India and a Resurgent Asia

Date November 17, 2005
Speaker Aftab SETH(Former Ambassador of India to Japan / Professor, and Director of Global Security Research Institute, Keio University)
Moderator NISHIMIZU Mieko(Consulting Fellow, RIETI)


This phenomenon that we hear about today of the rise of China and India is a very real phenomenon. The 21st century being the century of Asia is something else that we often hear about with all these tiger economies, the Vietnamese, Thai, and other economies moving at a very fast pace, but we need to remember that all the world's major religions were born in Asia, and are Asian religions.

We must also bear in mind that until the early 19th century, China and India accounted for 45% of the world's gross domestic product (GDP) per capita. If you add Japan these three Asian countries accounted for over 50% of the world's GDP. Both China and India were not just strong agricultural economies; they had very strong manufacturing bases. We all know that China invented gunpowder and printing and India discovered the decimal system and the zero and developed modern mathematics and geometry and algebra. India was the largest exporter of textiles in the world until the first half of the nineteenth century, and China was a major exporter of a large number of highly sophisticated manufactured goods.

The largest city in the world was not in Europe or in North America. It was right here where we are sitting today; Edo. It was the city of 1 million people; much larger than Paris or London of the day. The Mings were the richest empire up the 15th-16th century; they were also great explorers. Zheng He, the great admiral, brought his huge ships, the likes of which no one in Europe had seen, a couple of centuries before Columbus, up into Southeast Asia, India and the east coast of Africa.

What I am trying to tell you is that what we see today is not so much a rise of China or India, but a resurgence of both countries, civilizations and economies -- because they were economies as much they were civilizations. Please remember that after the decline of the Mings, it was the Mughal Empire in India, which was the richest empire in the world, and emperor Akbar and Jahangir had wealth which was computed as 10 times what the Sun King, Louis XIV had accumulated and we know from Versailles as we visit it today that that wealth was phenomenal. So these were countries of great wealth, and it was the wealth of China and India, not their poverty which attracted people from outside. And it is the wealth of China and India today which is once again attracting people from outside. So that is why I term this phenomenon that we are witnessing today not the rise, but the resurgence of China and India.

Now, we all know about the BRICs study by Goldman Sachs, which projects that by 2050, China will have a GDP of US$44.4 trillion; that India will have a GDP of US$27.8 trillion, and that Japan will have a GDP of US$6.7 trillion. At any rate, three of the top four economies in the world, with the Americans being in second place, according to the Goldman Sachs study, will be Asian economies. Today America accounts for 25% of the world's GDP; China 4%, India 2%. By this projection, by 2050, America, China and India will together account for 75% of the world's GDP.

Concerning the growth in India, there are several factors fuelling this great resurgence. The 1950s and 1960s where India saw a growth rate of 3.5%, which was called the Hindu growth rate, because it never seemed to inch its way beyond 3.5%. Those years were slow economic growth years, but they saw two or three things happen which had a powerful impact on the more rapid growth that we are witnessing today of between 6% and 7% a year.

Firstly, and most importantly, was the establishment of the democratic system in India; the habit of elections, the etiquette of dialog, the construct of consensus. This system was painstakingly built up by our first Prime Minister Nehru, who was vastly popular in the country and who could, had he so desired, have assumed undemocratically dictatorial powers and could have ridden roughshod over the opinion of other people. But he and the other leaders of the time chose not to, and to painstakingly build up this democracy from the grass roots in a country which at that stage was 70% illiterate. When I say illiterate, people who could not read and write, but people who were nevertheless very clever and who had even before the end of the British rule in India become accustomed to the process of elections.

The second important thing that happened was the establishment of first-class institutions of higher education. The Indian Institutes of Technology (IITs) were established in Nehru's time. Today, as institutes of technology, they are ranked amongst the top three in the world, next to the Massachusetts Institute of Technology (MIT) and Stanford. Of the 200,000 people that take the entrance exam every year a mere 2,000 get into the IITs every year, which is a success rate of about 2%, compared to the success rate at Harvard, which is 11%. So it is a little more difficult to get into the IITs in India than it is to get into Harvard in America. And it is these people and the Indian Institutes of Management (IIMs), high quality management institutes, of which India has the second largest number after the United States, which have produced this vast pool of talented human resource in India. Of course there were older universities, but it is the graduates of these IITs and IIMs who are fuelling this great expansion of high tech growth in India, both in information technology and biotechnology and in other areas of endeavor.

The third important thing that happened from the late 1960s through the early 1970s when the economy was still not expanding at nearly the rate that it is today was the establishment of food security. India before 1947 had experienced famine occasionally, and not because there was a shortage of food in the country, but because there was a lack of publicity and a certain indifference on the part of the ruling powers of the time. Grain could not be moved from where there was a surplus to the deficit areas. That changed after 1950, certainly after 1966 when Indira Gandhi became prime minister. The hybrid Mexican wheat seed, which they used also for wheat because India is perhaps the fifth largest exporter of wheat, was adapted for rice. By using new techniques developed, greater use of water and fertilizer and pesticide and so on, the food grain production in India grew from a level of 50 million tons in 1950 to the present day figure which is about 250 million tons, with about 18-19 million tons of that production in storage. It is not always a very economic way of handling things because you spend a lot of money on holding these huge inventories of food grains, but I suppose it is the fear that there may someday be a shortage since still more than half our agriculture is monsoon rain dependent and is not under irrigation, and we have to be conscious of the fact that monsoons may fail, as they have in recent years.

So these three things which happened in the years of Hindu growth rate are what make it possible for us today to achieve the kind of growth rates that we are doing now. Of course, governmental policy reforms instituted in the early 1990s by the present prime minister when he was finance minister--the dropping of tariff barriers to opening up of the country to foreign investment--also helped to bring our economy up to the level that is it today. Now in India, about 2 million mobile phones are sold every month. We are now the fourth largest car market. In all ranges of consumer goods there is a rising demand. There is also an accretion of 14 million fairly skilled people every year to our workforce, with three million undergraduates every year, 300,000 post graduates every year, 200,000 engineering post graduates every year, and 9,000 Ph.D.s every year.

I spoke to you about democracy; I will speak to you about the second "D" which is demography. Contrary to Malthusian fears that a rising population would mean shortages of food and deaths on account of starvation, food grain production has more than matched the rise in population. Unlike China where the population levels are likely to level off in the next 10 or 15 years at the outside because of the one-child policy which has been pursued in China, in India the population is likely to continue to show a rise for the next 20 or maybe 30 years before it starts leveling off. It is this growth which is going to give us a slight advantage in demographic terms; these educated young people will continue to fuel the workforce in the country and will be in the productive taxable age, and will therefore contribute greatly to the burgeoning government revenues, which can be recycled in the growing infrastructure. The World Bank and the ADB estimate that we need to spend in the next five years a minimum of US$150 billion to improve our infrastructure, particularly ports and airports, which we are trying to privatize, and roads and railways, where we have help from the Japanese through one of the ODA projects related to railways.

There are two other things that I ought to mention. One; the shortening gap between rural and urban incomes is a result of democracy. In rural areas, especially those around large cosmopolitan cities like Delhi and Bangalore, you can find the rising prosperity in the rural areas which is fuelling the increase in demand; 2 million mobile phones are sold a month, and it is farmers, truck drivers, fishermen who are the unsaturated part of the market who are fuelling this increasing demand. Every day, 100,000 people move up from below the poverty line of a dollar a day into the lower and the middle class--about 3 million people a month. And much of this is not because of rising incomes in the urban areas, but also because of rising incomes in the rural areas and this is largely the product of our democracy. This has not been the case in China, because the politicians who go at election time and promise roads and infrastructure and schools and do not deliver do not get re-elected. So pure self-interest demands that politicians deliver on their promises, and therefore they ensure that infrastructural improvements that have been promised are fulfilled.

I will speak about a third phenomenon which is the Indian diaspora. This is numbered at about 20 million people spread out in a few geographical concentrations all over the world. After Prime Minister Mori's visit to India in August 2000 the visa regime was loosened up. As a result of that, there are thousands more young Indians today working in various high-tech companies here than there were as recently as five years ago. So they are also a diaspora, even though a temporary one because we do not know how long they will live in Japan. But there are settled diasporas or semi-settled diasporas; big chunks in the Middle East--about a million in Saudi Arabia and several more million spread out in the United Arab Emirates (UAE), Kuwait and other Gulf countries--there are a million plus in the UK, a reasonably integrated community.

In North America, the U.S. particularly, there are about 2 million people of Indian origin, and the vast majority are Indian-born, which means they are young people who moved out in the late 1980s, early 1990s and thereafter. They are young, very highly educated and the average annual income of the Indian minority has been estimated at about $68,000, as distinct from the national U.S. average, which is about $38,000-$39,000. So the Indian minority of two million enjoys an average income which is double the national average making it the most affluent ethnic minority in the country. It is not only affluent, it is highly productive, and it is contributing not only to the growth of the American economy by running major companies, but by the brain-gain phenomenon of the last five to six years, when the Indian economy showed this impressive growth.

This brain-gain has resulted in the return of several of these people from our affluent diaspora to set up branches of their businesses -- in high-tech areas, in IT and biotech -- in India. They split their time between their old home and new home, and this is another factor which has contributed to the increased growth that we have seen, and the move into high-tech areas, because it is these highly skilled human beings who are coming back to fuel this phenomenon.

Questions and Answers

Q: You mentioned that the gap between the rural area and urban area has diminished because of democracy. Would you explain more about that? Democracy is a political system, and this gap is rather economic. Secondly, you have a caste system. How does this fit with democracy or the shortening gap between urban and rural incomes?

A: Democracy means that politicians make promises to rural populations about building roads, improving infrastructure, bringing economic development. They have a five-year period in which to fulfill that promise. If they do not they might not get reelected. Those politicians who succeed in obtaining the funding from the state government, central government donor agencies, and bring development to the rural areas stand a very good chance of being reelected. Every politician's aim is to remain in power; therefore they try and ensure that the development promised in their constituencies and rural areas is actually implemented. That is how democracy has contributed to this phenomenon. In China, last year, there were about 58,000 mass protests, largely in rural areas. We have seen no such phenomenon in India at all. We are worried about many other things, but we are not worried about inequality built into our system.

In response to your second question, India's constitution enacted certain laws for where people from the lowest caste were reserved 25% of all places in government employment as a constitutional reservation, and a further 35% for the other lower caste. The president of India today, Abdul Kalam, belongs to a very low caste of fisherman and is also a convert to Islam, so he a double minority. The prime minister belongs to a minority religion called Sikhism, and the head of the coalition is the president of the Indian National Congress, Sonia Gandhi, who is by birth a Roman Catholic. So India is today ruled by a triple minority; the president, the prime minister and the head of the coalition. None of these three belongs to the upper castes of the Hindu faith, who are the vast majority in the country. It is the accommodative system in India which has a strong base in the Hindu-Buddhist tradition of inclusiveness; an upper layer of democracy, but with a lower base of grassroots democracy which has been in existence in India for centuries. It is local self-government, where local village elders are responsible for the development of their own territories. It is this interplay of forces which is responsible.

Q: Let me push you a little bit. If what you are saying is correct, then how would you explain your home state Bihar? Probably the poorest state in India, but the population is bigger than most countries in the world. It is also known to have one of the worst governance issues in India and much of the developing world, but it is supposed to be democratic; how do you explain that?

A: I think it explains itself. It is the perversion of democracy and misuse of democracy for personal aggrandizement which has led to the bad governance of Bihar. It is not that democracy per se is responsible; it is the misuse of democracy. They have been unfortunate in having a string of politicians corrupt to the core who have lined their pockets at the state exchequer's expense, and have misused caste for political purposes. Therefore it is the perversion of democracy which has resulted in the bad governance of that particular state.

Now next door to Bihar is West Bengal, which has the largest Japanese investment anywhere in India. For 25 years, it has been ruled by a coalition of communist and leftist parties, who some would say have overprotected the rights of workers and not allowed the hire and fire system to work with freedom. Recently there was a general strike called by the communist party, nationwide, and the chief minister Buddhadeb Bhattacherjee said the IT and high-tech industries came under the essential industries act, and therefore were not subject to the order for a general strike by the trade unions. Some trade unions did not like that; they went and parked their jeeps in front of an IT office to prevent the workers from going in. The manager rang up the chief minister and two truckloads of policemen came and removed the agitators. So that is a communist government providing good governance. Democracy itself is not harmful but like any other system can be misused.

Q: When the Uruguay Round concluded there was so much damage in India to the micro-businesses or small shop owners. How do you foresee the results of the Doha Round? Do you see India as a winner this time or not? A second question; maybe the very high growth rate in India could face another constraint like energy or environmental issues. What do you think about these factors?

A: Well about the Doha Round, India as much as Japan and oddly enough, increasingly China, has a very important stake in an orderly management of the international monetary system, of the international trading system, and of the protection of intellectual property, even though it is being pirated at a rapid rate in China and is one of the many causes of friction between China and the U.S. We have a stake in having an orderly financial system in the world. We support President Kuroda in the ADB's efforts to have an Asian monetary system. We support his efforts towards Asian economic integration. There is far too much interdependence today, including China, and therefore those like Karl Inderfurth, David Shambaugh and others in the administration plead for engagement with China rather than following these outworn Kennanesque policies of containment. It is their voices that need to be heard, for there is no alternative to engagement. Of course concerns can be expressed and very justifiably about rising military expenditures and threatening attitudes towards Taiwan, but there is no option to engagement. How else, except through the Doha Round?

We seek a fairer system for agricultural prices in Europe and the U.S., greater access for our products, and some protection for our farmers, because do not forget that while agriculture only constitutes about 26% of our GDP, 66% of our people are dependant on agriculture. We do not want rural unrest like China, so we have to be very careful at the Doha Round. That is the stance we are adopting. We are very much in favor of being engaged with the rest of the world and finding mutually acceptable solutions. But of course we have to state our case as forcefully as we can.

The second question, energy and environment, faced with problem of rising energy prices and ever increasing appetite for fuel supplies of both oil and natural gas. We are also equally concerned about the environmental problems. In China protests are about environmental issues such as building of dams and deforestation. We hope that with increasing activism on the part of NGOs in China, and hopefully some day the democratization of China, that these issues of high energy consumption and environmental degradation will be resolved. One of the ways we tried to resolve it is to try and build an oil pipeline from Iran and from Central Asia, through Afghanistan and Pakistan into India. And when Prime Minister Wen of China was in India in March, my petroleum minister who is a former diplomat offered Prime Minister Wen that if we ever build this pipeline for LPG we will take it through Burma into Southern China, and he expressed the hope that perhaps as steel and coal had been the sinews in the very early stages of uniting the first three steel and coal communities, France, Germany, and the Benelux countries, hydrocarbons could be the sinews for a great Asian economic integration. The answer is to push projects like that, plus joint development of Siberian resources between India, Japan and Russia, which we are already doing, but to do that with China, because unless you fulfill the demand, there will be this rat race around the world driving up prices. It has to be a combined effort on the part of everybody to share the world's resources in an equitable fashion.

Q: The problems in China are not as serious as you portray them. In the past 16 years more than 80 million people have said goodbye to poverty. Our new government will try to build a coordinated society to solve the social problems. Two concrete questions. Firstly, what is the relationship between India and the resurgent Asia, since the resurgent Asia refers to East Asia and India? What kind of role can India play in the East Asian integration? Secondly, the U.S. and India are the two biggest democracies. How do you see the relationship between the U.S. and India?

A: One of China's ambassadors once said that India conquered and dominated China for 20 centuries without ever sending a soldier across its borders. What brought China and India 2,000 years ago was the knowledge, the compassion of the Buddha. And that influence persists in spite of what happened in Mao's time and the attempts to suppress Buddhism. I saw it in 1998 when I was in Beijing. The Buddhist temples were full.

Asian consciousness, more than economic integration, is not something new. It is a rebuilding of an Asian consciousness that was temporarily lost during the colonial period. In China in the 19th century, in India in the 18th and 19th centuries, and in other parts of Asia, there was a slight break, but only at a cultural level. Trade continued, even though we had problems with the colonial people who were ruling in those territories. So I see the Kuala Lumpur process as being part of this historical interlinking and interdependence, culturally, intellectually, economically.

Look at Indonesia and China is 1965; the antagonism. Look at China and Malaysia after they had won independence and they were having a communist insurrection, and they suspected Chinese communist involvement. This year the Chinese and the Malays and the Indonesians jointly celebrated the 600th anniversary of the Chinese admiral Zheng He's visit to Semarang on the north coast of Java, and in Malacca in Malaysia. So what could be construed as an effort by the Chinese emperor to demand tribute form his tributary countries, is now viewed as an act of friendship; an act of interlinking the Chinese civilization with the countries of the Southeast Asian region, South Asian region and East Africa.

Look at China's relations with Russia and compare them to what was happening in 1969. Look at China's relations with Vietnam and compare them to what happened in 1979 when the Chinese wanted to teach the Vietnamese a lesson for having invaded Cambodia and deposing Pol Pot, who was China's friend. I am being very frank, but the point is that you see China's relations today, they are completely different. There is an effort to engage the security relationship with so many countries. If you look at China's relations with Australia, which was once viewed as an outpost of U.S. imperialism in Asia by then, now they are exchanging visits at the highest level. Look at China's relations with us, which I mentioned to you earlier.

So my answer to your question is because of China's efforts to engage the rest of the world, particularly its neighbors, to engage countries like India which is the other major power on the Asian continent, Japan is an island country off the Asian continent, because of those efforts of all of us to engage each other, to bring Australia and New Zealand into it, I see good prospects for the Asian economic community moving forward into the future, with the active help of people like Kuroda at the World Bank, who has set up a special department for Asian economic integration, headed by the director-general of the Greater Mekong sub-region, which brings together China, Myanmar, Thailand, Cambodia, Laos and Vietnam and this under the ADB sponsorship is already bringing seamless movement of people goods, with customs barriers slowly dropping, power grids being built, and road and railway networks being built to bring this Greater Mekong sub-region together.

Q: While you painted a very rosy picture about the future of India, you also said you have concerns. What are the concerns regarding India's future?

A: The concerns are basically about the environment. My principle concern about India is water. I think our shortage of water is going to prove to be more important than our shortage of oil. Because of increasing populations in various parts of our country, the water shortages are proving to be a problem and I think much greater and more skillful management of our water resources is in my view the most important concern. It affects agriculture; it affects sanitation, it affects health because of disease. If you cannot keep yourself clean, if you cannot keep your immediate environment clean you are exposed to diseases and in tropical countries there are any number of diseases to choose from. The shortage of water creates multiple problems and retards development.

Q: I think we cannot forget still a third of India's GDP growth rate is determined by monsoon rain. India would not have a water shortage if it was managed well with good governance. It has got ample water, it is just wasted.

A: It is waste; bad management. But that is optimism.

*This summary was compiled by RIETI Editorial staff.