An 'East Asia' growth model for India

Sanjeev Sanyal considers the push for export-oriented manufacturing

PUBLISHED : Wednesday, 20 August, 2014, 12:07pm
UPDATED : Thursday, 21 August, 2014, 2:06am

Last Friday, Narendra Modi delivered his first Independence Day speech as Indian prime minister. Though he continued the tradition of addressing the country from the ramparts of Delhi's historic Red Fort, the speech broke with convention. Shunning a written text, Modi extemporised for an hour, mapping out an explicit vision for India, including an economic model that constitutes a clean break from India's past.

Since 1991, India has been slowly changing its policy framework away from the socialist vision of its first prime minister, Jawaharlal Nehru. However, for political reasons, the changes were always justified in an almost apologetic way. Indeed, many Nehru-era institutions continue to exist, and even thrive.

In one fell swoop, Modi announced the abolition of one of the most important of these institutions: the powerful Planning Commission, which had continued to churn out Soviet-style "five-year plans" and remained at the heart of a centralised resource-allocation process. Its successor, a national development and reform commission, will probably function more as a think tank, with no power to allocate.

Modi also argued for a new economic-growth model based on export-oriented manufacturing. This means encouraging domestic entrepreneurs to manufacture goods for export and inviting the world's top companies to relocate production to India. This effort is important, because India's economy and exports are dominated by services.

When Modi's emphasis on export-led manufacturing is viewed in the context of his government's focus on heavy infrastructure projects - ranging from power generation to railways - it becomes clear that his growth model, with its mass deployment of labour and capital in industry, looks similar to East Asian countries' strategy.

The shift to an "East Asian" growth model should not be surprising, given India's demographic pipeline. India needs to create jobs for the 10 million people per year who join the working-age population. It also needs to accommodate the millions who wish to shift away from agriculture, which still employs half the workforce.

The service sector has proved to be a poor job creator. By contrast, construction and manufacturing are rightly seen to be more promising outlets for the mass deployment of semi-skilled workers.

There are, of course, many obstacles in Modi's path. India's tax and regulatory regime is widely regarded as unfriendly to business, but Modi's track record suggests he will be able to make significant improvements.

The greater challenge for Modi will be financing his growth model. The success of the East Asian model was predicated on a sharp increase in the investment rate. Beginning with Japan, every rapidly growing East Asian economy sustained investment rates in the range of 38-40 per cent of gross domestic product over its rapid-growth phase. India's fixed-investment ratio, by contrast, has declined in recent years to around 30 per cent of GDP.

Foreign capital can play a role in supporting rapid growth, but international experience shows that domestic savings are key to sustaining high investment rates. Mobilising these savings will require careful thinking about how the domestic financial system can be expanded without risking a future crisis.

Despite all the obstacles and risks, Modi has articulated an explicit economic vision for the first time since Nehru. It is now a matter of implementation.

Sanjeev Sanyal is Deutsche Bank's global strategist, and a World Economic Forum young global leader. Copyright: Project Syndicate