India: a new economic powerhouse without government red tape

India is slowly, unevenly and chaotically loosening the grip of the "licence Raj" which has held back its talented people for generations. This change has the potential to create a new economic powerhouse with huge benefits for the world and for Australia.

A recent study from Goldman Sachs has indicated that even if the Indian economy continues to grow over the next 20 years at just the same pace as it has over the past ten years (about five and a half per cent each year), it will become the third largest economy on the planet, after US and China. If it can match China's growth rate (more than seven per cent a year) its economy will, within 50 years, exceed China's and be the world's second largest economy. The scope for a China-style growth rate is very real. While India has smothered its manufacturing sector with red tape, corruption, and huge tariffs barriers, its service sector is booming.

Indeed, India is becoming the world's supplier of back-office and IT services. More than 200 of the Fortune 500 firms have, or are planning to, contract out services to Indian operations. Most major IT, telecommunications, insurance and accounting firms have large operations in India. Starting from nothing 15 years ago, India now exports $15 billion of IT and business services. This trade is growing at 14 per cent last year.

While India's low wages and large pool of highly skilled and motivated people (India has more than 15 million university graduates and five million engineers) are important, they are not the only draw. Indian IT and back-office firms use state-of-the-art technology and have developed unique skills, particularly in the software development area. They also are extremely nimble in terms of ideas, operations and structure, and they speak English. Moreover, India is quickly becoming an essential part of the global business chain; if you are in the global business of information processing, you need to have a presence in India.

The key to Indian success in business and IT services has been the absence of Government. It all started before the deadening hand of the "licence Raj" could stop it. The industry went to lengths to keep government away, including building its own infrastructure. By the time the Government caught up with the sector's success, it was too big to stop.

There are signs that some manufacturers, in particularly the car and pharmaceutical sector, are starting to take a cue from the global services firms. While in the past manufacturers cowered behind huge tariffs wall and government restrictions to produce shoddy products, some firms are now restructuring to focus on global markets. As a result, the manufacturing sector is growing by seven per cent a year. The Indian Government is also getting the message and slowly reducing tariffs and red tape.

India's success will be Australia's and the world's gain. Australia has a large trade surplus with India (our ninth largest export market). The challenge for Australia and other wealthy nations is to keep their eyes on the big prize - a global, wealthy India - and not succumb to the fears of competition from outsourcing.