Hamish McRae: How India is becoming the new giant of Asia

What about the other Asian giant? The huge interest in the Chinese boom and all its consequences is now being matched by interest in India - not least because hardly a day passes without some announcement of British jobs being shifted there.

What about the other Asian giant? The huge interest in the Chinese boom and all its consequences is now being matched by interest in India - not least because hardly a day passes without some announcement of British jobs being shifted there.

Yesterday it was the turn of both Abbey National and AXA to move jobs to India. It is a measure of our concern that this should be a significant story, for set alongside the fall in unemployment of 8,300 last month, some "offshoring" should be acceptable. But we worry.

To focus on job transfers, however understandable, is to see only part of the story. From an Indian perspective the shift of US and UK white collar jobs is helpful to the economy as a whole, and in some cities, such as Bangalore and Hyderabad, it is having a big economic impact. (I was in Bangalore last week and it was indeed extraordinary to move from the hubbub of an Indian city to the calm out-of-town campus where young graduates were monitoring the computer systems of a British utility.)

But there is a bigger story of the country's considerable, if uneven, economic progress: India has become the new Asian giant.

That was the title of the Indian part of a presentation yesterday on China and India by Lombard Street Research. Its thesis runs like this. Indian real growth has risen from the 4 per cent average it had from the 1950s to the early 1980s to a current 6 per cent average (first graph). But because population growth has fallen from 2.5 per cent a year to 1.5 per cent, GDP per head is now rising at 4.5 per cent instead of 1.5 per cent - an enormous improvement in living standards. Most recently there has been a sudden spurt in growth: in the third quarter of last year it was an annualised 8.4 per cent, faster, as the Indian media crowed, than China.

Whether this spurt continues is doubtful, for it was in part the result of agricultural output rising following a good monsoon. But the general story of steady improvement stands. The reasons can be gleaned from the next two graphs. There has been a steady rise in the service sector since the early 1980s and particularly since the liberal reforms of the early 1990s. Manufacturing, apart from one or two particular segments such as motor components, has gone nowhere - partly because of ill-designed regulation but also because poor port and airport facilities make it hard to ship goods. Software, on the other hand, can be shipped over the wires. Thanks in part to this, Indian exports have almost doubled as a percentage of GDP over the past two decades, and are currently running up some 25 per cent year-on-year. India now has a trade surplus with China.

There is also, unsurprisingly, a long agenda of things needing attention. The fiscal-monetary mix needs to be rebalanced. The government deficit is around 5 per cent of GDP and has been around that level from most of the past 40 years. The deficit funds low-quality public investment as well as crowding out private investment.

Meanwhile monetary policy is too tight, which makes it difficult and expensive for companies to borrow. And while progress has been made in deregulation, labour controls still inhibit hiring by private sector companies.

The positives, however, also make long list. There is a reasonable expectation that the 6 per cent growth rate can be sustained. Despite all the lapses of governance, the corruption, the destructive regulation and so on, some aspects of the Indian system function better than the country's east Asian neighbours. The banking system is solvent, with non-performing loans making only 4 per cent of GDP, against 41 per cent in China. There is the English language, a competence that will take China a generation to acquire, and the possibility of the creation of special economic zones, like China, with less rigorous labour and other regulation.

Lombard Street Research also feels there are investment opportunities in equities. Certainly the Mumbai stock market is one of the few world-wide that has risen significantly above its 2000 peak. It is now at an all-time high and stands at three times the level of a decade ago (final graph). But there is the feel of the bubble about it. If you say that to people in Mumbai, as I did last week, the reply is those ominous words: "This time it is different." Well, maybe. The market is on a PE of 18, which for an economy growing at 6 per cent plus, does seem quite acceptable. Investors are also protected by the undervalued rupee, which trades at perhaps one-quarter of its purchasing power parity value. That gap will eventually narrow. Meanwhile booms do come to an end, and Mumbai is clearly booming.

Whatever the market does or does not do, though, the economic story surely remains intact. There are considerable concerns about the growing inequalities that have resulted from this spurt of growth, for the south is racing ahead of the north. Still, the experience of economic success is still quite a new one and the wealth that faster growth is throwing out gives the government the political support to carry on its reform programme. The faster the reforms go through, the broader the base for economic progress.

From a UK point of view, expect outsourcing to continue. Not all call centre jobs will go to India of course. Productivity in UK centres is considerably higher and quality of customer satisfaction higher too. Some jobs that have been shifted to India by US companies are being brought back following customer complaints. Where there is a human interface, cultural and accent barriers will remain.

Creativity may also be culturally compartmentalised: what appeals to people in one country may not work in others; witness the way television programmes do not generally cross national boundaries.

But where there is no direct customer interface the story may be different. The management of computer systems can certainly be done as well in India as anywhere else in the world, maybe better. At any rate it would be wise to expect many more announcements of jobs being shifted to India in the years to come.

It would also be wise to assume that, gradually and inexorably, India will play a larger role in the world economy. The views of its businesses and financiers will attract more attention. It will become more appealing as a market, not just as a supplier of cheap services.