Finance Minister P. Chidambaram: 'India Will Be an Economic Power, and Nothing Will Stop Us'Published: October 03, 2007 in India Knowledge@Wharton
P. Chidambaram, who as India's finance minister is part of what is known as the economic dream team in the world's second largest nation, sounded confident as he spoke about his nation's surging economy, currently growing at more than 9% annually.
Chidambaram -- currently serving in the ruling government of Indian Prime Minister Manmohan Singh -- also predicted that rapid growth won't last if the gains are not shared by hundreds of millions of Indians still mired in isolated, poverty-stricken villages. "If I grow at 9%, it means nothing to somebody in a village who has no access to clean drinking water, who doesn't have sanitation, when there is no school in a radius of 5 to 10 kilometers, with no access to basic medical care, no electricity and no roads," said Chidambaram, kicking off the 2007-08 Wharton Leadership Lecture Series. "Nine percent growth is completely meaningless."
But if pulling up several hundred million citizens from deep poverty -- in a nation of roughly one billion people -- sounds like a daunting problem, Chidambaram believes the framework does indeed exist for the poor to share in India's current boom. The keys, he said, are better schooling and improved local infrastructure -- something that is much more possible today than ever because of the country's soaring economy.
"The 9% growth gives me an opportunity to make life a little more meaningful for them," Chidambaram said. "The 9% growth gives me the revenue volume to allocate more money for health education; it gives me room to involve private and public sector players, to provide the growth and the liquidity...."
Learning from the Mistakes of Others
Chidambaram offered a broad overview of a rapidly developing nation that has become a global powerhouse over the last 15 years. In addition to highlighting the success of Indian entrepreneurs in a liberalized economy, he brushed off the concerns that come with rapid growth. He insisted that India has learned from the mistakes of other rapidly-developing economies and has also benefited from unique factors, including its growing population.
"For the next 20 years, India will be an economic power, and nothing will stop us," Chidambaram stated, after noting that India will be alone among large countries in boasting of a working-age population -- compared to a population of dependents -- that will continue to grow for another generation, until roughly 2040. The resulting gains in jobs, income and investment should guarantee a steady cycle of growth "as long as we don't do anything stupid."
For much of the 1990s and the current decade, India has had a succession of economic successes. The recent surge in gross national product -- measured at 9.4% in 2006-2007 -- makes India the world's second-fastest growing economy behind China, and the current projections remain rosy. Goldman Sachs recently estimated that while the Indian economy is now the world's 12th largest, the South Asian giant should be number three behind China and the United States by 2035. Growth has been fueled by a growing urban middle-class -- largely English-speaking -- which has given rise to the well-documented growth in back-office operations, such as call centers, for multinational corporations.
Chidambaram (the "P" stands for "Palaniappan") has been a key player for more than a decade in pushing through the government reforms that have helped spur economic growth. The 62-year-old lawyer from India's Tamil Nadu state rose in prominence along with Prime Minister Rajiv Gandhi, whose economic policies turned the country away from its brand of socialism and toward a free market economy before his assassination in 1991.
Chidambaram has served twice as India's finance minister during the era of free-market reforms. The first time was from 1994 to 1996, when he was widely praised for curbing government spending and carrying out tax reforms in a nation where, even today, just 3.5% of the population actually pays taxes. He survived various shifts in India's often rough-and-tumble parliamentary-style politics to regain the key job a second time, in 2004.
If there was anyone in the audience who did not realize the significance of the economic liberalization that began in 1991, Chidambaram carefully retraced that history. He noted that Indian entrepreneurs were restrained by colonialism prior to India's liberation in 1947, although he pointed out the irony that homegrown Tata Steel, once subjugated to mighty British Steel, bought the former UK powerhouse earlier this year. However, Chidambaram said post-1947 socialism -- especially a rigid licensing regime -- held back the economy before Rajiv Gandhi took power.
"In the space of six weeks, exports and imports were largely made free, exchange controls were relaxed and licensing was virtually abolished, and Indian businesses were put on notice that the socialist model would make way for an open and competitive economy," Chidambaram said. Those reforms, he added, allowed Indian companies to compete on a global stage, and today the country's growing array of software and biotechnology companies has even been acquiring foreign rivals. About 32% of India's foreign investment is in the United States, he said.
One guiding principle in Chidambaram's political career has been his belief that economic freedom and competition, rather than aggressive state controls, is what will lift the lower classes in a developing nation out of poverty. He acknowledged that the heavily rural nature of India -- with some 60% of its land devoted to mostly small farms that depend on monsoons for irrigation -- poses special challenges to sharing the rewards of economic growth. "There is no organized production of goods and services in villages -- only what you can consume locally," Chidambaram said. "There is no market beyond a few kilometers." Villagers not directly involved in farming tend to make handicrafts or work on hand looms, and many are forced to search for other work during non-growing seasons to pay for the goods that they need.
But Chidambaram believes that the rural economy can advance on several fronts. He said that the prices paid to farmers for their crops have lagged behind other costs in India, and that needs to change. He also stressed that the Indian government -- which has seen tax revenues increase by a whopping 40% in just the current fiscal year -- needs to reinvest much of that windfall in rural infrastructure for drinking water and sanitation, and better schools and healthcare. But most important, he said, is training that will, in Chidambaram's words, "wean" some of India's rural population away from agriculture and into more productive manufacturing jobs, a change that would have a vast "ripple effect" on the overall economy.
A Shortage of Knowledge Workers
Yet Chidambaram also acknowledged that India's rapid growth is starting to create some problems at the top end of the nation's economy -- a shortage of workers in the most advanced professions, such as engineering, medicine and science. Currently, just 11% of India's college-age population is enrolled in higher education, which lags behind both developed and some developing nations. The government is pushing to increase that to 15% in the short term. "That is the biggest problem in India. We have enough of these shortages already showing up in the economy," he said, noting that the government is hoping to tackle this by sharply expanding the numbers of universities and by encouraging private, for-profit higher education, which doesn't yet exist in India.
It's just one area where the Indian government is seeking to promote privatization, but Chidambaram was careful to note that the current policy of undoing the remnants of Indian socialism has proceeded on a case-by-case basis. While competition has been brought into a range of businesses, from airlines to FM radio, some state-owned industries that are successful and well-run have been kept intact. Privatization, he said, "is not an ideology."
The finance minister repeatedly stressed that the need for widespread political support in a democratically elected government sometimes makes it more difficult to implement some reforms quickly. He noted that the voting power of millions of owners of mom-and-pop store owners has so far thwarted any effort by international retailers, such as Wal-Mart, to enter the vast Indian market. "There is general fear among shopkeepers -- family-run shop people are employers -- that their jobs are at stake and businesses will close" if large foreign retailers enter India, Chidambaram said, although he believes that growing Indian-owned retail chains will eventually change the public's opinion on foreign investment.
Despite that impasse on allowing in U.S.-owned retail giants, Chidambaram was largely upbeat about relations between India and the United States. In particular, he voiced his support for the agreement announced in July 2005 to end the long American ban on nuclear trading with India -- dating back to India's initial nuclear tests in 1974 -- and to provide energy and satellite aid. Chidambaram said the nuclear ban had made it very difficult for India to maintain -- let alone expand -- its use of nuclear energy, which now accounts for just 3% of electricity there.
"We are friendly countries with friendly relations, although there are some differences," Chidambaram said. The main reason for that friendship is an obvious one -- the increasing economic interrelations between the two nations. The rising population of Indian ex-patriots in the U.S. -- roughly 3 million and growing -- and television have also narrowed the divide.
Despite his outward confidence, Chidambaram acknowledged that he has worries, particularly about events that are well outside of his control. His list of potential problems includes a sharp rise in crude oil or commodity prices, a recession in the United States and Europe, the "sub-prime mortgage problem" and what he called "bellicose speeches" in the United Nations.
"Yes, I'm worried about a number of things, but I'm not worried about sustaining the growth," Chidambaram said. He insisted that India has closely studied the rise of other developing Asian nations -- like Korea and Indonesia -- in an effort to avoid mistakes and to sustain steady economic development at an even pace. "India is not immune to the laws of physics," he added. "Indian is not immune to the laws of thermodynamics, and India cannot be immune to the laws of economics."