Everyone agrees that India has great potential, and other countries all want a piece of the action. Understanding how India will bring about its growth miracle is essential to participating in it.
India has been growing in excess of 8% per year for the past three years, and the outlook for 2007 is for only a modest slowdown, to about 7.5%. Analysis of Indias underlying growth potential, particularly population projections, suggests that sustained long-term growth in excess of 6% is possible. Moreover, India has excess capacity right now, which means that India could, technically speaking, grow by 7-8% over the next 10-20 years as it catches up to its full potential.
That may be true on a technical level, but India faces constraints that might prevent its full realization. There is a shortage of highly-skilled workers, because demand has outstripped the education systems ability to supply them, which should prove temporary. Infrastructure is poor overall, and massive investments will be needed to construct a platform for growth. Regulation remains a challenge, too. These constraints are not uncommon, nor are they insurmountable.
On the positive side, India is increasingly embracing trade as a tool of development. Most would agree that international trade is essential to the sort of growth plan that India envisions. True, Indian tariff levels remain high in many sectors, and hopefully they will decline as India comes to realize the benefits of trade. But India is clearly engaged in what we call integrative trade.
Integrative trade is so labelled because it integrates traditional export trade with the importing of input goods and services (supply trade) and the foreign investments required to build global supply chains. Thus, the new trade paradigm sees international trade as a triangle, with imports from supplier countries, and exports to demander countries, and the suppliers and demanders may not be the same. Consequently, bilateral trade statistics like the level of Canadian exports to and imports from India, for instance are not very illustrative of true business linkages.
Trade represents 37% of Indian GDP, about half the ratio for Canada but much higher than for such large economies as the U.S., the E.U. or Japan. Furthermore, trade is penetrating the Indian economy more deeply every day. In the past five years, Indian merchandise exports have been growing by 18% per year, on average, and imports by 22%, both far faster than Indian GDP growth. Trade in services, in both directions, has been growing even more quickly.
Meanwhile, integrative trade also requires foreign direct investment, in both directions, to build supply chains. And foreign investment into India has been growing by 23% annually during the past five years, and Indian investment in foreign economies has been growing by 34% annually. This shows that Indian companies are globalizing, and being globalized, both at the same time.
The bottom line? India clearly has a lot of potential, and has a long way to go before achieving it. A key ingredient will be embracing integrative trade trade and investment both inbound and outbound and the signs on that front are very encouraging.
Stephen Poloz is Senior Vice-President, Corporate Affairs and Chief Economist, Export Development Canada. His column on trade-related issues appears weekly on www.ctl.ca