The Boom From The Bottom

Though it may not look it on the ground at times, India is one of the few bright spots in a global economy with decidedly dim prospects in 2009. It is forecast to grow at a robust 5 to 6 percent this year—which is faster than it averaged in the 1990s, and nearly double the rate of expansion over the country's first three decades of independence. Yes, its stock market has crashed, unemployment is spiking, swaths of the real-estate market have more than a passing resemblance to Miami Beach and it now turns out that Satyam Computer Services—one of the country's top five IT companies—has been cooking its books. But a one off incident of fraud in the flagship IT sector won't knock the country off the rails. India boasts an unlikely growth driver all its own: legions of poor whose incomes have risen just enough in recent years to create powerful demands for basic goods and services.

The rise of India's aspiring middle—a group that lives above the poverty line but hasn't yet attained true membership in modern consumer society—is hardly a new story. But what's surprising is the resilience of this cohort, and the extent to which it has counterbalanced the global credit crisis and the slump in the global export economy of which India is a key player. In part, this is a consequence of New Delhi's past failures; policymakers were never able to make India the export powerhouse that China has become over the past three decades, so now they don't rely nearly as heavily on growth driven by investment and demand from foreign markets.

Yet Indian planners deserve some credit, too, for avoiding a national addiction to cheap credit and creating "growth multipliers" like roads and telecom networks that now link the country's vast interior to modern cities. "The basic component of domestic demand [in India] is consumer demand, because people still have incomes to earn," says Saumitra Chaudhuri, chief economist at ICRA, an Indian credit-ratings agency affiliated with Moody's. "And those incomes are not substantially influenced by international developments."

The idea that Indian backwardness is a plus may sound absurd. But it is always easier to grow from a poor base, so the fact that India is not yet a major economy is an advantage in a downturn. A population so large that subsists at such a low economic base is a powerful economic driver if it can be mobilized. India's has been, and it is proving resilient to the prevailing headwinds in the global economy. "It's kind of a self-sustaining process," says Subir Gokarn, chief economist at Crisil, the Indian arm of Standard & Poor's. "There's a huge, huge underpenetration of most commodities and services, and you have enough people at the bottom experiencing enough of an increase in income to sustain growth."

So even as middle-class consumption wanes in India—signified by a sharp drop in auto sales, airline travel and fine restaurant dining since mid-2008—domestic demand remains strong thanks to aspiring consumers, many still tied to the farms, who spend their rupees on essentials like soap, medicine and the shoes and clothing that they wear to work. As Gokarn puts it: "If you go back to the economic textbooks, they will tell you that the poorer you are, the stronger your propensity to consume."

The contrast with China, Asia's other economic giant, is stark. Domestic demand makes up three quarters of the Indian economy, compared with less than half for China, which is "why, relative to East Asian economies, India is somewhat insulated from the global trade slowdown," says Shankar Acharya, a former chief economic adviser to the government. Another Indian mainstay—agricultural growth—should remain steady this year, and the services sector, which now accounts for about 55 percent of India's GDP, is expected to be "more resilient" than manufacturing, says Acharya.