Comparison of the Indian and South African Economies

-Jonathan Katzenllenbogen

 

India and South Africa: Paths to Reform

In the great wave of deregulation and economic liberalisation that has swept the world, India and South Africa stand out among those that are late and have hesitated along the path of policy reform. China and much of East Asia began their reforms much earlier on and countries in Latin America were quicker off the mark in the late Eighties and early Nineties. Eastern Europe and the former Soviet Union have been cases of shock therapy.

India has quickly reaped the rewards of reform with a growth rate average of 7 percent for the past three years. There is now growing concern that the momentum may have slowed with the election of a vulnerable coalition government of 13 parties. Growth in South Africa remains half the rate of the government goal of 6 per cent and although macro-economic policies are viewed as sound, implementation of development plans is the most serious concern.

Global Economic Prospects and the Developing Countries (1996) published by the World Bank draws an empirical association between faster speeds of integration and higher growth. The measures of integration used include ratios of trade to Gross Domestic Product (GDP) and Foreign Direct Investment (FDI) to GDP, as well as credit worthiness ratings, tariffs, the share of manufactures to exports. India and South Africa are classified, up until 1994, as slow integrators compared to East Asian countries.

Table 1. Growth Rates Compared

Country/Region GNP Per Capita Average annual

Dollars 1994 Per Capita growth

1985-94

East Asia and Pacific 860 6.9

South Asia 320 2.7

India 320 2.9

Sub-Saharan Africa 460 -1.2

South Africa 3,040 -1.3

Source: World Development Report, 1996, World Bank.

India and South Africa: Perspectives on Comparisons

There are some fundamental differences between India and South Africa. When reviewing aggregate data on the two countries, it is worthwhile to consider that around 40 per cent of South Africans live in absolute poverty. 1994 is used as a cut off point as it was the year in which the impact of India's reforms kicked in and the year in which a democratically elected government came to power in South Africa. Gross National Product (GNP) per capita data is used for population and GNP per capita is from the most recent World Bank, World Development Report (1996).

Out of 133 countries ranked by per capita GNP, India ranks as one of the poorest low-income countries, at position 23, above the very poorest. South Africa ranks at position 93, in the group of upper-middle-income countries. South Africa's per capita income is close to 10 times that of India's. In South Africa's case it is useful to bear in mind that average per capita income is well above median income because of serious inequality. Per capita growth has been negative in South Africa and far from spectacular in India's case up until 1993-94.

Table 2. India and South Africa: GNP, Population and GNP Per Capita

Country GNP Million $ Pop. Millions GNP Per Capita $

1994 1994 1994

India 293,606 913.6 320

South Africa 121,888 40.5 3,040

Source: World Development Report, 1996, World Bank.

Until the trade reforms that began in 1991, India was virtually a closed economy. With a GNP of close to 2.5 times that of South Africa, India exported approximately the same value of merchandise exports in 1994.

Table 3. India and South Africa: Exports and Imports

Country Merchandise Merchandise Exports as % GDP

Exports Imports

(Million $) 1994 (Million $) 1994 1980 1994

India 25,000 26,846 7 12

South Africa 25,000 23,400 36 24

Source: World Development Report, 1996, World Bank.

The reform driven growth in India has been beyond many expectations, but still falls short of China's, and may now be slowing. South Africa's per capita growth is by comparison in a far lower league even after 1994.

Table 4. India and South Africa:

Per Capita Growth Rates pre and post 1994

Country Annual Average 1994 1995 1996

Per Capita GNP

Growth

1985-94

India* 2.9 5.4 5.3 5

South Africa -1.3 0.5 1.2 0.5

* Indian financial year runs from April to March

Much of Indian growth has been driven, although the surge of manufacturing investment driven by reform is also a major factor. There is growing concern in India that the growth in exports is unlikely to continue at previous rates due to emerging bottlenecks in the country's infrastructure.

Table 5. India and South Africa: Export Growth

Country Ave Annual Ave Annual 1994 1995 996

Growth Growth

1980-90 1990-94

India 6.3 7.0 18.4 20.8 6.4*

South Africa 0.9 2.8 1 9.3 7.8

* April-December, The Indian financial year for national accounts runs from April to March.

Source: World Development Report, World Bank, and Ministries of Finance, India and South Africa.

Import growth has been very rapid for both countries post-1994. This was in large part due to the import liberalisation in India and the investment boom. The considerable slowing down in 1996 indicates the growth in imports was in both cases a one time surge associated with new economic eras.

Table 6. India and South Africa: Import Growth

Country Ave Annual Ave Annual 1994 1995 1996

Growth Growth

1980-90 1990-94

India 4.5 2.7 22.9 28 4.4

South Africa -0.8 5.3 16.1 16.6 7.7

Source: World Development Report, World Bank, and Ministries of Finance, India and South Africa.

South Africa faces massive problems in extending the electrical, water, and road and telephone networks to what were formerly classified as black areas. While payment arrears in areas that have experienced boycotts remain a serious problem, for the most part fast utility expansion is underway and its continuation is regarded as problematic but feasible. Infrastructure is not, in South Africa's case, acting as a serious bottleneck on growth as it is in the case of India.

Rehabilitation and expansion is a key priority of the Indian government. The Indian Ministry of Finance's Economic Survey of 1997 states: "Because of unvailable, uncertain or erratic supplies from the public grid, the economy is paying a heavy price in the form of foregone production, lost exports of goods and services, frustrated investment intentions, recourse to high costs captive power generation, loss of international competitiveness, and barriers to the spread of information technology." The drop off in growth from 7.1 per cent in 1995 to 6.8 per cent in 1996-97 is attributed largely to the fall in the rate of growth in electricity production.

South Africa does not face anything like the Indian infrastructure problems, but the loss of wider economic efficiencies as a result of a poor infrastructure should be a reminder to policy makers of the consequences of serious deterioration.

India and South Africa are in similar dominant political and economic positions in their regions. South Africa accounts for around 80 per cent of the combined South African Development Community (SADC) GNP and India accounts for a similar proportion of the GDP of South Asia. Any proposal which might come from dominant powers in regional fora is more likely to meet with suspicion than one from smaller powers. In the settings of Southern Africa and South Asia, this factor might act as a drag on the pace of regional integration.

Another dimension of useful comparison is the degree of inequality in the two societies. Research at the World Bank now points to the connection between the degree of inequality and prospects for growth. Societies with more even distributions of income tend to grow faster, as those at the bottom end of the scale are more likely to have access to credit. The distribution of income in South Africa is more unequal than in India.

Table 7. India and South Africa: Distribution of Income

Country Gini Index Lowest Lowest Highest Highest

10% 20% 20% 10%

India 33.8 3.7 8.5 42.6 28.4

1992

South Africa 58.4 1.4 3.3 63.3 47.3

1993

The Gini index is a summary of the extent to which the actual distribution of income differs from a uniform distribution in which all receive identical shares. A Gini co-efficient of 100 per cent indicates that one person receives everything, and at the other end a 0 means absolute equality.

In some social indicators India is better than South Africa. India's population growth rate rate is below that of South Africa, 1.8 per cent compared to 2.2 per cent. Life expectancy in India is only two years less than South Africa's 64. Overall economic improvement in India, albeit from a low base, is faster than in South Africa, but India faces a far greater challenge. South Africa has the capital markets and infrastructure for faster development, but has yet to use these effectively to extend economic growth to a greater number.

Overview of Indian Economic Reform

The series of reforms since 1991 have covered virtually every area of economic regulation and have amounted to a decisive break with the country's past of central planning, a high degree of regulation, and attempts at virtual autarky. The trade and exchange rate regime, taxation, investment regulation, and the financial sector, and the tax system have all been substantially reformed.

The view has been advanced that there were drawbacks to the attempts at autarky but there were certain blessings. "A close look at the nation-building process in the last half century shows that the choice of autarchic economic policies was as essential to forging a united India as was the development of its uniquely flexible democracy," wrote Prem Shankar Jha in The Hindu recently.1 He argues that the numbers of losers, the artisans, small peasant farmers and shopkeepers, and future tensions with organised labour would have meant a very difficult force to deal with as the leadership was attempting to build nationhood. While this may have been the choice as perceived by the Indian leadership, in retrospect it restricted economic growth and the rate of poverty alleviation. Better economic performance would perhaps have contributed better to nation building. While great gains have been made against famines, illiteracy, high population growth, the public sector, trade and investment restrictions, and poor infrastructure exercised a drag on growth.

The big break with the Indian economic past came with a newly elected government in June 1991. Part of the success for reforms is that they were launched in a crisis environment. Between the end of 1989 and July 1991, there were four changes in government. The rise in oil prices with the Iraqi invasion of Kuwait placed the balance of payments under pressure. Capital outflows led banks to further reduce their exposure. In June 1991, foreign exchange reserves had declined to around two weeks of imports.

In January 1993, the Foreign Exchange Regulation Act of 1973 amended discriminatory treatment against firms with more than 40 per cent foreign equity ownership. Decisions were also taken to open the mining, coal, telecommunications, and pharmaceutical sectors. Reforms were also taken to eliminate the need for government approval to expand, diversify or merge. In the 1980s, there had been reforms but the basic rigid investment environment remained.

The Indian government has adopted a gradualist and politically cautious economic reform programme based on proceeding largely by consensus. The approach of the Indian government has been to appoint high level committes of experts to formulate reform proposals. These have then been made public and discussed with academics, industrialists, and unions. "It has helped the government build consensus around the economic program, anticipate public reactions to reform measures, and avoid the reversals that have sometimes derailed adjustment programs elsewhere. Equally important, it also enabled the government to avoid errors in the sequencing of reforms," says a recent World Bank Report on India.2

Another World Bank Report also notes that because the Indian economic crisis was less dramatic, it has been more difficult than in Latin America to cut government spending.

Trade reform in terms of tariff reduction has been deep, but the country's pre-reform barriers were far higher than Latin America's and Asia's. "Even after five rounds of significant trade reform, India's tariff and non-tariff barriers remain among the world's highest," states a World Bank Report on the stabilisation programme.3 A series of tariff cuts have reduced maximum tariffs from 400 per cent in 1990-91 to 65 per cent at present, and the import weighted average tariff from 87 per cent to 33 per cent, according to a World Bank survey of the Indian economy.4

The government has said it intends to reduce maximum tariffs over the next two years to 30 per cent, the same as in South Africa, on intermediates and 20 per cent on other goods. In a first step, the Export-Import Policy of April 1994 expanded the range of the special licence scheme for imports of consumer goods. A recent World Bank Report on India states, "Restrictions on consumer goods imports remain pervasive and a bolder approach is warranted to eliminate them." The government has said that maximum tariffs would be reduced further over the next two years to 30 per cent on intermediaries and 20 per cent on other goods. India has been warned by the World Trade Organisation (WTO) that there is little choice if it wishes to avoid marginalisation. On exchange control, the rupee was floated in March 1992 and near full current account convertibility was established in March 1994.

While the investment regime has been substantially liberalised, there are still impediments to private investment, often at an industrial sector level. Sectors once restricted to public investments such as power, telecommunications, mining, ports, roads, river transport, air transport, and banking are now open to private investors. In the areas not reserved for public investment, the previous strict licensing requirements have been abandoned. Foreign investment has risen from US $200 million in the early 1990s to US $4.7 billion in 1993-94. Licensing restrictions remain in areas designed to protect small-scale industry. The World Bank is pressing for reform in this area as it believes these regulations restrict economies of scale and investment in modern technology.

Reform of the financial sector has been aimed at moving away from regulation of returns on assets and restrictions on competition. Financial institutions are allowed greater choice in portfolio selection. Commercial banks' compulsory holdings of government debt have been reduced. Interest rate controls have been reduced and firms' access to capital markets removed. Public banks are being given greater autonomy.

India's interventionist path has created a situation in which public enterprises (PE) manage 55 per cent of the economy's capital stock and generate one-fourth of the non-agricultural Gross National Product (GNP). In July 1991, the government launched its attempt to strengthen the financial position of public enterprises, but has not had much success. The World Bank attributes this to the strength of labour unions and the weak political support for PE reform which means managers do not have the authority to retrench, close or sell units, or enter joint ventures with private investors. "It is essential that the government accelerate the pace of PE reform," as, "unless a pragmatic approach is adopted, the financial position of public enterprises will deteriorate as domestic and external competition increases."

There is some scepticism that the present United Front (UF) government is as capable of pushing through with reform as its predecessor. In an interview with the London Financial Times, the Indian Minister of Finance said he and other reformers must "nurse the consensus" in the 13-party UF government which relies on the support of the Marxist Communist Party which opposes "indiscriminate privatisation or across the board liberalisation."

Indications are that the impact of the reform programme on employment and poverty alleviation has been positive. Part of the reason is that the reforms have led to an expansion in labour intensive exports, a similar development to that in a number of East Asian countries, and may have created the foundation for sustained growth of 6 to 7 per cent.

Overview of South African Economic Reform

Under the Nationalist government a highly interventionist economy was constructed, much of it to establish protected employment for the favoured and strategic self-reliance. Tax subsidies and government credit gave priority to the large continuous process type of mega-project and effectively discriminated against labour intensity. The legacy was an unemployment rate of close to 33 per cent, and 40 per cent of the population living in absolute poverty.

The cornerstone of the African Nation Congress' (ANC) economic policy, the Reconstruction and Development Programme, was launched prior to the April 1994 general election. Widely criticised as more of a wish list than an actual economic policy, the government, soon after coming to office, found that a list of goals for development was insufficient. The actual process of major policy design is gradually reaching a conclusion with the formulation of Green Papers, an ensuing process of consultation, and the final version of a White Paper. Reform has been, like that in India, gradualist and largely built on consensus.

A number of key policy issues have been negotiated between business, government, and labour in NEDLAC, the National Economic Development and Labour Council. This is the sucessor to the National Economic Forum, established during the transition to bring together business, labour, and political parties. What former Minister of Finance, Derek Keys described as "the golden triangle" of business, government and labour, continues to make up the key group on most economic policy matters.

What will emerge as a key reform when it is fully implemented, that of the trade regime, was carried out in the transition, but negotiated by the major political parties. While there have been howls of protests from the clothing industry, the introduction of South Africa's new trade regime to be phased in by 1999 has been relatively smooth. The emerging trade regime is one that should effectively lower input costs for many downstream and potentially competitive industries. Under the WTO agreement South Africa has agreed to the removal of all quantitative restrictions, a reduction and simplification of tariff lines, and a 30 per cent ceiling. Sensitive industries such as clothing, textiles, and motor vehicles are given special treatment. The exchange rate depreciation has helped the position of exporters and prepared them for the full application of the agreement in 1999.

The government has now, to an extent, taken the initiative on economic policy with the release of its major policy statement on Growth Employment and Redistribution. Apart from acting as a statement on fiscal prudence, it has also sent the message to its labour allies that it is prepared to differ on key aspects of policy. The labour movement seems also to have indicated that it will go along, albeit with public protest, on certain issues as long as it obtains its goals on issues that are closest to its interests, such as the recently passed Labour Relations Act.

On issues that are of real importance, as it did in making cuts in the deficit to GDP and the aim to gradually lift exchange control regulations, the government is not prepared to be stalled by labour. However, the government has hesitated in its privatisation programme in response to union demands and has entered into a National Framework Agreement (NFA) with labour on the restructuring of state assets. Labour is not given a veto over the process and the NFA does not grant job security. It rather calls for efforts to redeploy workers between state enterprises. While there might be hurdles for labour on individual privatisations, particularly those with a public policy or strategic value, the government has so far only announced that relatively small public corporations are up for sale, and has gone for the strategic partner approach, as with Telkom prior to a privatisation.

Fiscal and monetary policy has support from markets, the international financial institutions, and is firmly within a "Washington consensus." But the major problems lie more at the local level where development is not being delivered on a sufficiently rapid scale to meet expectations. The major challenges are now more in the areas of building effective local government and delivery of housing.

South Africa's problem remains jobless growth. The rigidity of labour markets in the face of massive unemployment is one of the country's great paradoxes. The recent Labour Relations Act has probably increased the total cost of labour and bolstered the position of unionised labour. Whether the standards imposed by minimum wages in industries and those under the Act are widely applied outside larger firms is not clear.

Drawing Lessons

The agendas for reform in India and South Africa occur in widely disparate environments. India had a far more restrictive investment and trade regime. However, some further questions might be asked and some preliminary lessons drawn.

While the gradualist consensus approach may have its benefits in that the opposition of key groups can sometimes be softened, it is also slow and can be derailed. The uncertainty as to whether or not it has been derailed has serious consequences as occurred with the fall in the rand. It may also entail other payoffs to groups. Reform, even of the shock therapy sort, is very often also negotiated at some stage. A comprehensive shock therapy approach inflicts the pain suddenly, but may bring about union opposition at every turn on second stage measures. Sequencing of policies can be better as demonstrated by the Indian approach. The appointment of expert panels, opening matters for public comment can be an avenue for delay and undermine decisiveness when most required. Even then the report of a commission may not bring about a resolution of a policy issue.

Another widely expressed concern over the consensus approach is very often the narrowness of the consensus and the exclusion of those without lobbying power. The often asked question is, where are the unemployed and rural poor represented in "the golden triangle."

Professor Ajit Singh of Cambridge University has advised India to liberalise reluctantly. Indian policy makers should "drag their feet" as monetary and real instability occur simultaneously if the pace is too fast, he said at a recent conference in New Delhi on "Globalisation and Liberalisation in the Nineties."5 The slow integrators argue that the case of East Asia favours a strategic integration of favouring exports rather than imports and the Mexican crisis of 1995 and the subsequent Tequilla effect demonstrate the danger of trade liberalisation while depending on volatile capital flows. There is also a cost to liberalising too slowly in terms of the protection that is maintained and the confusing signals it may sent to markets.

The stimulus given to labour intensive exports by India's reform programme bears certain similarities to the East Asian pattern of development. With an unemployment rate of close to one-third and the scant possibility of the formal sector creating jobs on a sufficient scale to absorb new entrants into the workforce, South Africa urgently needs job creation strategies. Labour intensive exports and the operation of the Indian informal sector lessons on the informal sector should be closely examined by South African policy makers. In India, only about 3 per cent of the economically active population are employed by private firms with over 10 employees. Around 6 per cent work in the public sector.6

 

Section II

South Africa and India

In the late 1940s, 3 to 4 per cent of India's exports went to South Africa. Today, after a hiatus of sanctions, India's exports to South Africa are only around 1 per cent of the country's trade. Total trade grew by close to 58 per cent from 1994 to 1995 and by 64 per cent in the following year when the first three quarters are compared. Whether trade will continue its initial spurts in the first years since India withdrew sanctions in 1993 is doubtful, but perhaps possible if major contracts are in the offing.

While South Africa has been in deficit for 1995 and 1996, it is not by significant amounts, and follows a large surplus (R82 million) in 1994. Furthermore, in the latest period for which data is available (January-October 1996) South African exports grew at close to 75 per cent, compared to the Indian export growth to South Africa of 62 per cent.

South African exports to India are fairly heavily concentrated in a narrow range of commodities. In 1996, for the period January to October, base metals, largely iron and steel, make up close to just over 30 per cent in value terms, chemicals make up about 25 per cent, mineral products, mostly coal, are around 18 per cent. These are all essentially commodity items with low value added and a relatively low labour content. Diamonds and gold are exported to India through third countries. Indian exports are more diversified but textiles and apparel make up around 22 per cent, agricultural products around 20 per cent, chemicals 13 per cent, and machinery and equipment 8.5 per cent.

Table 8. South African Exports to India

(January-October 1996)

Category Percent Share

Base Metals 31.3

Chemicals and Allied 25.4

Mineral Products 18.3

(Coal)

Textiles and Articles 8.2

Pulp and Paper 6.8

Machinery and Equipment 4.2

Miscellaneous 5.8

Source: South African Department of Customs and Excise

Table 9. South African Imports from India

(January-October 1996)

Category Percent Share

Textiles and Textile Articles 22

Agricultural Products (Rice) 20

Chemicals 13.4

Machinery and Equipment 8.5

Skins and Leatherware 8.4

Base Metals and Articles 7.1

Plastic and Rubber Articles 3.3

Footwear and Headgear 3.2

Vehicles 3.2

Miscellaneous 10.9

Source: South African Department of Customs and Excise

Opportunities for increased Indian exports probably lie predominantly in pharmaceuticals, textiles, software, and small-scale machinery. Due to high levels of competition, economies of scale, and often lax enforcement of patents, India is a competitive producer of generic and sometimes non-generic drugs. The effectiveness of a cartel in South Africa has allowed the maintenance of relatively high prices by international standards. The market for Indian textiles and clothing has expanded rapidly in South Africa and with increasing price sensitivity, should expand. Software and systems design by "body shops" is another industry in which the country has displayed competitiveness. Small-scale machinery aimed at the small holder or informal entreprenueur is another area of trade that could undergo expansion in time as credit is extended more widely in South Africa.

South Africa has no special concessions for the foreign investor and the widespread perceptions of labour unrest and a relatively high crime rate do not give it a competitive position against other locations. Moreover, the Indian government has recently complained that a large number of businessmen who have wished to visit South Africa to investigate opportunities have been denied visas. Nevertheless, there is continued interest on the part of Indian companies exploring for new global opportunities. India and South Africa have accorded each other most favoured nation (MFN) status and have signed treaties on double taxation, protection of investment, and cooperation on trade.

The largest investment to date is that by the UB Group with the purchase of Mabula Game Reserve for R30 million and a 30 per cent stake in National Sorghum Breweries for R70 million. Shriram Industrial Enterprises is to manufacture air conditioners in Durban. Luan Labs from India recently announced, subject to Reserve Bank approval, a joint venture with Quattro Medical to manufacture antibiotics and an anti-TB vaccine.

Last year, the Export-Import Bank of India made a US$10 million line of credit to Standard Bank. Under the terms of the credit, loans can be made for machinery, plant and equipment, and drugs and pharmaceuticals.

About 25 Indian companies have set up offices in South Africa. These range from general traders to firms in the pharmaceuticals, small-scale machinery, bicycles, chemicals, and steel industries, and software industries. Tata Industrial Corporation which manufactures and distributes trucks which are widely used in African countries has an office in Johannesburg. The State Bank of India recently opened an office and the Indian Eximbank is relocating its African office from Abidjan to Johannesburg.

Table 10. South African-Indian Trade

R Millions

1994 1995 1996

(Jan-Oct)

SA Exports 488.2 701.4 891.9

SA Imports 406.2 711.2 844.9

Total Trade 894.4 1,412.6 1,812.8

Ranking in SA Exports 25 24 21

Ranking in SA Trade 24 26 23

Source: South African Department of Customs and Excise

While India's trade position with South Africa might rank relatively low, the South African Department of Trade and Industry gives it a rank of No. 6 in a Trade Potential Index. This is described by the Department of Trade and Industry as, "a simple framework to determine relative market potential and pinpoint overall trends as far as South Africa's recent export performance." India achieved the ranking by gaining 40 out of a possible 50 points for its position as a "medium share, high growth and high share, medium growth market." The second element in the index weighting was potential for manufactured exports. In this category, India did well with a 9 out of a possible 10, something that should greatly stimulate South African interest in the Indian Ocean Rim initiative.

 

NOTES

1. Prem Shankar Jha, "Drawbacks Yes...But Blessings Too," The Hindu, January 26, 1997

2. World Bank, "India: Recent Economic Developments and Prospects," A World Bank Country Study, 1995.

3. World Bank, "India: Five Years of Stabilisation and Reform and the Challenges Ahead," 1996, p. xviii.

4. n. 3.

5. Anirudh Deshpande, "The Whereabouts of Liberalisation," The Financial Express, February 2, 1997.

6. "A Survey of India," The Economist, February 22, 1997, p. 13.