India is rolling in gold but still poverty-stricken

By Jacob Saulwick
Sydney Morning Herald (Australia)
Saturday, June 30, 2007

http://www.smh.com.au/news/business/rolling-in-gold-but-still-povertystr...

In 1865, Jamsetji Nusserwanji Tata -- a one-time opium trader and scion of a sparkling line of Parsee priests, Zoroastrians who had fled to western India from persecution in Iran -- attended a lecture in Manchester, England, given by Thomas Carlyle.

Carlyle, a cantankerous Scot, was known for his historical and philosophical essays, but he also put his mind to the budding field of political economy.

"The nation which has the steel will have the gold," Carlyle told the lecture hall, and burnt a deep impression on the visiting Indian merchant.

Jamsetji Tata took Carlyle's idea and, after opening up textile mills, he in time emerged as India's mightiest industrialist.

Today, the company he founded is a goliath. Tata Group is the world's fifth largest steelmaker and sees itself as a symbol of the re-emergence of the Indian economy.

And Carlyle's notion has proven literally apocryphal, with India emerging as the world's largest importer of gold.

And this is having a big impact on the trade performance of another ex-colony, Australia.

If asked, most goldfish will tell you about the importance of China to the Australian export market. But over the past five years Australia's fastest-growing export market has been India.

Like exports to China, Australia's exports to India are dominated by non-rural commodities. The biggest contributor among exports to India is non-monetary gold.

The numbers here are striking. Over 30 per cent of Australia's total exports to India in 2005-06 were sales of gold.

Gold exports to India have risen by an average 110 per cent every year for the past five years .

As pointed out last year by Australia's high commissioner to India, John McCarthy, in 2000 gold exports to India were valued at less than $50 million. By 2005, they had increased to more than $2.5 billion.

And what the torrent of gold reveals about the nature of the Indian economy is just as striking. In effect, it lays bare both the emerging strength and the continued backwardness of India's economic development.

The expansion of the Indian economy over recent years -- it is now the world's fourth largest, when exchange rate variations are taken into account -- has led to the creation of an increasingly confident middle class.

And with increased wealth, the compulsive cultural and decorative demand for gold has flourished.

Necklaces, rings, bracelets and gold-laced saris are all coveted by the Indian consumer, in the world's most voracious gold market which peaks with festivals in the Hindu calendar.

But the rampant demand for gold is not just the drippings of new-found wealth.

In impoverished rural communities gold retains a financial function. Where monsoonal rains regularly wreak havoc with rural incomes, demand for gold reflects its importance as a repository of wealth.

Looked at in this way, the gold trade highlights the limited financial services available to vast swathes of the Indian people.

Another distinctive aspect of the Indian economy revealed by its high proportion of gold imports is its relative insularity. In 2005, India spent around $85 billion on resources imports. But oil, gold and diamonds accounted for over $70 billion of this.

Compare this with China, where industrial inputs such as iron ore form the vast bulk imported commodities.

The difference is because in China production is sharply focused on manufacturing for world export markets (or more accurately, for living rooms across the tundra of American suburbia).

But in India, where the sum of exports and imports is only 33 per cent of gross domestic product compared with China's 67 per cent, production is still largely focused on the domestic economy.

As a result of India's relative trade isolation, Australia has started chalking up hefty trade surpluses against the sub-continental country. In 2005-06 Australian companies sent $7.4 billion goods to India, against only $1.2 billion goods imported.

Servicing India's domestic economy is proving a boon for many Australian companies and industries.

Services exports to India have almost tripled over the last five years, from $0.5 billion to more than $1.4 billion.

Education is the big ticket item here, with Australia now the third largest provider of education to India behind the US and Britain.

The number of visas issued to Indian students leapt by 54 per cent between 2004 to 2005 to more than 15,000.

Engineering and infrastructure firms are exploiting demand stemming from of the growing domestic market.

Leighton, the engineering and construction group, has built a mobile phone construction factory for Nokia in Chennai. It also has plants under way for Motorola and Flextronics.

The retired basketballer and Olympic flag-bearer Andrew Gaze has tapped into the deep reservoir of the Indian sports market and tied up a deal with an Indian sports company which is to open 20 sports stores across the subcontinent in the next five years.

But how smoothly the opportunities will continue to develop depends on how well the Indian authorities manage the deep contradictions stemming from of India's expansion.

For one, the vast chasm in wealth opening up in Indian society is potentially explosive.

The majority of Indian people remain extremely poor. GDP per capita is estimated at about $4500, a tenth of Australia's and less than half of China's.

Adult literacy is only at 60 per cent, against China's 90 per cent.

Despite the heady claims made about India's information technology sector, only about one million Indians are employed in the sector: less than a thousandth of the total population.

Even in the cities, where most foreign investment occurs, poverty remains intransigent. A recent study by the Asian Development Bank shows poverty reducing at a much faster rate in urban China than in urban India. Economists are also worried about inflation, which remains high at over 5 per cent. This is despite the Reserve Bank of India ratcheting up its overnight lending rate to 7.75 per cent over the past year.

Managing interest rates will be a tricky balancing act for India's money masters. Raising rates to combat inflation will hamper construction momentum and choke consumption and investment -- which are just what the country needs to break the poverty trap.

India enjoys a big demographic advantage over China. Within 20 years its population is tipped to surpass China's, with a much chunkier proportion of it of working age.

But, contrary to treasurer Peter Costello's oft-repeated claim, demography does not make destiny. With India's wealth still pocketed in a relatively narrow band, its widely touted ascent in the global economy is by no means assured.

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