Guaranteed success?

His fellow-economists are still to digest Surjit Bhalla's thesis (articulated in this newspaper last month, and fleshed out at a session in the capital on Saturday) that investment levels in India have shot up to 40 per cent of GDP, compared to 30 per cent two years ago and approaching China's dizzy achievements on this front. Dr Bhalla has a history of mining the data to come up with conclusions that challenge more cautious scenarios (as with his assessments of absolute poverty). In the immediate case, he argues that there is a structural break with the past, that GDP growth will accelerate, and that nothing is likely to come in the way of 10 per cent GDP growth, an "all is well in the best of all possible worlds" scenario, which naturally draws sceptical responses.

Dr Bhalla argues, correctly, that India's inadequate physical infrastructure (power, transport), and China's contrasting abundance, are not a matter of despair and will not impede sustained 10 per cent GDP growth because in China and elsewhere, large-scale investment in physical infrastructure happened many years after GDP growth accelerated, and followed demand rather than preceded it. The optimistic conclusion this suggests is that India will get its infrastructure act together before long; the sceptical will wait for evidence, though the scaling up of investment in India's highway network, the proposed railway freight corridors, the sharp increase in the share of privately-owned minor ports in overall port traffic and the rush to build special economic zones would suggest that Dr Bhalla has a plausible case. The massive growth in mobile telephony, after all, was a response to the shortage of conventional fixed-line phones. Similarly, Dr Bhalla argues that the usual dirge about India's institutions of governance is misplaced because the growth of the middle-class is leading to greater activism, a more assertive public voice and a judicial response, all of which are positive developments.

Dr Bhalla contends that the usual pessimism with regard to foreign investment in India (especially when compared with China's record) is another case of needless self-flagellation. He argues that the numbers for foreign direct investment (FDI) should be taken together with portfolio investment by foreign institutional investors (FIIs), and from that perspective India's inflow is smaller only to the extent that its economy is 40 per cent of China's in size. Conventional logic has it that FDI creates new investment in plant and machinery while FII flows are volatile. Dr Bhalla demonstrates that these have in fact been remarkably stable, and that they help improve company valuations, which in turn helps raise the equity capital with which to finance investment, as Bharti has done.

Mainstream economists criticise the RBI for wanting to keep the rupee weak (after more than decades of over-valuing it), but Dr Bhalla contends that mercantilism has served both India and China well, though the latter has obviously benefited more, given the higher levels of undervaluation. Of course it remains true that the levels of benefit also depend upon the ground conditions. If, for instance, poor labour laws prevent textile firms from expanding rapidly to take advantage of the freeing up of the global textiles trade, the impact of an undervalued currency will obviously be less than otherwise.

On most specific issues, Dr Bhalla is more right than wrong, but taken together, there is a multiplication of negative scenarios that should weigh against definitive prognostications. In any case, the danger in articulating the thesis that India's rise and success are inherent in the very nature of things is that it will breed precisely the complacency that can stifle badly- needed change.