Asia: Indian Tiger Changes Stripes to Chase the Dragon

The Indian economy will expand at 8% a year - shrugging off the credit crunch and high oil prices - as it is transformed into an industrial powerhouse to rival China, the government's top policy tsar said yesterday. He predicted that Chinese-style 10% annual growth was "achievable".

Montek Singh Ahluwalia, deputy chief of India's planning commission, said the government would be "targeting 9% growth, getting up to 10%. It may look ambitious with the global economic slowdown. But in the medium term, it is achievable."

India's central bank expects growth in the year ending 2009 to slow to 8% - down from 9.1% in the previous 12 months.

The commission has signaled a huge shift in the economy - forecasting that in the next five years 58m new jobs will be created but none of these would be in the vast, unproductive farm sector. In the past five years farming employment increased by 9 million while India's rice production remained less than half the world average of four tonnes a hectare.

Economists have long argued that for India to mimic China's "long boom", the country would have to see industry fuel growth. In China, this led to millions of people leaving the land to work in factories. But this process has not happened in India, where growth has been driven by capital-intensive sectors such as information technology. Although hugely successful, Indian software companies employ only 1.5 million people - a mere drop in the labor pool of 470 million.

However, the planning commission says that in the next five years the bulk of new jobs will be created in factories, construction sites, restaurants, retail stores and warehouses.

Many commentators say the country is at a turning point. "I think as labor costs rise in China and there's a price to pay for pollution that we will see manufacturing coming to India," said Niranjan Rajadhyaksha, a columnist with the business daily Mint. "There's been for some time a sense that agriculture can no longer absorb any more people."

Others, however, dispute the commission's analysis, saying that Indian business has "voted with their wallets" by expanding abroad faster than at home. Foreign investors on India's stockmarket have also been withdrawing funds as the world economic downturn has begun to bite.

Mohan Guruswamy of the Center for Policy Alternatives said: "India has become a net exporter of FDI [foreign direct investment]. That's because it is too difficult to start up labor-intensive manufacturing of the kind you find in China. Sixty per cent of Indians depend on agriculture and I don't see that changing."

The commission has also produced a plan to "engage with 10 high-growth sectors" in manufacturing. If these projections are met they would see India's car industry employ 25 million people by 2015 and produce exports of $145bn (£77.5bn). Similarly, the textile sector would have almost 42 million workers and be taking $115bn in overseas orders.

Most dramatic, however, is the coming transformation of India from a software to hardware superpower. The commission says in less than a decade it is looking for exports of $320bn in "chip manufacture ... design and mechanical assembly line operations".

"The hardware [estimate] seems optimistic. The auto industry seems in the right area," said Shankar Acharya, former chief economic adviser to the government. "The important question here is what kind of jobs are created. In the past it has been low-security and low-paid jobs in what is called the informal sector. That needs to change."

Economic growth: Closing the gap

The big question for many economists is why the Indian economy has not matched the fast pace of growth enjoyed by China in the past 20 years. China was set on the road to rapid industrialization in 1978 when the then premier Deng Xiaoping introduced free market reforms and measures to encourage foreign investment.

In recent years the economy has expanded at a rate of 10% a year with industrial production increasing by 17% annually. India, on the other hand, has not created such an established and stable manufacturing base. China joined the World Trade Organization in 2001 and exports account for more than a quarter of GDP. The booming economy has, however, led to fears about inflation and rising wage rates.

The stockmarket has slumped by 62% since its peak last October with exporters hit by the global downturn. Some predictions suggest inflation will reach 8-9% this year.