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posted on 05 June 2016

India's Future

by John West, Asian Century Institute

Can India follow East Asia's industrialisation path? John West reports on discussions at the Asian Development Bank Annual Meeting in 2016.

India is the world's fastest growing large economy, with GDP increasing by 7½%, according to the Asian Development Bank. But looking back over the past couple of decades, India's economic performance has been a disappointment, especially compared with China and some other East Asian economies, in part due to an inability to develop its manufacturing sector.

Hun Kim, Director General for South Asia at the Asian Development Bank, said:

"The only successful model of modern economic development is that of East Asia. The East Asian model involves a structural transformation of the economy as low-productivity rural labour moves to urban areas to work in export-oriented factories."

But East-Asian style urbanisation and industrialisation has not taken place in India, despite the country's relatively strong economic performance.

Mr Kim said:

"India's manufacturing sector has been stuck at around 15% of GDP. The services sector, especially business process outsourcing and tourism, has been a key driver of the economy".

Today, industrialisation could play an important role in India's development, since it faces the challenge of creating jobs for millions of semi-skilled young people entering the labour market.

Mr Kim said:

"Fortunately, Prime Minister Narendra Modi's government wants to develop its manufacturing sector. India is very keen to join the global value chains of Southeast and East Asia, following in the footsteps of Bangladesh's success."

Mr Kim said:

"Major investments are being made in improving the country's logistics in areas like coastal shipping, highways, and railways, which would help move products around. Inspired by the government's "Look East" policy, these efforts are being concentrated on the eastern side of the country, which is close to fast-growing Bangladesh and Southeast Asia. Special economic zones and economic corridors are also being developed."

The government has liberalised some policies for FDI, including through a "Make in India" initiative, and net flows of FDI surged to $32 billion in 2015, nearly 26% higher than in the previous year, according to the Asian Development Bank. Leading companies like Foxconn, Softbank and Microsoft all have plans to invest in India.

Mr Kim said:

"Korean companies have been very successful in India. Koreans are like jazz-players, they know how to improvise in different markets."

Mr Kim said:

"South Asia has been the least economically integrated region of Asia, and there is much to do to catch up in terms of cross-border infrastructure, connectivity and logistics", "At last, India, Bangladesh, Bhutan and Nepal are now gradually becoming more connected through road and other links."

Mr Kim said:

"We are optimistic about India's future. A lot remains to be done. But India's economic performance will only continue to improve, though not at the pace of East Asia. In India, things move more slowly. Even when there is new direction from the country's leadership, for things to really move, everyone must be on board in India. And this takes time."

Acknowledgements

An abridged version of this article, written by John West, was first published by FDI-Intelligence, a Financial Times magazine.

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