China and India are often seen around the world as examples of successful developing strategies that should be emulated by other developing countries. They are also often lumped together with Brazil and Russia, as part of the BRICs, the group of countries that would overtake the developed world by mid-century. Brazil and Russia, however, are to great extent commodity exporters, and the Brazilian success story has been over-hyped.
The case of India is of particular interest for developing countries, since it suggests that high rates of growth are possible, in the context of a multicultural, multiethnic, democratic society. Also, India seems to provide an alternative model in terms of the pattern of structural transformation of the productive sector, with a pronounced acceleration in the growth of the service sector in an early stage of the industrialization process. The growth in services is, in part, associated with the expansion of services exports, which, in turn, are related to the offshoring process.
India has an edge because it provides English-speaking workers at a highly competitive price, which explains why it has become the preferred choice for offshoring. The English speaking advantage, the relatively high levels of education of the labor force, and the relatively low wages by international standards are often used to explain the competitive advantage of the Indian economy in the services sector.
However, there are at least two concerns with the Indian development model that should be noted. First, economic growth has translated in persistent trade deficits that have become increasingly larger after the boom in commodity prices since 2002. These deficits have been made possible by financial flows, remittances and services exports. In other words, even though India still has a relatively closed capital account, it depends on capital inflows. India is certainly not close to a balance of payments crisis, with a current account deficit that shrank after the global crisis from around 3% in 2008 to close to 1.5% of GDP in 2010.
Yet, the current account deficit implies that Indian authorities are forced to be cautious in terms of their fiscal policy, to avoid upsetting financial markets, and the benefits of growth cannot be used to reduce massive poverty by more extensive fiscal transfer programs. Further, a balance of payments crisis, as in 1991, cannot be ruled out if the prices of commodities (particularly oil) continue to be high, or if interest rates rise sharply, making the debt dynamics unsustainable.
Also, the dependence on remittances and export of business and communications services means that as much as certain Latin American countries, in particular Mexico and Central American countries, India depends on exporting people. In the case of India the immigrants tend to be highly educated, and the low wage workers are not in the ‘maquila’ sector, but in the services sector. As in the case of Latin America, the inability to incorporate surplus workers in the more dynamic sectors of the economy implies that disguised unemployment remains high. Reflected in the Latin American mirror the Indian strategy seems less impressive.
Octavio Paz, the Mexican writer and ambassador to India, was fascinated by the similarities that he found between India and his native country, despite the incredible cultural differences. The development strategy in India makes Octavio Paz’s conclusion more understandable: “The strangeness of India brought to mind that other strangeness: my own country.”