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The Indian Miracle Lives

NEW DELHI – To hear some people tell it, the bloom is off the Indian economic rose. Hailed until recently as the next big success story, the country has lately been assailed by bad news.

Tales abound of investor flight (mainly owing to a retrospective tax law enacted this year to collect taxes from Indian companies’ foreign transactions); mounting inflation, as food and fuel prices rise; and political infighting, which has delayed a new policy to permit foreign direct investment in India’s retail-trade sector. Some have even declared that the “India story” is over.

But today’s pessimism is as exaggerated as yesterday’s optimism was overblown. Even as the world has faced an unprecedented global economic crisis and recession, with most countries suffering negative growth rates in at least one quarter in the last four years, India remains the world’s second-fastest-growing major economy, after China.

Many reasons have been cited for this success. India’s banks and financial institutions were not tempted to buy mortgage-backed securities and engage in the fancy derivatives trading that ruined several Western financial institutions. And, though India’s merchandise exports registered declines of about 30%, services exports continued to do well. Moreover, remittances from overseas Indians remain robust, rising from $46.4 billion in 2008-2009 to $57.8 billion in 2010-2011, with the bulk coming from the blue-collar Indian expatriate community in the Gulf.

Finally, the external sector accounts for only about 20% of India’s GDP. Most of the economy is a domestic affair: Indians producing goods and services for other Indians to consume in India.

The Indian private sector is efficient and entrepreneurial, and is compensating for the state’s inadequacies. (An old joke suggests that the Indian economy grows at night, when the government is asleep.) India is good at channeling domestic savings into productive investments, which is why it has relied so much less on foreign direct investment, and is even exporting capital to OECD countries, where it is well able to control and manage assets in sophisticated financial markets. Indeed, India, home of Asia’s oldest stock market and a thriving democracy, has the basic systems that it needs to operate a twenty-first-century economy in an open and globalizing world.

There are other reasons for confidence that India will weather the storm. Not only does India have considerable resources of its own to put towards investment; as the persistence of global recession drives down returns in the West, foreign investors will look anew at India.

Still, many are inclined to compare India unfavorably with China, so a few macroeconomic numbers are worth considering. Half of India’s growth has come from private consumption, and less than 10% from external demand; by contrast, 65% of China’s real GDP growth comes from exports, and only 25% from private consumption. China is thus far more vulnerable to external shocks.

Moreover, India has the highest household savings rate in Asia, at 32% of disposable income. In fact, households account for 65% of India’s national annual savings, compared to under 40% in China. Bad loans account for only 2% of Indian banks’ credit portfolios, versus 20% in China. And India’s workforce has been growing at nearly 2% annually in the last decade, while China’s grew at less than 1%.

Putting China aside, India’s economy grew by 6.5% in 2011-2012, with services up by 9% and accounting for 58% of India’s GDP growth – a stabilizing factor when a world in recession cannot afford to buy more manufactured goods.

McKinsey & Company estimates that the Indian middle class will grow to 525 million by 2025, 1.5 times the projected size of the US middle class. According to last year’s census, the country’s 247 million households, two-thirds of them rural, reported a rise in the literacy rate to 74%, from 65% in 2001. In just the last two years, 51,000 schools were opened and 680,000 teachers appointed.

An impressive 63% of Indians now have phones, up from just 9% a decade ago; 100 million new phone connections were established last year, including 40 million in rural areas; and India now has 943.5 million telephone connections. Nearly 60% of Indians have a bank account (indeed, more than 50 million new bank accounts have been opened in the last three years, mainly in rural India).

Some 20,000 MW in additional power-generation capacity was added last year, with 3.5 million new electricity connections in rural India. As a result, 8,000 villages got power for the first time last year, and 93% of Indians in towns and cities now have at least some access to electricity.

These trends all augur well for India’s economic future. And they aren’t slowing: India is looking for $1 trillion in infrastructure development over the next five years, most of it in the form of public-private partnerships. This offers hugely exciting opportunities to investors.

The real picture of dogged progress is far removed from the perception of a government beset by inaction and policy paralysis. As Prime Minister Manmohan Singh modestly put it: “I will be the first to say we need to do better. But let no one doubt that we have achieved much.”

Read more from our "Will India's Boom Go Bust?" Focal Point.