Friday, June 02, 2006

The rise of the Indian economy

Link from Marginal Revolution to this piece which provides a historical context of the Indian economy.

Among other things is this observation about India today:

Two and a half percent of GNP goes into power subsidies; only half the electricity that's generated actually gets paid for. Some of the other half goes in unfortunate (we economists think) programs to give free power to the farmers.Unfortunately, the farmers who qualify for free power are the ones who are rich enough to be able to afford power in the first place. But having gotten free power, they let their neighbors tap into it. That's another portion of the power goes that way. Then there are those who tap the lines. It's dangerous, but people know how to do it. So half the power doesn't get paid for even while there's a big increase in the fiscal deficit, while one has very expensive power for those who do pay, which includes large industry. What do you do if you're an industrialist with power that costs more to buy than you can generate it for? You buy a generator, which is socially wasteful. A lot of the investment in India is wasted by companies' generating their own power so as to bypass the power system. So while there have been some attempts at privatizing the power sector and at imposing a regulatory system, there are still big problems at the moment.

And despite the overall optimism about India, a small para about China screams for attention.

China starts off with a higher standard of living. It has more manufacturing, a bigger economy, much better infrastructure, and a dense network of superhighways, as against India, which is just finishing its first superhighway grid linking the four big cities, the ones with more than 10 million people. China also starts off with a faster growth rate. It's been growing at 9-10 percent a year, it has a high rate--over 40 percent of GDP--of investment, it has practically universal literacy, and it has an open economy, measuring openness in terms of trade and FDI.

A good concise read about the Indian economy, I think.

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