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The services sector has done amazingly well for the country, but it is not 'the area where India has a long-term comparative advantage,' says an expert on the determinants of economic growth in developing countries.
Barry Bosworth, Senior Fellow in the Economic Studies Program at the Brookings Institution and an editor of the third annual India Policy Forum volume -- a joint Brookings Institution and the New Delhi-based think tank National Council of Applied Economic Research, said this at a roundtable luncheon coinciding with his book's release.
He was answering a query on how much inclusive growth will take place in India in the next few years.
"There are unskilled workers in the middle of the country who have been largely unaffected by what has been happening at the few centers for services," he said.
Responding to the ongoing debate on whether the 'services model' that India has been following thus far can create enough jobs or whether it needs to change the source of growth to manufacturing, Bosworth argued that 'to the extent that it is growth within manufacturing, is very perverse because it is the high-skilled manufacturing industries that have been expanded, not the labor-intensive ones.'
Bosworth, who has been with Brookings for nearly three decades, said, "Neighboring countries have done much better (than India) in this regard."
"You would think that this will not come back to haunt the government, but that there are just not enough people participating in the economic expansion at present to sustain it over a long period of time," he said, adding, "You are going to run into skilled manpower shortages."
The roundtable was attended by several leading economist and analysts from various think tanks around Washington, as well as senior World Bank and Bush administration officials.
"We have now had two conferences where, each time, the big focus was on education. And if you were an outsider, you would be horrified by how badly the education system serves the people of India," he said.
"In fact, it is not the picture that outsiders have of India because we think of all these bright Indians, but that is not the majority of the people of India. The education system serves people very badly at, both, the elementary and at the secondary levels."
Bosworth said, "Although there is a big preoccupation with discrimination, reforms have not helped (end) discrimination very much. It is very disappointing how little progress has been made."
He predicted that 'the biggest challenge the (Indian) government faces -- even though services is a huge success -- is that it has to have a broader base than the current one. And, more important politically, whether the government is going to build support for it from the general public?"
"I think otherwise the story is 'throw the rogues out,' because from the point of view of the average person, it does not look as it is doing anything," added Bosworth.
Bosworth was director of the President's Council on Wage and Price Stability in the late 1970s and served on the President's Council of Economic Advisers in the late 1960s, after teaching stints with the University of California, Berkeley and Harvard University.
Suman Bery, director general of the NCAER and one of the editors of the India Policy Forum, along with Arvind Panagariya, the first Jagdish Bhagwati Professor in Indian Political Economy at Columbia University acknowledged that 'it was not desirable for India to be stuck at a 17 per cent share of GDP for manufacturing,' while countries like China were doing well over 40 per cent.
"However, whether that is an issue of inclusive growth or whether that is an issue of how fast you can grow because productivity growth is obviously easier than it is in manufacturing than it is in services," he argued, adding, "That debate is about a slightly different group of issues than just incomes."
When some participants made the argument that all the hype about India is the services sector with the Infosyses, the Wipros and the TCSes, whereas it should be the rural sector and agriculture that should be driving the economy, Bery said, "This government has been in office three years and in terms of lip-service, the amount of attention they have paid to the underperforming agriculture sector has been substantive."
But, he said, many Indian economists argue that 'some of the aspirations for agriculture as a productive sector are unrealistic -- four per cent GDP growth or value-added growth -- that is not going to happen.'
"There is a lot of analytically, low-hanging fruit there in terms of the distortions in the agricultural economy that are government-induced. We need to go back to a time when the big focus was food security through cereal production," he said.
While acknowledging that a vibrant rural sector was imperative in India, he said that unlike China, which already had the job machine going on the manufacturing side, the reason why India moved in this manner was because it was 'trapped in an inefficient lack of integration between our agricultural sector and the world economy."
Panagariya, meanwhile, argued: "What you need is determined leadership," and predicted that "in the states where you get some determined leadership, it (agricultural reform) will happen."
"My political economy model in the Indian context is that the person at the helm has to be determined that he wants to do it. Then Prime Minister Atal Bihari Vajpayee was committed to reforms -- in the 5-6 years during Vajpayee's government, huge amount of reforms happened actually," he explained.
Panagariya said, "The current central leadership is not so determined actually. It is not the prime minister. The prime minister obviously isÂ… his heart is in reforms, but the shots are called by Congress president Sonia Gandhi, and I do not think she has any commitment to reforms. When it comes to agriculture, land, labour, et cetera, there are reforms to be done at the state level."
Speaking about India's economy, Bery said, "Let us not assume 9 per cent growth."
He said unlike China, in India's case, this rate of growth was 'relatively recent,' and recalled that 'when I got to India in 2001, there was a lot of despair because it was 4-5 per cent growth.' Bery was a former top World Bank official.
He said India was surfing on an unprecedented global boom which might go on to hopefully become not an unprecedented global bust. "How India fares in that transition is up for grabs. We have to see."
Bery said: "We have been more sensible than the Chinese in the way we have managed our external account, albeit an open issue is whether the structure of our balance of payment produces vulnerability."
"We are in a situation where we have a massive trade deficit but it seems like a structural surplus on the services account. The question of whether this is just the way it is going to be or whether this is some kind of distortion for a country as poor as India, is a big issue."
"When you consider the political position of this government -- which is to say a centre-left government strongly dependent on the support of the Left -- the fact that they have been able to maintain the kind of commitment they have to public-private partnerships in infrastructure is impressive... with the very important exception of the power sector," Bery said.
"So, I would say that this is a regime, which is gun-shy about claiming reform because its partners in the coalition don't particularly appreciate it. But, below the surface, although not enough, some important things have been happening."
Bery acknowledged it is highly unlikely that India would ever be in the 'kind of breakthrough trajectory. "I do not think politics supports that."