A dynamic progression

During the first 50 years of India's independence, its economic record was relatively poor. Total national income grew by about 4 per cent per annum. Per capita income, or income per head, grew by a meagre 1.9 per cent per annum on an average. As a result, India was seen as one of the poorest countries with a per capita income that was close to the lowest in the world. Unfortunately, India also continues to be near the bottom of the league of nations in terms of most other indicators of human or social development. According to the official count in 1995, nearly one-third of Indians live below the so-called 'poverty line', i.e., their income and consumption are even less than half of India's low average per capita income. Nevertheless, paradoxical as it may seem, in recent years, the patterns of global trade and investment have moved in our favour. India now has the opportunity and potential to achieve what it could not in the previous 50 or 100 years, i.e., poverty elimination. India's comparative advantage no longer lies in the production of low-value, low-technology and labour-intensive goods, but in relatively high-value, skill-intensive and high-technology products and services.

It is true that foreign trade and investment have a relatively small share in our country's national income and total investment. As such, a faster growth in these components alone cannot dramatically improve the outlook for poverty alleviation. However, a favourable shift in India's comparative advantage can make a crucial difference to the prospects for its balance of payments. Unlike the past, our external trade and payments position need not be a constraint on growth in the twenty-first century, but can become an important source of strength for the economy.

The sources of comparative advantage of nations are vastly different today from what they were 30–40 years ago. For example, 40 years ago, developing countries were primarily producers of commodities such as jute, rubber, tea and cotton and the value added in manufacturing was largely captured by industrial countries. This is no longer true. Developing countries have now emerged as major and competitive producers of manufactured products. As mentioned in the previous chapter, the following developments have subsequently improved the comparative advantage of several developing countries:

⁕ In the 1990s, low- and middle-income countries accounted for almost 80 per cent of the world's industrial workforce. Among the world's skilled workforce, the share of developing countries increased from one-third to almost half. This signalled an era where the industrialized countries no longer held dominance of manufacturing production.

⁕ A fast growth in manufacturing has been associated with nearly a 500 per cent increase in employment and wages of workers. The substantial growth in employment has resulted in movement of workers from low-wage agriculture and plantations to high wage manufacturing jobs.

⁕ In the past three decades, however, the bulk of investment in developing countries in infrastructure, and capital-intensive and long-gestation projects has come from the private sector and not the public sector.

A number of factors account for why developing countries, in the present phase of development of the world economy, have emerged as major producers and exporters of manufactured goods. First and foremost, the end of British rule and participation by developing countries in post-War trade negotiations have significantly levelled the international playing field. Interventionist strategies during the early years of the post-colonial period helped establish an industrial base and industrial culture in several developing countries, which could be used to exploit the new opportunities in international trade. Up to the end of the Second World War, foreign investment was entirely directed towards production and trade of primary products (e.g., plantations, minerals and oil). In more recent years, the bulk of foreign investment has gone into manufacturing and service industries. Another important factor which has promoted the growth of developing countries' trade in manufacturing is the cost-reducing technological changes of the last three decades. Technological change has made the accumulation of skills a more important factor in determining comparative advantage than capital endowments.

Owing to conscious policy choices, India did not benefit immensely from the rapid growth that the developing world's trade in manufacturing experienced. In fact, our share of world trade fell from about 2 per cent in 1950 to only 0.5–0.6 per cent in the 1990s. However, India was perhaps better situated to take advantage of sweeping technological changes than most other developing countries, including China. We had the advantage of an early start in industrialization and in providing broad-based opportunities in skill-based education, including technological and managerial education. It can only be a matter of speculation of how much better off India would have been economically if it had seized its initial advantages to capture skills-related value addition in manufacturing.

The 1990s experienced a rather phenomenal change from India's point of view with the ever-increasing role of skill-based services in determining the comparative advantage of economies. Thus, it is imperative that the development of certain services is given more focus as their development is now regarded, not as one of its consequences, but in fact, as one of the preconditions of economic growth. The fine line between goods and services is also disappearing, as services of various kinds are delinked from the manufacturing process and become essential elements of the productive structure.

As mentioned earlier, there is a new category of products circling international trade. This category is referred to as 'new' manufactured products. World exports of these products, which were linked to exports of high value-added services, reached over $360 billion in 1993 compared with $76 billion in 1980. What is equally striking is the rising share of developing countries in the exports of these highly sophisticated products. By 1993, developing countries' share in new-product exports had risen to 28 per cent (from 11.5 per cent in 1980). This was significantly higher than their share of 22 per cent in total world manufactured exports.

If we look at the developments made in production and trade in new products and services, one can decipher that the expansion of high-technology and knowledge-based services must have an important place in any strategy for rapid growth of incomes and jobs in India in the twenty-first century.

Only a handful of developing countries were able to match India to take advantage of the phenomenal changes that have occurred in international trade, production technologies, capital movement and deployment of skilled manpower. A small but telling example of the change in India's position over the last 40 years is that today there are more Indian-origin managers in the city of London than there are British or US managers in Mumbai. India has acquired the knowledge and the skills to build any project, manage any firm and contribute to production and processing of a wide variety of industrial and consumer products. However, there is a major implication affecting India's growth potential with the shift in India's comparative advantage. In fact, from the mid-1980s to the mid-1990s, after nearly 20 years, the industrial production saw an increase of 8.5 per cent per annum on an average. National income also increased in a substantial manner during this period (over 6 per cent per annum as against an average of 3.5 per cent per annum during the period 1950–80). The strong relationship that exists between sustained growth and reduction of poverty is an important conclusion that emerges from the recent economic history of developing countries. The higher the growth of the economy, the greater seems to be the capacity of the government to finance social expenditure. Higher government expenditure on the provision of social services combined with higher growth in employment opportunities (as a result of growth) can make a decisive impact on poverty levels.

It is no coincidence that only those countries were able to achieve the best results in reducing poverty and improving the health and nutrition of their people who have registered high and sustained rates of growth over a reasonable period. In some cases, progress in reducing poverty or improving the level of human development indicators has been much greater than would seem warranted by their rate of growth, as has happened in the Indian state of Kerala, and Sri Lanka. There are also cases where high growth has been combined with a worsening of the poverty ratio or where high per capita incomes have not resulted in adequate progress in education and other social services (e.g., some of the oil rich countries). However, such cases are not many and they have their own special reasons. Per capita expenditures on anti-poverty programmes have declined because of fiscal stringency. In view of low industrial growth, unemployment has become a pervasive problem. This is now a major obstacle to further progress on the poverty front.

(Excerpted with permission from Bimal Jalan's From Dependence to Self-reliance; published by Rupa Publications)