India has experienced unprecedented economic expansion in recent years. Novel, too, is the path that has led the nation to this growth.

By Priya Ghai

India is experiencing some of the most explosive economic growth the world has ever seen. In the first six weeks of this year alone, the following major international deals have been accomplished: Tata Steel bagged Corus for $12 billion, Vodafone bought Hutch Essar for a whopping $16.4 billion and foreign big box retailers are clamoring at the door. The Bharti-Wal-Mart JV has the country discussing the inevitable fate of Kiranas (mom and pops), which currently make up 97 percent of the unorganized retail sector.

This country is filled with a powerful energy that is manifested in an entrepreneurial zeal consisting of equal parts highly skilled labor, national pride and a belief in the universal life force. This in itself makes India unique. A commonly debated issue is whether India can sustain this kind of growth, which provides experts the opportunity to gaze into their crystal balls. I, for one, have opted not to discuss the sustainability factor, at least not much, as I am neither expert nor jyotshi (fortune teller). Instead, I would like to focus on India's road to growth and how it is differs from every other developed or developing nation, with particular emphasis on the East Asian economies.

SERVICE SECTOR-FUELED GROWTH
What is so unique about India's expansion? First and foremost, the services sector has been the leading contributor to India's miraculous growth story. This is in sharp contrast to the rest of the Asian continent, whose growth primarily has been fueled by the manufacturing sector. Conventionally, countries with a large pool of low-cost labor will implement a plan that centers on a labor-intensive strategy, as this is the surest and perhaps the safest route to securing jobs for the masses. The trend of the other Asian countries has been to shift the displaced agricultural and farming workers toward employment opportunities in the manufacturing base. India has not done this and the effects of it are being debated today--and it is a serious issue. The agricultural sector contributes about 5 percent of India's GDP; however, it employs 60 percent of the country's workforce. This figure clearly underscores the level of disguised unemployment, and with a "recorded" population of 1.1 billion, this is clearly worrying.

So why did India choose the services sector? Some experts believe much of this was due to the policies of post independence. Closing up the economy and aligning with the then USSR severely hampered growth, and perhaps India missed the boat on manufacturing as the basis of an export-driven growth strategy. By the time the liberalization policies of the '90s came into effect, the demand for services was growing and the manufacturing sector already had another leader. India instead chose to focus on expanding its educated middle class and services industry sectors such as IT, telecommunications and banking. In contrast, other East Asian countries concentrated on low-cost products, such as cheap consumer goods, and then made their way up the value chain to products such as electronics and cars.

It could perhaps also be argued that entrepreneurs recognized India's shortcomings with respect to infrastructure and decided to focus on a service-led strategy. The growth of the IT sector was catapulted by the Y2K issue, which led to the establishment of BPO services, and today this sector continues to flourish with companies offering turnkey solutions for industries from the financial sector to the entertainment sector. However, with such overwhelming success a certain price is paid, and it could be said that the monumental IT success story has meant that the onus and dedication to improving infrastructure and manufacturing has taken a back seat.

A PROPENSITY TO SPEND
Another major difference between India and East Asia is the fact that the Indian economy is growing in terms of consumption. Indians have a propensity to spend, whereas the driving engine for the other economies was investment-led. China led an export-driven economy and a large part of the incremental income was saved and re-invested into infrastructure. India's demand, on the other hand, is based on domestic consumption growth. Maybe we do like to splurge, but another key factor could be that by the time the economy opened up, there was enough per capita income to enable a consumption-led economy. However, there are moves toward convergence and the establishment of Special Economic Zones (SEZ); the commitment to building roads and improving infrastructure clearly illustrates a focus on achieving a more external-orientated model.

A FULL AND FREE DEMOCRACY
When people talk of India vs. China, the term democracy invariably comes into play. This is a key issue that sets India apart from all development models. Japan began to develop during the Meiji restoration and under the autocratic system that existed pre-WWII. South Korea, Taiwan, Singapore and Indonesia all had restrictive political systems. Western nations also had to contend with non-democratic issues. Britain's political system was hedged with property qualifications and only moved toward the "first past the post" system in the 20th century--a system which some still claim as non-democratic. The U.S. had slavery and denied voting rights to both African-Americans and women. In every other developing nation, the trend has been to first grow and then slowly allow universal freedoms, perhaps under the notion of waiting until when "there is enough to go around."

However, India is the first nation to take on this rapid development path with full adult franchise. While this can slow the decision-making process and thereby impede growth, and a coalition government perhaps means the absence of a clear leader, the question arises as to whether it could be any other way. Unlike other Asian countries, India has a huge population comprised of many languages, cultures and religions. India is resilient and democracy has allowed all to live in the country and at peace (aside from the Kashmir issue).

A NEW PUBLIC-PRIVATE PARTNERSHIP?
India also differs in the degree of private and public cooperation. The Chinese government established SEZs early on. India is just undertaking this now; in fact, India's most successful sectors--such as IT and jewelry--have had no government intervention. There is, of course, a move toward cooperation as the government clearly sees the need for private and public partnership with respect to infrastructure. Incentives are being put into place to attract this. Another major difference is that India has been slow to allow Foreign Direct Investment (FDI) in many sectors; this is clearly felt in the retail sector. China, on the other hand, welcomed FDI with open arms.

There are still major issues that India has to tackle, such as illiteracy rates. India has concentrated on tertiary education, which could be another reason why the country chose the high-tech route to development. However, experts believe that India will benefit from a demographic shift in the next decade (more than 50 percent of India's population is under the age of 25), which will boost the labor force and increase savings. Furthermore, primary education is a major focus and literacy rates are expected to increase to 90 percent by 2020.

The question as to whether India can sustain its growth is always a matter of hot debate. Is India simply riding the current global liquidity wave, or is it as the Goldman Sach's report of 2003 states: "India's growth acceleration since 2003 represents a structural increase rather than a cyclical upturn. Productivity growth is driving the increase, and explains nearly half of overall growth." The fact is that no one knows. No other country has followed this model, so maybe it boils down to Kismet (fate or destiny).

Priya Ghai is general manager India at Guthy-Renker Corp. She can be reached via e-mail at pghai@guthy-renker.com.