DCN ARCHIVES

March 22, 2005

Guest Column

By Stephen Poloz

Sr. Vice-President & Chief Economist

EDC

India worth exploring

China has been getting a lot of attention lately. All the superlatives have been used, and deservedly so. But there are other great opportunities out there, and one of them is India.

India is not just an also-ran plodding along behind China. India has a much larger, well established middle class than China.

In part, this is because India has not followed the typical development path from an agrarian society to one dominated by manufacturing and then to economic maturity. Instead, it has practically skipped the middle step, graduating to a more mature economic structure with a thriving, high value-added service sector all in one go.

Perhaps it is more apt to compare India to Ireland before its boom.

During the early stages of that historic upswing, the coming Irish success story was not easily discernable in the economic statistics, either.

You had to go there yourself to see what was happening, especially the swarms of Irish expatriates who were returning to their homeland to take up well-paying jobs.

India has not done all the reforms that facilitated the Irish boom, nor does it belong to the sort of benefactors club that Ireland had in the European Union. Nevertheless, progress is being made in India.

Certainly, India is much more open for business than it used to be. The share of international trade in GDP has risen from 15 per cent in 1990 to about 24 per cent today, putting India in the same league as other large economies, such as the U.S., Japan and the Eurozone. The recent budget reduced the maximum tariff on non-farm imports from 20 per cent to 15 per cent, a positive step.

Foreign direct investment is another matter. Foreign investors own less than $60 billion (U.S.) in assets in India, which is less investment than China attracted in 2004 alone. Although there may be a lot of reasons for this, many point to restrictive Indian labour laws as discouraging foreign investment.

But the government is proposing to create special economic zones where labour laws will be more flexible.

Corporate tax rates were adjusted down in the recent budget, and the government plans to do more of this in future. They also are putting a great deal of emphasis on infrastructure investment — transportation, telecommunications, water and power — all good signs.

Canada is participating, albeit modestly. Canadian goods exports to India amounted to $828 million in 2004, of which $250 million was pulp and paper, $100 million in specialty crops, and $175 million in machinery and equipment of various types.

But at least our exports are growing fast: 13 per cent in 2003, 12 per cent in 2004, and a projected 14 per cent in 2005.

Further, our exports of services to India are estimated to be well in excess of $300 million annually. Our imports from India, at $1.6 billion, are about double our exports. And, most of those imports are consumer goods, not the sort of intermediate goods that would indicate that Canadian companies are globalizing their supply chains in India. Indeed, Canadians have invested a paltry $184 million in India to date.

The bottom line? India is not China, but in some ways it is more.

There are multiple signs of an improving business climate, our exports there are growing rapidly, and the biggest obstacle to foreign investment might simply be a lack of solid information. That makes India worth exploring.

Stephen S. Poloz, is senior vice-president and chief economist at Export Development Canada. The views expressed in this column are those of the author and not necessarily of Export Development Canada.

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