No. 41, December 2005

No. 41
(December 2005):

India's Place in the US Strategic Order

India as 'Global Power'
I. The Reality of India, the New 'Global Power'

India is, of course, not a great or global power. That it is necessary to state this obvious fact is a testament to the power of public indoctrination.

Let us recall some obvious facts. There is a yawning gap between India and the developed world. According to the World Bank, India's Gross National Product (GNP) in 2003 was $568 billion, compared to the US's $10.95 trillion. India, with 17 per cent of the world's population, accounts for less than 1.7 per cent of the world's income. Thus India's per capita GNP was $530, compared to the US's nearly $38,000. Even South Korea's per capita GNP was over $12,000.

India's situation is slightly better in terms of 'Purchasing Power Parity' (PPP)3, but even India's PPP per capita income is ranked 84th in the world. For all the rosy projections of rapid growth by India and other Asian countries by 2020, the US's National Intelligence Council admits that "per capita income in most (Asian) countries will not compare to those of Western nations."

Human underdevelopment
The situation is far worse in terms of 'human development'. In the UN's Human Development Index, which claims to be a composite of various factors such as health, education, and income, India ranks 127th among 175 countries. India's under-five mortality rate per 1,000 live births is 93, that is, one in eleven children dies before the age of five. Its maternal mortality ratio per 100,000 live births is 540, compared to 56 for China and 380 for even Bangladesh.

No doubt, we are constantly told that poverty in India is declining, and a great industry has sprung up of academic treatises to show how fast poverty is declining. However, these treatises have reduced poverty by defining the term so that it no longer relates to whether or not people get their minimum requirements of calories. The official National Sample Survey of 2000 revealed that three-fourths of India's rural population and half the urban population did not get the minimum recommended calories. This is confirmed by nutritional and health surveys, which reveal the following: more than two-fifths of the adult population suffer from chronic energy deficiency, and a large percentage are at the border of this condition; half India's women are anemic; half its children can be clinically defined as malnourished (stunted, wasting, or both). (See Aspects no.s 36 & 37) As one writer puts it, "There is already a sub-Saharan Africa (SSA) within India – half of our rural population or over 350 million people are below the average food energy intake of SSA countries."4

At any rate, any honest economist should have been struck by one glaring contradiction in this official finding of declining poverty. Poverty as such is not directly observed: the National Sample Survey (NSS) gathers responses to a questionnaire regarding consumption, and the poverty estimates are then derived (after making various assumptions) from this data. But the same NSS directly observes that employment growth plummeted between the last two surveys (1993-94 and 1999-2000). (See Aspects no.s 36 & 37) Now, it is virtually impossible for poverty to have declined if unemployment grew sharply, and the methodology of any study that claims poverty has fallen should be questioned.

No doubt, one sector of the country's economy has seen breakneck growth in the past decade: the provision of software services and business process outsourcing services to foreign (principally US) firms. However, that sector accounts for 0.25 per cent of the labour force. Where are the rest? Nearly half of India's total working-age population (15-59 years of age) is unemployed, most of it not even counted as part of the labour force.5 While agriculture continues to employ the majority of those considered employed, it accounts for less than a quarter of the national income, and that share continues to shrink.

No industrial transformation
Conventionally, national income is divided into three sectors, agriculture, industry and services. At various times in the past, all the countries in the developed world passed from being predominantly agricultural economies (in terms of the share of agriculture in national income and in employment) to being predominantly industrial economies. It was only after industry had brought these entire economies (including their agriculture) under its sway, commodities became vastly more plentiful than in the past, and the economic surplus grew massively, that these economies could sustain growth in the share of services. Today, industry accounts for the largest share of GDP in the economies of China, South Korea, Taiwan, Malaysia, Indonesia, and Thailand, as much as 51 per cent in the case of China. In India's case, however, the share of industry is low -- just 26.4 per cent in 2001.6 Industry has never been the dominant sector of the Indian economy. Moreover, its share of GDP has not been increasing, but is stagnant or shrinking. And Indian industry's share of employment is just 17.6 per cent.

Indeed, in the two commodity-producing sectors – agriculture and industry – one cannot find any miraculous takeoff in growth during the period of 'reform'. See Chart 1 and Chart 2, based on data from RBI, Handbook of Statistics on the Indian Economy, 2004-05) The average rate of growth of agricultural production during the past decade (1995-96 to 2004-05) is just 0.6 per cent per year7, which means production fell sharply in per capita terms. The growth rate of industrial production during the decade 1995-96 to 2004-05 was only marginally higher than during the 1980s.8The last two years (2003-04 and 2004-05) have no doubt seen high rates of industrial growth; this has continued into the current year. But one should beware of drawing sweeping conclusions on the basis of two or even three years' figures. And while the services sector has led growth over the past two decades, so that it now accounts for 57 per cent of GDP, much of the services sector (eg growth of police and armed forces, the explosion of financial sector and real estate activity) has no tangible benefit for the people at large. (See Aspects no.s 36 & 37)

Finally, the rate of investment in the economy (excluding errors and omissions) was 23 per cent in 2003-04, and 22.9 per cent for the five-year period ending 2003-04. This is lower than the rate in the last pre-reform year of 1990-91. No doubt, there has been an investment boom during 2004-05, which has continued during 2005-06. Nevertheless, the rate of investment will remain far below that required for the GDP growth rates being talked of by the Government (8-10 per cent).

It is true that certain Indian firms (or Indian units of foreign firms) have attained 'world standards' in quality of output, and with their lower labour costs may become highly competitive exporters. Glowing press reports of such units convey the sense that the Indian economy has undergone a 'take-off'. However, these firms are generally dependent on imported capital goods and are strongly linked to export markets; they have few linkages to the rest of the Indian economy. They remain islands in the large sea of underdeveloped India. Contrast this with the transformation of the economy that would take place with the rapid development of industries catering to domestic demand for items of mass consumption. That would create demand for raw materials and indigenous capital goods, in the entire process generating huge employment and promoting indigenous technological know-how.   

At any rate, India accounts for less than one per cent of world exports. 'High technology' goods constitute just five per cent of its exports.9 Moreover, India's import bill currently is growing much faster than its export receipts: thus India's trade deficit rose from $15.4 billion in 2003-04 to $38.1 billion in 2004-05, and is running during just the first quarter of 2005-06 at nearly $16 billion. The sharpest increases in the import bill are not on account of higher oil prices, or imports of machinery; they are on account of imports of gold and electronic goods. In consumption, no doubt, India's elite sections rival their counterparts anywhere in the world.  

In the press, India's rapidly growing oil imports (and India's high-profile efforts to secure long-term oil and gas supplies from abroad) are being held up as a sign of its rapid economic growth. This is ridiculous. It actually is a sign of the absence of national planning. Much of the growth in oil consumption is on account of the great boom in private automobiles. This is in turn the result of the failure of public transport, growing income inequalities, and the massive expansion of cheap credit for car purchases. Moreover, rapid growth of oil imports signifies not the growing strength but the growing vulnerability of the Indian economy. Genuine national planning would have ensured instead (i) restraint on consumption (through the expansion of railways for goods and passenger transport, expansion of public transport in cities, and a variety of energy conservation investments), and (ii) a programme of investment to develop and use the country's oil, gas and plentiful coal resources effectively and economically. A combination of such measures could have greatly reduced the country's dependence on oil imports. Instead, the share of oil in India's energy is growing, and the share of imports in its total oil consumption is on course to reach 90 per cent or more in some years. As competition for the world's oil and gas resources heightens, the Indian economy will pay a heavy cost for these choices.       

In the last few years, large foreign capital inflows and the booming foreign exchange earnings of the IT sector have resulted in the rapid growth of the country's foreign exchange reserves. As a result, the Government has liberalised foreign investment by Indian firms. Thus a number of Indian firms have been investing abroad, in many cases acquiring foreign firms. This phenomenon has generated considerable excitement in the business press, which point to it as further evidence of India's new global status: now, they claim, Indian firms too are multinational corporations. Indeed, for two years, 2003-04 and 2004-05, India ran a current account surplus, which means that it was a net capital exporter. This was even celebrated by some commentators as a matter of pride.

Such investments may make business sense for the firms which are making them; but in general they run contrary to the requirements of national economic development.10 India is not a capital-surplus economy, but an underdeveloped, capital-starved one, with large resources lying idle for lack of investment. It makes no economic sense to export capital from such a country. Indian capitalists may earn financial returns from their investments abroad, but such returns will give paltry stimulus to the Indian economy, whereas investment in manufacturing within the country stimulates demand, productive activity and employment in a number of sectors, with far-reaching benefits for the whole economy.

'Knowledge economy'?
As part of the propaganda about India's 'emerging' as a 'global power', we are told ad nauseam that India is a 'knowledge economy', an 'information technology (IT) superpower', and the like.

The truth is that adult literacy in India is just 61 per cent; on this score, it ranks 146th out of 177 countries in the UN's Human Development Index  (that is, many countries with much lower per capita income had much higher literacy levels than India – for example, much of desperately poor sub-Saharan Africa). In recent years, on the recommendation of the World Bank, the Indian government has focussed its meagre education expenditures increasingly on primary education, largely abandoning secondary and higher education (as if they were a luxury). Yet official data tell us that 42 per cent of children enrolled drop out before completing primary education (I-V) Another 19 per cent, according to official data, drop out  before completing upper primary education (VI-VIII).

These data in fact understate the problem. Survey-based data, which are more reliable, put the figure of drop-outs at the primary level at around 50 per centnt.11 And according to Census data, 43.5 per cent of the children between the ages of five and nine are not in school.12

Moreover, the quality of education imparted in government schools is so dismal that "half the children in Class IV in government schools in Mumbai cannot do the arithmetic calculations required of a Class I student. When put to the test, 18 per cent of students attending Classes II to V in Andhra Pradesh couldn't do single-digit additions while only 12 per cent managed single-digit subtractions. In a spot-the-object quiz, only 54 per cent got the results right.".13

Higher education, which the Government has increasingly abandoned to a rapacious private sector, is out of the reach of all but a small section. At any rate, the infrastructure and staff of many of the new private institutions are appalling, and thus the degrees imparted to a large percentage of graduates may not be worth the paper they are printed on.

Trivial research and development expenditures
No doubt, given India's large population, even the tiny percentage completing higher education translates into about 2.5 million persons per year, a substantial manpower base for the IT and BPO industries catering to foreign demand.  But is even this enclave really an important centre of 'knowledge'? Is India a power in the field of research?

According to the official publication Research and Development Statistics (2000-01, the latest edition), India's expenditure on R & D has been falling as a share of GDP, from 0.91 per cent in 1987 to 0.81 per cent in 1998. Let us look more closely at this 'R & D' expenditure. First, the Indian private sector does not account for much of it. According to official figures, eighty per cent of R & D expenditure was carried out by the Government. This was largely not for productive purposes, but for military purposes: 32 per cent on direct military research, 21 per cent on space research (much of which actually serves the missile programme) and 12 per cent on atomic energy (much of which actually serves the nuclear weapons programme). Even allowing for some genuine space and atomic energy expenditures, at least half of R & D expenditure in India appears to be for military purposes. Yet despite this ample funding, the showpieces of defence R & D – the Main Battle Tank project (started in 1974) and the Light Combat Aircraft project (started in 1983) – have yet not been completed, and, after the expenditure of billions of rupees each, the chances of their actually being inducted into the armed forces are dwindling. For example, the air force is now in the international market for a mammoth order of 126 fighter planes, at a cost of over $6 billion.

It is unlikely that the private sector accounted for even 20 per cent of R & D expenditure. The latest RBI survey of the private corporate sector14 shows that their R & D expenditures in 2003-04  account for just 0.3 per cent of sales. By contrast, these firms spent much more on advertising and promotion (2.1 per cent of sales) – a clear indication of how low R & D figures in their priorities. Capital goods imports were, at 1.9 per cent of sales, over six times R & D expenditure. The figure for these firms' foreign technology payments is not given separately, but it is likely to be much larger than the figure for their R & D; whereas, to absorb foreign technology properly (in such a fashion that one can further develop it), R & D expenditures need to be multiples of technology payments. And finally, much of what passes under the name of R & D in Indian industry is merely classified so for tax saving purposes, and actually consists of adaptation of products to local conditions, or even merely quality control.

By conventional measures of scientific output, India's performance is dismal.15 The standard database in this regard is the US-based Science Citation Index (SCI). In 1980, around 40 Indian journals were indexed in the SCI; this figure has fallen to 10, or just 0.3 per cent of all SCI-indexed journals. In 1980, nearly 15,000 scientific papers from India were indexed in the SCI; this figure fell over the next two decades to just over 12,000 (China's figure grew from under 1,000 to over 22,000 during the same period). India's share of the world's total research papers published in SCI-indexed journals was just 1.79 per cent in 2002. Finally, India's world ranking in the SCI's citation impact (the number of times a paper is cited by others) has fallen to an abysmal 119 out of 149 countries listed.16

The following figures capture the respective strengths of the US, China and India in creation and control of technology.

  Researchers in R & D per million people
Patents granted to residents per million people

Receipts of royalties & licence fees (US $ per person)

United States

Source: Human Development Report 2005, U.N. Figures relate to most recent year for which data are available.

The IT sector
India's much-vaunted Information Technology (IT) sector is composed of two parts: the software sector, and the IT-enabled sector (ITES). In both cases, work that was earlier done in the developed world, particularly the US, has been 'outsourced', or contracted out, to locations in India.

In the case of the ITES, the activities outsourced include call centres, medical transcription, data entry, ticket-reconciliation, claims processing, credit card administration, and such other routine office work as can be performed at remote locations. While this work requires knowledge of English, it does not require superior education or skills. Indeed, some of it is so mechanical and repetitive that it is in danger of being eliminated: "Optical-character-recognition software is automating the work of Indian data-entry workers. Electronic airline tickets are eliminating some of the ticket-reconciliation work airlines carry out in India. Eventually, natural-language speech recognition is likely to automate some of the call-centre work that is currently going to India, says Steve Rolls, the heir apparent at Convergys, the world's largest call-centre operator."17 Other countries too are entering the same business, particularly those once colonised by an English-speaking country: the call-centre business is booming in the Philippines. 

This is clearly not high-technology or knowledge-based work; new information-and-communications technology has merely made it possible to carry out such work at remote locations. The sole reason for outsourcing such work is that wages for it in India are a fraction of those in the developed world (according to Deloitte Research, one-tenth), yielding massive savings to US and UK corporations. The jobs threatened in those countries are primarily ones that already pay low wages because they require low skills; by outsourcing to India, firms are able to drive their costs even lower.

Given that the sole basis on which India is competing is wages, it will lose its competitive edge if wages in India rise, or if even poorer countries join the game. Indian ITES chiefs are thus anxious to ensure that the production of 'cyber-coolies' in India is adequate to maintain an excess supply of labour power:

The biggest supply may be of BPO (business-process outsourcing) workers who do not need to use the telephone much: claims processors, credit-card administrators, health-insurance workers and so on. Indian universities churn out 2.5 million graduates a year. Perhaps a quarter to half of these have the right skills to do this sort of BPO work, says NASSCOM's president, Kiran Karnik. To improve that ratio, he is working with India's University Grants Commission to have three-year degree courses supplemented by one-year technical certificates in IT or American accounting standards.18

Thus university education in India is to be tailored to providing labour supply for the requirements of American and British corporations' low-value work. As a recent study by the V.V. Giri National Labour Institute has pointed out, the call centre industry "leads to a wastage of human resources and de-skilling of workers" which will have a high impact on Indian industry in the long-term.

A small but increasing amount of higher-value work as well is being outsourced to India, for example, animation and web design, legal services, R & D work, and in future even sophisticated financial services (such as administering speculative funds). But in all these cases, India is not competing on the basis of the superior quality of services or any technological innovation, but solely in wage costs.

The same applies for the software sector. It is true that India's annual production of IT engineers is larger than that of the US. However, Indian engineers are employed in relatively low-value work: as Business Week (1/3/04) points out, "So far, the less-creative software jobs are the ones being moved offshore: bug-fixing, updating antiquated code, and routine programming tasks that require many hands." The magazine depicts a 'software pyramid', with a few thousand 'architects' at the top, followed at successive levels of skill and pay by researchers, consultants, project managers, business analysts, and finally basic programmers. This last category are "The foot soldiers in the information economy, they write code for applications and update and test them". It is a part of this lowest category that has been 'offshored', much of it to India.

Indeed, a large proportion of India's software exports are still accounted for by 'body-shopping', whereby Indian firms supply software workers to US firms to do their work onsite in the US itself, at a much lower cost than if US citizens were hired.19

Indian software firms manage applications of programmes owned by multinational software giants; but Indian firms produce virtually no proprietorial software, that is, copyrighted programmes which are sold to a large number of customers, and earn a continuing stream of revenue (what Microsoft earns its money from). Rather, both the hardware and the software they use are imported. Thus the present prime minister pleaded on his recent visit to the US for sympathetic treatment:

American investments in India, especially in new technology areas, will help American companies to reduce costs and become more competitive globally. Equally, India's earnings from these investments will lead to increased purchases from the US. The information technology revolution is built primarily on US computer-related technology and hardware. (20/7/05)

India is thus not a 'knowledge economy' but a low-wage economy, distinguished from other such by its colonial heritage, English. It does not command increased international status by virtue of its economic strength; rather, the publicity about its 'emergence' as a 'power' is an outcome of conscious US policy.

Let us look first at why the Indian ruling class is so anxious to be anointed a 'global power', and then at why the US is interested in anointing it so.




3. 'PPP': Whereas the exchange rate is Rs 45 = $1, Rs 45 in India can purchase more goods and services than $1 can in the US. Thus, it is claimed, India's national income expressed in US dollar terms understates its real value as compared to, say, the real value of the US national income. By estimating how much various currencies can purchase of a certain mix of comparable goods and services, the Purchasing Power Parity measure claims to better capture the actual national income. (back)

4. Utsa Patnaik, "It is time for Kumbhakarna to wake up", Hindu, 5/8/05. (back)

5. 'Labour force', in the official terminology, includes only those actively seeking work; those who do not seek work because they know there are no jobs are not counted in the labour force. Those not in the labour force (thus defined) are not counted as unemployed. (back)

6. Asian Development Bank, Key Indicators, 2002, cited in Economic Survey, 2002-03. The share of industry indeed appears to be even lower than that; from Reserve Bank of India data, it would be less than 22 per cent – see the RBI's Handbook of Statistics on the Indian Economy, 2004-05. (back)

7. Reserve Bank of India, Annual Report, 2004-05.(back)

8. RBI, Annual Report, 2003-04 & 2004-05. (back)

9. Human Development Report, 2005. (back)

10. Different Indian firms invest abroad for different reasons, and we are only commenting here in a general way about foreign investment by a capital-starved economy. (back)

11. Business Standard, 2/11/05. (back)

12. The 2001 Census data show that of 128.3 million children between the ages of five and nine, only 72.5 million are attending school. (back)

13. P. Bidwai, "The Great Indian Education Bazar", (back)

14. "Finances of public limited companies, 2003-04", RBI Bulletin, August 2005. (back)

15. No doubt, there can be different frames of reference to assess a nation's scientific and technological performance; properly speaking, it should be assessed in terms of its relevance to the nation's specific problems and stage of economic development. Yet those who claim that India is a 'knowledge economy' and a 'research powerhouse' are referring to conventional notions of scientific and technological advancement, which can be measured quantitatively. (back)

16. "A tale of two databases: India's R & D dilemma", Rajesh Kochhar, 13/6/05, SciDev.Net; "Indian science loses to China", Johnson T.A., Times of India, 30/6/04; "Story of missed targets", P. Bidwai, Tribune, 6/6/00. (back)

17. Economist, "A world of work: A survey of outsourcing", 13-11-04. (back)

18. Ibid. (back)

19. "Unravelling the outsourcing puzzle", C.P. Chandrashekhar, Hindu Businessline, July 19, 2005. (back)


NEXT: The Class Logic of the Indian Rulers' Drive for 'Great-Power' Status


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