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.

Despite the financial crisis, the nation’s IT sector managed to grow some 20

percent in 2008, according to India’s National Association of Software and

Services Companies, and IT companies have already extended 100,000 new job

offers for 2009. "For whatever reason, China has been highly focused on the

export market, while Indian business has been highly focused on the domestic

market, and their exports have been incidental," says Chaudhuri. Which makes

India, more than China, a master of its own destiny.

The conventional wisdom has always held that India failed to become an

export-driven dynamo on the Chinese model because its democratic system

couldn’t deliver the hard infrastructure and soft labor laws needed to

manufacture competitively. While there is some truth to that, what is often

overlooked is how much India’s current growth multipliers—all of them linked

to infrastructure—resemble China’s in the 1980s.

One example: India’s ambitious program to expand the national highway

system, launched in 2003, which is now adding about 100 kilometers of

highway per day to the grid. Each new strip of pavement links additional

villagers to urban markets, allowing them to fetch more for what they grow

or make and to travel farther afield for wage-paying jobs. Capitalized at a

whopping 5 percent of GDP in 2000, India’s rural roads program will

ultimately connect all Indian villages of more than 500 people to one

another with all-weather roads. Fewer than half of these villages had roads

of any sort when the project started. Similarly, in a six-phase national

project, the National Highway Authority plans to add or upgrade nearly

30,000 kilometers of highway, which would expand the existing system by a

third.

Telecommunications has made faster inroads. In 2008 the subscriber base for

India’s national telecom network topped 350 million people, and India’s

telecom market is now growing faster than even China’s. Charges have dropped

to less than 50 U.S. cents per call. That connectedness has a huge potential

impact on incomes in a job market "extremely sensitive to how quickly one

can get information," says Gokarn. There’s also the IT sector itself to

consider. It has created 1.8 million jobs directly over the past decade, and

as many as 6.5 million more support jobs for drivers, security guards and

gofers with primary or high school educations. That has put rupees into the

hands of people "more likely to spend it rather than save it," says Gokarn,

and though job creation will slow as the IT sector cools off, the huge

workforce creates a good deal of momentum.

India’s bottom-up boom can’t drive the economy at full speed, to be sure.

But it is largely immune to the downturn that’s evident higher up the

consumer chain. The stock bust hasn’t affected the aspiring underclass

because its members are not invested in the markets, and they’re not to

blame for the drop in auto sales because they’re too poor to afford cars.

Even the housing bust is far removed from them; despite the glut of top-end

condos in places like Mumbai and New Delhi, India as a whole is suffering an

acute housing shortage. The problem: construction companies all aimed for

the top of the market, leaving the lower tiers underserved. According to the

National Planning Commission, urban India needs an additional 24.7 million

ordinary homes to satisfy current demand. As evidence of this unquenchable

thirst, when the Delhi Development Authority held a lottery last year to

find buyers for 5,000 affordable flats it built in the city, some 500,000

applications flooded in.

The mismatch illuminates India’s way forward. Like many other governments,

New Delhi recently announced a major new spending package aimed at

bolstering growth. And it, too, seeks to spur domestic demand. Yet the main

target isn’t the urban middle, as in China or the United States, but the

poor. In October, Parliament approved additional spending of about $50

billion (or 4.5 percent of GDP) to boost salaries of government workers,

waive farm loans, further fund the rural-employment-guarantee program and

finance petroleum bonds so that oil and fertilizer companies can keep prices

low. "While there are legitimate concerns about the long-term impact of some

of these measures," says Gokarn, "they will undoubtedly help boost

consumption spending, particularly by lower income households, which in turn

will help shore up growth in the immediate future."

India avoided a U.S.-style housing bust and is better positioned to pump

money into the cash-starved financial system today because its much-maligned

central bank was never wooed by the allure of easy money—no matter how

loudly industry clamored for faster growth. When the central banks of other

countries were essentially offering free money, India’s realized that, as a

democracy of mostly poor voters, it couldn’t afford to grow at 10 percent a

year if that meant skyrocketing prices for essential commodities like rice

and flour. For that reason, the central bank constricted the money inflating

the real-estate bubble (and prices for everything else) by raising interest

rates to a peak of 12.5 percent last summer, which earned it criticism for

being out of step with more aggressively growth-oriented central banks.

Because of this, India has ample ground clearance to lower rates and reduce

reserve requirements for banks to spur growth and avert deflation.

The private sector is in pretty solid financial shape, too. The central bank

kept a close eye on both state-owned and private banks, preventing them from

leveraging to perilous heights by keeping the cash reserve ratio high,

limiting the use of securitizations and derivatives and essentially barring

the off-balance sheet vehicles that U.S. banks used, disastrously, to hide

their debt. As a result, India’s banks aren’t sitting on a mountain of bad

loans, which makes them freer to lend to companies in need. Indian

companies, cognizant of the cash crunch that burned them in the late 1990s,

didn’t overextend this time, either. "[One] great source of strength is

India’s corporate sector, who have much stronger balance sheets [than in the

past]," says Chaudhuri.

One sign of that is companies that are putting their wealth to work. In

December, India’s Wipro Technologies purchased Citigroup’s captive IT

services firm Citi Technology Services for $127 million in cash, and in

October, Tata Consultancy Services was able to buy Citi’s business process

outsourcing business, Citigroup Global Services, paying $505 million. Both

moves suggest that reports of the IT sector’s demise in India are greatly

exaggerated.

The biggest risk to India in 2009 at this point may not be the global

economy but domestic politics. Prime Minister Manmohan Singh’s United

Progressive Alliance will see its term expire in May, and India’s election

rules mean that he can no longer enact any significant policies—a measure

adopted to prevent incumbents from stacking the deck with populist sops.

That means as much as five months of paralysis, precisely when speedy,

creative action is the order of the day. Moreover, though the nemesis of

Singh’s Congress party—the Bharatiya Janata Party—mostly favors similar

policies, a change in government would likely result in some further slowing

of infrastructure projects that are already running behind schedule. And

elections in India can be tricky. In the last one, the BJP-led National

Democratic Alliance lost despite racing economic growth, because poor voters

rejected the BJP’s campaign claims of an "India Shining."

With the light bulb flickering, Singh’s Congress may face an even bigger

challenge winning them over. The poor don’t care how much faster than other

nations India is growing, only whether their lives are better than they were

five years ago.