Can India Keep Growing?

It depends on which India you're talking about.

Just a few years ago, it seemed the sky was the limit for India. Its budding high-tech industries were supplying software and services to countries around the world, its call centers were ubiquitous at the end of English-speakers' phone lines, and its pharmaceuticals industry was pumping out low-cost cures for hundreds of millions of customers in emerging economies. Now, skepticism about India's growth abounds. Is it justified?

India certainly doesn't lack potential. As I've written before, the main ways for a country to raise living standards are to put more capital within the reach of its workers and to adopt new technologies from abroad. India has room to do much more of both.

One way to bring workers and capital together is urbanization, which tends to track economic growth fairly closely. The graph below shows the strong relationship between urbanization and per capita incomes. Each point represents a country, and the green one is India. It's right on trend, and it has a good long way to go.


Other populous countries have trodden India's path already. Indonesia was at a similar point in the early 1990s, as was China in the late 1990s. Both continued to urbanize, with about 50 percent of their populations living in cities today. But China's per capita income is higher, and it also urbanized more quickly. There's room for plenty of variance around the trend line, so India's future is far from certain.

India, too, grew rapidly in the past two decades, but it was not the fastest mover. In 1993, its population was 26 percent urbanized; in 2012, it was 32 percent, with growth in GDP per capita, adjusted for inflation, of 5.2 percent per year. Yet during the same period, Vietnam reached 32 percent urbanization after starting at 21 percent, with growth in GDP per capita of 5.8 percent per year.

What slowed India down? After all, it was a capitalist democracy that had the good fortune to be a British (rather than a French or Belgian) colony, and British colonies have tended to do better than their counterparts during globalization. What about India was so retrograde that a supposedly communist country that was more corrupt and only joined the World Trade Organization in 2007 could perform better during the peak era of globalization?

One answer is that India lagged in human development. People need health care, education, access to opportunities, and a raft of other intangibles to realize their full potential in society and the economy. For the majority of Indians, these pillars of human development were and are still far below par.

According to the United Nations Development Program's most recent measure, India ranks 136th in the world for human development, with Vietnam 127th. When the figures are adjusted for inequality, India sits 21 places behind Vietnam. To understand why, consider that life expectancy in India was about 66 years in 2012, while in Vietnam it was over 75. Children in India can also expect a year less schooling than their Vietnamese counterparts.

Even though India's GDP per capita is similar to Vietnam's in dollar terms, the money is not making it down to the grassroots. A few elites pulling in hundreds of millions of dollars every year can boost average incomes, but their children still count as only one person each for life expectancy and schooling. By the same token, an urbanized population living in slums without decent shelter or basic services isn't necessarily a productive one. These disjoints may be at the heart of India's underperformance.

Nevertheless, there is one enormous caveat in any discussion of India's economic prospects: There are many Indias. India is made up of 35 states and territories that vary enormously along all of the axes I've mentioned so far. Generalizations about India make about as much sense as generalizations about Africa.

For example, consider India's much bemoaned corruption. In 2010, a survey by CMS India, an independent watchdog, found vast differences between Indian states in the likelihood that people would be asked for a bribe. In Andhra Pradesh, an eastern state of almost 85 million people, only 7.4 percent of respondents reported being asked for a bribe by a public official or civil servant. That's not a bad market for investment -- a relatively clean place that would rank among the top 20 countries in the world by population. By contrast, more than half the respondents in neighboring Chhattisgarh said they had been asked for a bribe, and more than three-quarters of them said they had paid.

The variation extends to human development, too. Life expectancy in Kerala, a state of 34 million people, was 74 years in 2010, but in Madhya Pradesh it was only 58. This is a stunning difference, equivalent to the gap between Romania -- a member of the European Union! -- and Djibouti.

Of course, there is a limit to these differences. State governments have little say in the regulation of foreign investment, capital controls, openness to trade, and competition. But to echo the Indian saying "yahan kuch nahi ho sakta" (essentially, "nothing works here") is to take a very narrow view of an enormous and complex country. Some things are clearly working in some parts of India, and those parts are sure to grow. The question is whether they will carry the other parts of India with them.


Daniel Altman

Day of Reckoning

The vultures are circling over Argentina's stricken economy. Can it hold off disaster until the next election?

The marathon is in its last stages, and the only question is whether the runner will make it to the finish line or collapse a few miles short. With two years left before she must leave office, Cristina Fernández de Kirchner has brought the Argentine economy to the brink of a currency crisis. Can the peso survive until a new president arrives?

Back in October, I outlined the worsening problems with Argentina's economic policy. Fernández's government has been spending oodles of money with the side effect of annual inflation in excess of 20 percent, which it has repeatedly denied in almost comical fashion. As if to prove that inflation could not possibly be so high, the central bank has defended the peso at an artificially strong exchange rate with the dollar. This policy has required the central bank to deplete its reserves, selling dollars to prop up the peso, while Fernández's government has strictly limited Argentines' ability to buy dollars at the favorable rate and take them out of the country.

Inevitably, a black market has arisen for dollars in Argentina. As I write this column, the official exchange rate is about 5.7 pesos to the dollar; the black market rate, which is sufficiently out in the open to be quoted in newspapers, has the peso at about 9.2 to the dollar. The gap is enormous, suggesting that an end to the central bank's interventions would lead to a massive devaluation.

In the past few years, the central bank has relied on trade surpluses to prop up its reserves. But those surpluses, which ran as high as 2.5 percent of gross domestic product in 2009, have essentially disappeared. In fact, the International Monetary Fund predicts that Argentina will see trade deficits every year from 2013 through 2018.

These deficits will continue to chip away at the reserves, as will the interest payments on Argentina's still unsettled debts, for which the government has lately relied on the central bank. Foreign investment in Argentina would help to bring in more hard currency, but the country has consistently lagged behind its neighbors Chile and Uruguay in attracting money from abroad.

As things stand now, the safety net for the peso is rapidly fraying, a fact made obvious by a comparison of the central bank's reserves with the size of the money supply. In the spring of 2009, the reserves were worth about 1.8 times as much as the monetary base at the official exchange rate. Since then the ratio has dipped steadily, settling at around 0.65 this month.

Perhaps ironically, this value is just below the level of 0.67 that the central bank was required to maintain before the disastrous crisis that began in 2001. In fact, the ratio never slipped below 0.82 that year, but a huge devaluation still occurred when the government finally abandoned the peso's one-to-one peg to the dollar. The peso fell by 25 percent in two weeks and more than 70 percent in six months.

Clearly, the current exchange rate is also unsustainable in the long term. But is it sustainable until 2015?

If the central bank can hang in there, Argentina could achieve a rare soft landing. All of the likely candidates for president -- Mauricio Macri, Sergio Massa, Daniel Scioli, and Elisa Carrio (or one of her allies) -- have condemned the rampant inflation that is destroying the peso's value. To varying degrees, they are all committed to converting the economy from a mad scientist's laboratory into a more transparent and integrated part of the global financial system.

As a result, a successful election is likely to bring a flood of foreign capital and a reinvigoration of the economy, bolstering the central bank's reserves and the peso. Government spending would fall, the printing of money would slow, and inflation would ease. Share prices and asset values would rise. Only a gradual devaluation of the peso, if any, would be necessary.

But Argentine governments don't always survive until elections, especially when the economy runs into trouble. If the gap between the official and black market exchange rates continues to grow over the next few months, so will the flight of capital that the government has tried so doggedly to restrain. Eventually, the loss of liquidity could lead to runs on banks and chaos in the streets.

A trigger might come much sooner, however. On September 30, the U.S. Supreme Court will decide whether to hear Argentina's appeal in a case brought by bondholders who have yet to settle claims from the last crisis. According to a brief filed by Argentina's lawyers, the current ruling could cost the country another $15 billion in reserves. If the court refuses or rules against Argentina, default and devaluation could occur virtually overnight.

In this situation, not only the soft landing but also the transition to an economically saner regime could come under threat. The last post-crisis transition featured a string of five presidents in two weeks, and the time would be ripe for less scrupulous hands to grab control of the ship of state. With a bad political outcome, the promise of an improved business climate might disappear, and along with it any chance of an influx of foreign capital.

It has been suggested that Fernández de Kirchner dreams of a constitutional reform and a third term in office, much as her predecessor Carlos Menem did in 1999. In truth, she'll be lucky to finish her second. Yet if she moderates her doomed economic policy now, she may still be able to protect the economic future of her compatriots, as well as her own legacy.