October 2006: The New Economic World Order (Part III: India)

India rapidly re-emerging as a global economic power
Author(s): 
October 1, 2006

The Asian century has arrived. Just as China is now the world’s manufacturing center, India is fast becoming the main provider of its office services. India’s GDP was $800 billion in 2005 and has grown 8.1% a year since 2003 (a rate second only to China’s) and 6% a year since 1991.

With a population of 1.1 billion, India is the world’s fourth largest economy and, since 1986, the country’s middle class has quadrupled to about 250 million people. Per capita income has increased from US$1,178 to $3,051 since 1980.

Indian companies dominate the world market in offshore information technology (IT) services with a two-thirds share, and hold about 50% of the market for business process outsourcing (BPO). In 2005, Indian IT and BPO revenues were US$36 billion (almost 5% of GDP), an increase of 28% from 2004. IT and BPO services include developing software, setting up call centres, and legal, finance, medical, credit and mortgage-related work. The biggest outsourcers are Western banking and insurance corporations.

IT and BPO are expanding so fast in India that by 2010 there is expected to be a staff shortage of 500,000 qualified graduates. Three of India’s top six companies--Tata Consultancy, Infosys, and Wipro--are IT/BPO providers, ranked fourth, fifth, and sixth, consecutively. Services make up 52% of India’s GDP while industry accounts for 27% and agriculture 22%.

As one commentator points out, “India has the third largest concentration of educated labour in the world, available at less than one-tenth the cost of their counterparts in the U.S. and Europe.” The significance of this abundance of skilled labour is explained by Mark Thirlwell, author of the report India: The Next Economic Giant, written for Australia’s Lowy Institute for International Policy. Says Thirlwell: “Services now account for by far the largest share of output in developed economies. That means the eventual impact of India’s service revolution on patterns of employment and growth in the developed world could ultimately prove to be greater than that of East Asia’s manufacturing revolution.”

In manufacturing, too, Indian corporations have become world leaders in the production of steel, motorcycles, auto parts, pharmaceuticals, cement, and footballs, among other goods. More than 80% of foreign investment in India goes to manufacturing, which is growing at 9% a year, makes up 16% of GDP, 53% of exports, and employs 48 million people. Mittal Steel, the world’s largest steel company, is Indian, as is Bharat Forge, the world’s second largest producer of forgings for car engine and chassis parts.

Bharat Forge exports half of its production and has bought six companies in four countries (Germany, Sweden, Britain, and China) in the last two years. In China, the company took over the forgings component of First Automobile Works, that country’s leading car manufacturer. Mittal Steel is bidding to buy the world’s second biggest steel company, Arcelor, (based in France) for 25.8 billion euros.

Tata Motors produces a car about every 80 seconds and gets 20% of its revenue from exports. Bajaj Auto, which makes motorcycles and scooters, produced 2.4 million vehicles in 2005, up from one million in the 1990s. Sales of cars and motorcycles have doubled since 1996.

India’s textile exports were worth $17 billion in 2005, with its garment exports to the U.S. increasing by 26%, and those to Europe by 20%.

Companies such as Mittal and Bharat have so much cash because of soaring foreign investment in the country’s stock market. India’s main stock index, the Sensex, has tripled in the last three years, with foreign investors putting $30 billion into 1,000 Indian companies, double the amount they had invested during the decade before 2003. Over 100 Indian corporations have a market capitalization above $1 billion. An astonishing 125 Fortune 500 companies have research and development branches in India.

After 15 years of rapid growth, the signs of an economic boom are widespread in India. Nearly all cities are undergoing intense construction, including 450 new shopping malls. The proliferation of new apartment buildings, schools, colleges, bars, restaurants, and cinemas has created what Time magazine calls “a new country.”

India is the world's most rapidly expanding large mobile phone market, with 52 million subscribers and five million new cell-phone connections being added every month.

Since 1996, the number of airline passengers has increased sixfold to 50 million a year.

India has 23 billionaires (10 of them rising to that financial height in 2006), worth $99 billion, a rise of 60% from 2005. China has eight billionaires.

Mumbai, India’s largest city, is growing so fast and creating so many jobs that, according to one observer, “anyone in any profession can rise faster and higher in Mumbai than almost anywhere else.”

Internationally, India is “emerging as the swing state in the global balance of power,” courted by both the United States and China. The Bush administration has declared India a strategic partner and recognized it as a legitimate nuclear power. Last year, Bush signed a deal with New Delhi to cooperate in the development of nuclear energy--this despite the fact that India has nuclear weapons and has not signed the Nuclear Non-Proliferation Treaty (NPT).

Washington has also accepted Indian leadership in matters of regional security. The U.S. obviously wishes to make strategic use of India against China and prevent the consolidation of an integrated Asian bloc of nations.

India, however, also has a strategic partnership with China. The two Asian giants make up more than one-third of the world's population and represent the two economies with the biggest potential. The countries have been rivals since 1962, when they fought a brief border war over boundaries. On April 11, 2005, India and China pledged to resolve border disputes by "peaceful and friendly consultations." China gave up its claim to Sikkim province, and the two countries signed agreements on trade, technology transfers, and economic cooperation.

These steps followed a summit between Chinese Premier Wen Jiabao and Indian Prime Minister Manmohan Singh in New Delhi. As Singh put it, “India and China can together reshape the world order.” In 2004, Indian exports to China shot up by 80%, and trade between the two countries was worth nearly $20 billion in 2005, up from about $200 million a year in the 1990s. In the next two to three years, China is poised to replace the U.S. and the European Union as India’s top trading partner.

Most importantly, India and China signed an energy cooperation agreement in Beijing in January 2006 that involves the countries’ state oil companies, ONGC Videsh Ltd. and the China National Petroleum Corp.(CNPC), placing joint bids for energy projects in third countries. In December 2005, the two companies purchased the Al-Furat oil-fields in Syria and are now attempting to acquire a property in Russia's Udmurtia Republic.

As Siddharth Varadarajan explains in The Hindu newspaper, “If the 21st century is to be an 'Asian century,' Asia’s passivity in the energy sector has to end. . . The prospects for Sino-Indian cooperation across the length of the hydrocarbon chain could pave the way for the creation of an Asian energy market and architecture--an Asian axis of oil–with major geopolitical consequences for the United States.”

According to Varadarajan, “the U.S. sees India as the weakest link in the emerging Asian chain. Today, Washington is trying actively to divert New Delhi away from the task of creating new regional architecture by dangling the nuclear carrot and the promise of world power status in alliance with itself. India will have to resist these allurements if the Asian project is to go anywhere.”

Varadarajan envisions the creation of an Asian market for crude and an Asian Energy Union. As he explains, “With India and China committed to building strategic petroleum reserves, South Korea offering to work on an 'Inter-Asia Oil and Gas Transportation System,' and Iran planning its own hydrocarbon bourse, such an idea is no longer far-fetched.”

India is also negotiating with Iran and Pakistan about the building of a natural gas pipeline to carry gas from Iran to India through Pakistan. The project is opposed by the U.S., which wants to isolate Iran.

Significantly, Varadarajan points out that “Linked to an Asian oil market is the billion-euro question of non-dollar denominated energy trade. Asian countries collectively hold more than $2 trillion worth of foreign reserves, the overwhelming share of which is in dollar-denominated instruments. Prudential norms suggest the diversification of the Asian reserve portfolio is overdue. One way to sustain this shift would be to consider yen- or euro-based trading in energy.

“The economic dynamism of Asia for the foreseeable future suggests what is needed is a strategic rather than tactical change in the composition of reserves. The huge and unsustainable deficits being run by the U.S. are undermining the ‘oil standard’ that has been central to the hegemony of both the dollar and Washington for more than three decades. Relying on the dollar for energy trade will hurt Asia’s producers and consumers alike in the long run. An Asian oil market trading in European euros: now surely that's a good recipe for a multipolar world.”

Such a scenario, if it were to unfold, could trigger the economic collapse of the U.S. empire, since the main factor preventing such a collapse is that oil is traded in U.S. dollars, the result of which is that other goods are also traded in U.S. dollars. (For more detail on this point, see the first article in this series: Monitor, May 2005.)

As Asian economies are integrating with China at their centre, India could become “the engine of economic integration in the Indian Ocean region.” India is negotiating several trade agreements with countries and multi-nation economic bodies such as the Association of South-East Asian Nations (ASEAN), the Gulf Cooperation Council (GCC—a Middle-Eastern grouping) and the Southern African Development Community (SADC).

India has become an ASEAN summit partner, with that group and China bent on creating an Asian trade bloc to rival the European Union. New Delhi wants an economic zone stretching from itself to Japan, with which it also has a strategic partnership. Japan has started investing in India and wants to increase military cooperation with New Delhi in order to counter China.

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The economic ascent of India and China means that, historically, events appear to have come full circle. Before 1800, China and India were the two most industrially advanced and richest countries in the world. They formed the centre of the world economy. Together, China and India made up 57% of world manufacturing output, and Asia’s total share was about 70%. In 1750, 80% of the world’s wealth was produced in Asia, which was globally the main “profit-generating area.”

Adam Smith wrote in 1776: “China is a much richer country than any part of Europe.” European travellers said the same about the wealth of India’s cities. India’s position was based on its superiority in textile production and its domination of the world market in cotton goods. China’s dominance was based on its even greater productivity in industry, agriculture, and trade.

The European colonial takeover of India and China destroyed the industries of both countries. In India, the hands of textile workers were cut off by the British, who forced the country to import clothes from England and to export raw cotton. This imperialist free trade led to disastrous famines which, along with extreme taxation, caused the deaths of millions of Indians.

As Priyamvada Gopal puts it in The Guardian, “More famines were recorded in the first century of the British Raj than in the previous 2,000 years, including 17-20 million deaths from 1896 to 1900 alone. While a million Indians a year died from avoidable famines, taxation subsidizing colonial wars, and relief often deliberately denied as surplus grain was shipped to England.” Two centuries of British colonialism made India “a vast abyss of all-pervading poverty.”

The British launched the two Opium Wars against China in 1839 and 1856 in order to force the Chinese emperor to buy opium grown in India. China also had to agree to open up the country to imperialist trade. After submitting to unequal treaties forced on it by the British, China saw its craft iron and steel industries partly destroyed. Britain and France enjoyed quasi-colonial status within China's five major cities. With opium’s legalization, China achieved a level of mass opium addiction never equalled by any nation before or since. By 1900, there were 13.5 million Chinese addicts out of a population of 400 million.

While British imperialism benefited enormously from the profits of drug trafficking, China stagnated for 93 years under the burdens of foreign domination, opium addiction, and related official corruption. This situation continued until the Communist victory in 1949, when colonial control over China was finally ended.

Britain could not compete economically with India and China, but had the military power to destroy and subjugate both. After the 1940s, both India and China built up their military strength until no Western nation could threaten them, and, with such protection, created significant economies which are today reclaiming their former globally dominant position.

The lesson is clear: to maintain its independence, an economic power needs to be militarily strong, too.

India’s economic rise, along with that of China, is a positive development for the countries of the South and middle powers like Canada. It gives them a massive alternative market to that of the U.S., as well as an important source of investment. The Indian-Chinese effort to build an Asian economic bloc, especially in terms of energy resources, has the potential to bring down the U.S. empire without firing a shot.

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India’s rise, however, like that of China’s, has come at the expense of its 770 million rural residents (70% of the total population). Consequently, India, like China, cannot serve as a model for Southern development. Information technology and business process outsourcing employ only 1.3 million people, and Indian manufacturing’s advances have produced few new jobs as they have resulted from increased automation and productivity, not the massive employment of cheap labour.

Industry in China employs more than 144 million people compared to 48 million in India. India’s poor rural majority has benefited little from its economic boom, and in fact has seen its position worsen. The same pro-capitalist economic reforms that have made India attractive to Western capital and benefited the urban–based middle and upper classes have worsened the impoverishment of the rural population.

These economic reforms were initiated in 1991 by the Congress Party government of Narasimha Rao, whose finance minister, Manmohan Singh, is the current Prime Minister. Under World Trade Organization rules, the reforms lowered tariff barriers, deregulated industry, privatized state enterprises, and encouraged foreign investment. In agriculture, government subsidies were cut for irrigation, fertilizers, and electricity, and credit from state banks was tightened. The prices of agricultural inputs rose steeply, and this, combined with the flood of cheap crop imports into Indian markets, bankrupted thousands of Indian farmers, driving 40,000 of them to commit suicide between 1997 and 2006.

Vandana Shiva, Director of India’s Research Foundation for Science, Technology and Ecology, calls these suicides “genocide” and echarges that “This genocide is a result of deliberate policy imposed by the WTO and implemented by the government. It is designed to destroy small farmers and transform Indian agriculture into large-scale corporate industrial farming. . . Artificial scarcity is being created to justify wheat imports meant to kill the domestic market.”

Shiva told The Hindu newspaper in May 2006 that the suicides were due to debts that resulted from the rising cost of production and falling prices, “both linked to free trade and trade liberalization policies in agriculture.” According to Shiva, India’s domestic markets have been taken over by multinational corporations such as Cargill, Canagra, Lever, and ITC, and the country’s “food security is being systematically dismantled. . . While being presented as an economic power and the new poster child of globalization, India now is the home of one-third of the world's malnourished children [the largest number]. And the problem of hunger will grow as peasants are pushed off the land.”

India has about half the world’s hungry people, and close to half of all children under five are malnourished or stunting. More than 50% of Indians live on less than $1 a day.

According to Professor Usta Patnaik, “The average [Indian] family is absorbing annually nearly 100 kilograms less in food-grain today than a mere five years ago. [That is] a phenomenal drop... never seen before in the last century of India’s history.” Ninety percent of pregnant women aged between 15 and 49 are malnourished and anaemic.

Even though the Indian economy is booming, the country has actually slipped in the UN Human Development Index ranking from 124th to 127th. Driving this deterioration has been the reduction of official spending on health care and education. Health care spending dropped from 1.4% of GDP in 1991-92 to 0.9% in 2001-02. As in China (see second article in this series: Monitor, October 2005), harsh poverty in the countryside has forced millions of people to migrate to cities in search of employment. More than 30 million people inhabit urban slums in India.

In terms of dealing effectively with this severe rural crisis, India’s vaunted democracy has so far been a dismal failure. Both main parties, the social democratic Congress and the fascist Hindu funadamentalist Bharatiya Janatha Party (BJP), offer the same neoliberal policies of trade liberalization, foreign investment, and privatization. After initiating these reforms in 1991, the Congress Party was thrown out of power in 1996. The party dominated Indian politics during 1947-1996, guiding the country to independence. Its first Prime Minister, Jawaharlal Nehru, the founder of modern India, established a close alliance with the Soviet Union and emphasized the development of heavy industry (much of it state-owned), which laid the foundation for India’s manufacturing strength today. Education was important to support industry, and the state’s investment in schools, colleges, and institutes made the recent information technology boom possible.

In other words, a form of Indian socialism is behind the emergence of India as a global economic power today. Since 1991, however, that socialism has been steadily jettisoned to the detriment of the poor rural majority, which reacted by first electing the BJP in 1996 to punish the Congress party, and then electing Congress in 2004 when the BJP failed to improve rural conditions.

This is not to say that India has ever been a socialist state; it has been a capitalist state, with some important aspects of socialism. Congress and BJP both represent the Indian capitalist class and the middle and upper-middle classes. Until 1991, however, the Congress government was able to give enough concessions to India’s peasantry and workers to retain their loyalty and avoid social upheaval.

Congress won the 2004 election by running on a populist platform that comdemned the BJP’s neoliberal policies and pledged effective measures to combat the poverty and unemployment generated by them. The party promised farmers free electricity, as well as guaranteed employment for 100 days a year. But these measures will have little impact because Congress is committed to extending trade liberalization (and the other neoliberal measures), which are bound to increase rural poverty.

India’s democracy thus offers no solution for the deteriorating economic position of its rural majority, and in this sense has made itself irrelevant. As Vandana Shiva puts it: “Trade liberalization and globalization policies empty democracy of economic content, and remove basic decisions from the democratic influence of a country's people.” This crucial failure of politics creates a potentially dangerous situation for the Indian ruling class. Since 1996, a rural Maoist insurgency has been spreading across India, and the government knows that support for that revolt has greatly increased. Ten years ago, the Maoists were active in four states. Now these guerrillas, known as Naxalites, number 20,000 and operate in 14 of India’s 28 states, including its poorest areas.

In April 2006, Prime Minister Manmohan Singh called the Naxalites “the single biggest internal security challenge ever faced by our country.” He admitted that “the rebels draw strength from deprived and alienated sections of the population.” According to an observer who has dealt with the guerrillas, such movements will persist “so long as you do not tackle politically the economic and social issues.”

As in China’s case, the problem with the Indian economic model is its capitalist nature. Capitalism has impoverished 80% of humanity to enrich a privileged élite, and the unleashing of this process in India threatens to destabilize the country. Great civilizations like India and China, once the centre of the world economy and now again approaching that status, have to go beyond merely becoming cheap labour havens for corporate exploiters. They have the potential to create alternative economic systems around themselves that can displace the Western capitalist model. To do this, however, they first need to ensure that their economic advance uplifts all of their people. Only then will the Asian century be truly realized.

(Asad Ismi has written extensively on global economic and political issues. This is the third in a series of articles about the New Economic World Order. The first, on the U.S. economy, was in our May 2005 issue, and the second, on China, in the October 2005 issue. Future articles will examine the rising economic power of the European Union and Latin America. For more of Asad Ismi’s reports and articles, visit www.asadismi.ws)

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