny, though highly visible, niche in the Indian economy. The total revenue of this sector added up to $72 billion in 2008. Translated into value-added terms, the IT sector contributed only about 4% to India's gross domestic product last year. Its contribution to employment is even smaller: About 2 million people are directly employed, and an additional 8 million jobs are created indirectly. Those are tiny numbers in a country with a labor pool of 700 million people. The fact that India's IT sector is just a niche is actually a blessing rather than a curse. Notwithstanding IT's annual growth rates of 25% or more, the bulk of the recent growth in India's economy has come from manufacturing and other services. Only the manufacturing sector has the scale to create jobs for hundreds of millions of people, most with relatively limited education. If India is to realize its potential as an economic superpower, it will have to keep following China's path by becoming one of the world's factories. The IT sector gives India a good brand image, but most Indian jobs will have to come from manufacturing. Myth No.2: India is decades behind China. Most visitors to India and China form their impressions about these countries by comparing such cities as Mumbai, New Delhi, and Bangalore with Shanghai, Beijing, and Guangzhou. The difference between the two countries' urban centers is truly stark. China's top cities now look more modern and sleeker than New York or London. By contrast, India's premier cities are still vivid examples of the third world. Yet most people overlook the fact that, even though China is clearly ahead of India, the former looks stronger than it is while the latter is stronger than it looks. In 2008, China's GDP was just a bit more than three times that of India. If India's GDP grows at 8% to 9% a year over the next decade—a reasonable prediction based on analyses by Goldman Sachs (GS), the U.S. National Intelligence Council, and other analysts—India's GDP in 2020 will be almost the same as China's in 2008. Of course, China would have powered ahead by then, but the fact remains that India's economy is about 12 to 14 years, not decades, behind China's. This is exactly the difference from 1978, when Deng Xiaoping launched China's reforms, to 1991, when India jumped onto a similar train. Myth No.3: India's democratic politics will prevent a rapid build-up of the country's infrastructure. Given its fiercely democratic political system, any Indian government will find it impossible to relocate quickly a few million people from a city's center to make way for gleaming office towers and elevated expressways. Note, however, that infrastructure consists of more than beautiful roads and buildings. It also includes ports, airports, power generation and transmission systems, telecommunications, airlines, and railways. The only aspect of infrastructure that India's democratic politics hinders in a major way is the beautification of cities. The number of people who need to be relocated to build interstate highways, intrastate expressways, and most other infrastructure components is minimal and thus largely unconstrained by democratic politics. From 1995 to 2007, China spent about 8.5% of GDP on infrastructure. During this period, India spent only about 4.2%. Today, though, the situation is radically different. India is currently spending about 8% of GDP on infrastructure and has plans to increase the figure to about 9%. Ugly and crowded cities, while an eyesore, are unlikely to derail the ongoing manufacturing revolution, which needs interstate highways and intrastate expressways far more than easy-to-navigate city centers. In short, given its political system, India is more likely to become a manufacturing power long before its cities begin to look modern. Myth No.4: Uncontrolled population growth is a major burden for India. China's one-child policy has clearly achieved a major reduction in birth rates and population growth. In contrast, when one thinks of India, the enduring picture is one of cities overflowing with poor and teeming masses. Hence the question on many people's minds: How can India sustain uncontrolled population growth? Notwithstanding the utter inability of India's democratic political system to impose any type of birth control policy, it is critical to remember that, as people become richer and better educated, they choose to have fewer children. Fertility rates (i.e., average births per woman) in India are declining rapidly—from 4.65 in 1980 to 3.25 in 2000, to 2.68 in 2007. A similar steep decline has occurred in the population growth rate—from 2.15% a year during the 1980s to 1.5% a year from 2000 to 2005 and 1.35% a year since then. If current trends continue, as is almost certain, fertility rates in India should drop to about 2.0 within the next 10 years, and the population's annual growth rate should fall to about 0.6% a year, similar to China's today. In short, population growth in India is a self-correcting problem that is getting addressed on its own at a rapid rate. In any case, in a democratic country such as India, it is far easier and wiser for the government to focus on how to make the economy grow at, say, a 9% rather than an 8% rate. Over 10 years, that can be as effective a mechanism for population control as any other. Myth No.5: India's education system is world class. In launching the "Race to the Top" fund for educational reform in the U.S., President Barack Obama encouraged schools to develop internationally competitive standards so that American students can take on "folks in Beijing and Bangalore." President Obama is right on the money in noting that, in today's era, labor markets are global and that kids in Los Angeles are competing against not just their peers in Chicago but also those in Beijing and Bangalore. It would, however, be incorrect to conclude that India's education system is anywhere close to world class. India is not just a large country but also one of the world's most diverse, with extremely high levels of income and educational disparities. The elite engineering and business schools (the Indian Institutes of Technology and the Indian Institutes of Management) are tougher to get into than Harvard or MIT and have produced a disproportionately large number of CEOs and senior executives for some of the world's biggest corporations. Yet one cannot overlook the fact that adult literacy in India runs at only about 61%, far below the 91% figure for China, the 90% figure for Indonesia, and the 89% figure for Brazil. During the past five decades, China has placed far greater emphasis on primary and secondary education. In contrast, India has placed far greater emphasis on tertiary education. The manufacturing revolution, which is now in full swing and must continue, will need high school graduates and vocationally trained people far more than highly trained engineers and scientists. As in the U.S., transformation of the educational system and rapid upgrading of the infrastructure will be two of the most desperate needs for India's economy over the coming decade.