The economy is sizzling and foreign businessmen and investors are swarming to Bangalore and Mumbai to grab a piece of the action. India's year-on-year growth rate could well hit double figures at some point in 2007, and the country may even grow faster than China for at least one quarter. But things are so hot there is a big problem: India's current pace of expansion may not be sustainable.
On the face of it, the figures are compelling. India's real GDP grew by 9.2 per cent in the year to last September. Over the past four years it has clocked up an average annual pace of more than 8 per cent, compared with around 6 per cent in the 1980s and 1990s and a measly 3.5 per cent during the three decades before 1980. But the economy is displaying alarming symptoms of overheating. This implies that demand is outpacing supply and hence the pace of growth is unsustainable.
All agree that the biggest obstacle to growth of 9 per cent or more is India's infrastructure - especially its lousy roads, ports and power. According to the World Bank, the average manufacturing firm loses 8 per cent of sales each year from power cuts. India spends 4 per cent of its GDP on infrastructure investment, compared with China's 9 per cent. In absolute dollar terms, China spends seven times as much on its infrastructure.
India's government has ambitious plans to increase total infrastructure spending to 8 per cent of GDP over the next five years. This will involve some increase in government spending, but the idea is for the bulk of it to be financed by public-private partnerships. That will be hard. Private investors still shy away from sectors like electricity and roads because they are uncertain of earning a reasonable return. Only about half of all electricity generated is paid for, because power is stolen and bills are left unpaid.
Another big problem is the dreadful quality of public services, from education and health to the provision of water. Half of urban households lack drinking water within the home; one quarter have no access to a toilet, either public or private. Many public services in cities have worsened in recent years. In Bangalore water is now available for less than three hours a day, compared with 20 hours in the early 1980s. This may be another reason why workers are not moving in from rural areas as rapidly as in China.
On the face of it, the figures are compelling. India's real GDP grew by 9.2 per cent in the year to last September. Over the past four years it has clocked up an average annual pace of more than 8 per cent, compared with around 6 per cent in the 1980s and 1990s and a measly 3.5 per cent during the three decades before 1980. But the economy is displaying alarming symptoms of overheating. This implies that demand is outpacing supply and hence the pace of growth is unsustainable.
All agree that the biggest obstacle to growth of 9 per cent or more is India's infrastructure - especially its lousy roads, ports and power. According to the World Bank, the average manufacturing firm loses 8 per cent of sales each year from power cuts. India spends 4 per cent of its GDP on infrastructure investment, compared with China's 9 per cent. In absolute dollar terms, China spends seven times as much on its infrastructure.
India's government has ambitious plans to increase total infrastructure spending to 8 per cent of GDP over the next five years. This will involve some increase in government spending, but the idea is for the bulk of it to be financed by public-private partnerships. That will be hard. Private investors still shy away from sectors like electricity and roads because they are uncertain of earning a reasonable return. Only about half of all electricity generated is paid for, because power is stolen and bills are left unpaid.
Another big problem is the dreadful quality of public services, from education and health to the provision of water. Half of urban households lack drinking water within the home; one quarter have no access to a toilet, either public or private. Many public services in cities have worsened in recent years. In Bangalore water is now available for less than three hours a day, compared with 20 hours in the early 1980s. This may be another reason why workers are not moving in from rural areas as rapidly as in China.
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