There's this interesting defence that's trotted out-by politicians, bureaucrats, and economists alike-whenever there is criticism of the slow progress of economic reforms in India. Thank God, we haven't opened up the economy entirely, they say. That is what has insulated us from the damaging effects of the global slowdown, the war in Afghanistan and a lot more.

Thank God indeed. But what does that mean for India's place in the world economy? Says National Institute of Public Finance and Policy's D.K. Srivastava, ''The Indian economy is at a threshold now. It has to decide whether it wants to revert to the introverted policies of the past or take on the challenge of globalisation.'' Actually, the decision may have already been made for India. Notes IIFT's B. Bhattacharyya, ''The integration with the world economy has reached a critical mass.'' There's no going back now.

It's just a question of whether India can hold its own in the cut-throat global market? Indeed, as India gets ready to take on global challenges, it faces a far more hostile economic environment than existed in the early nineties when it first decided to touch base with the world. The world economy is in decline, protectionism is growing globally, and China has joined the World Trade Organisation, posing a serious threat to India's competitive advantages.

What then are the strengths India can rely on? Interestingly, India's biggest bane-its population-could well turn out to be its most significant plus-point 10 years down the line. Most developed countries will face serious problems as their population greys. India, with its abundant labour, should be a natural choice for setting up manufacturing bases. China has leveraged that advantage and India needs to recover lost ground.

But it can't do that unless it pushes ahead with liberalisation. Despite the burst of delicensing in 1991-92 and the various incremental reforms since then, the Indian economy is still highly regulated. Each industrial unit is still visited by around 60 inspectors a month. Rigid labour laws don't allow for flexibility in operations. Infrastructure is still pathetic. Dealing with all this is going to prove an uphill task.

Let's not make too much of the services sector as an engine of growth. Yes, it is driving the economy right now. But remember that its growth has come on top of a small base. So, India is definitely not in a position to ignore its manufacturing sector altogether.

And the manufacturing sector cannot flourish as long as policy-makers drag their feet on second-generation reforms. Yes, there is greater acceptance of reforms now than there was 10, even five years back. Unfortunately, the myriad rent-seekers created by the old system (politicians, bureaucrats and industry groups) are still putting up stiff resistance. They don't want reforms to go beyond what is needed to plug the fiscal deficit or stave off yet another foreign exchange crisis. Vibrant growth can never based on such half-hearted convictions. Now is when India should answer the question staring it in the face: should it move forward for growth or move backward for sloth and inefficiency?

Can India Become A Services-Led Economy?

Infotech and IT-enabled services: a big plus

It is now fashionable to talk about services being the saviour of the Indian economy. The services sector not only accounts for 47 per cent of GDP, it is also the fastest-growing sector of the economy. The report of the Task Force on Employment Opportunities also points out that 70 per cent of the growth in employment opportunities in the next decade will be in the services sector. So, can the services sector pitchfork India into the top 10 economies of the world?

Remember, India has leapfrogged one stage of development-moving straight from an agricultural economy to a services economy, skipping manufacturing. Says S. Bhide, Head (Macro-Economic Monitoring and Forecasting) at the National Council of Applied Economic Research: ''Services-led growth has its limitations. We will require much greater levels of skills to sustain growth in that area, especially if we are meeting the export demand.'' But services will still be one of the key drivers of the economy, with the it, biotech, tourism, health, financial services, and education being potential high-growth areas.

Tourism: the great hope that will, hopefully, be

Information technology is the new hope for the Indian economy, growing at 50 per cent a year. Seventy per cent of its earnings are from exports. India has the capability of providing a range of e-enabled services-call centres, medical transcription services, back-office accounting. A Nasscom-McKinsey study predicts that the turnover of the it sector could touch $80 billion by 2008, of which $50 billion will come from exports. But the it engine could sputter given the low bandwidth and teledensity, apart from the erratic and poor quality of power supply.

Knowledge-based industries like biotech, pharmaceuticals, and health services are other growth areas. But given the skills required, the appalling state of education in India and the lack of spending on R&D could queer the pitch.

Travel and tourism is one of the fastest-growing sectors in the world and has tremendous spin-off effects on the economy. India has immense potential for both international and domestic tourism, provided tourist infrastructure is improved, and visa restrictions eased vastly.

Clearly, India needs to identify various sectoral problems and tackle them if it wants to join the big league. Says B.B. Bhattacharya, Director, Institute of Economic Growth: ''It is not the question of whether we are ready for a services-led economy. The truth is that it's our only hope.''

-Seetha

The Indian Economy: Two Possible Scenarios

Way back in 1700 ad, India and China were the world's top economies. India's share in world income was 22.5 per cent, just a step behind China's 23.1 per cent. Today, India's share in world income stands at around 5 per cent, half of China's, which accounts for around 10 per cent. Can India ever make it big?

BEST CASE
India concentrates on developing its natural advantage in services. It focuses on communications, biotech, and technology. And it increasingly pushes exports in these sectors. It doesn't ignore the manufacturing sector, but pays close attention to areas like hydro power, cement and pharmaceuticals. It also sorts out issues related to infrastructure, and leverages its demographic advantage: most first world economies (barring the US) are greying. Thanks to all this, India will grow at around 6 per cent till 2006.

WORST CASE
Indian policy-makers go slow on economic reforms and blindly oppose globalisation, thereby blocking market access for our goods and services. Infrastructure bottlenecks, especially in the power sector, continue. Education is still caught up in politics and little attention is paid to research and development. China, meanwhile, takes advantage of every opportunity that comes its way.

-T.R. Vivek