“India will be the world’s fastest-growing major economy in 2023.” — International Monetary Fund, December 2022.
“India will drive a fifth of the world’s expansion this decade.” — Morgan Stanley, January 2023.
“Don’t Bet Against India – New Delhi is brewing a comeback.” — Foreign Affairs Magazine, February 2023.
The outlook for major western economies is projected to be bleak over the next decade. And China is grappling with a variety of concerns such as Covid-19 management, declining population, and strenuous geopolitical relations. But India, with its increasing consumption, young demography, and quest to be a $10 trillion economy by 2035, continues to grab positive headlines. Its growth story euphoria coincides with the year of the G20 presidency, its circumstantially elevated geopolitical stature amid Russia’s invasion of Ukraine, and continued escalations between the US and China.
Prime Minister Narendra Modi has urged the nation to drive toward becoming a developed nation in the next 25 years. The government continues to lead the spendings in infrastructure development, with a proposed capital expenditure of Rs 10 lakh crore for FY2024.
Lessons from the past
At large, the global capital, political leadership, Indian industries and citizens expect India to materialise its dream. The government claims there has never been a better alignment of factors in favour of India’s interests. So, is India’s prime time here? Can we put behind the challenges of our size, scale, and decades of underperformance in GDP growth to graduate to the next level of prosperity? While the answers are anyone’s guess, this is not the first time that India has been hyped to be the leading light of global growth.
In the mid-1990s, the world touted India to be the ideal manufacturing hub but the red-tape culture and sluggish political economy passed on this opportunity to China. During the 2008-09 global financial crisis, the country gathered a strong momentum under Prime Minister Manmohan Singh (much like today). While the western world faced the Lehman Brothers crisis, India emerged as a fundamentally strong economy, aiming to undertake an export and infrastructure-led boom. But rather we created a pile of bad debts and non-performing assets (NPA), which rendered a stressed banking sector for decades to follow.
In 2014, with Modi’s arrival, India hoped to have the Ronald Reagan and Margaret Thatcher moment of pro-industry reforms. The BJP government, however, failed to deliver in sectors of land, labour and agriculture; finally stumbling the economy with its demonetisation decision.
So, every time the India growth story has developed, either our political and policy leadership or our cultural lack of long-term thinking has managed to punt the opportunity. The country’s working age (15-64) population is expected to be over 90 crore in 2023. A mere 1 per cent drop in GDP results in the loss of nearly 40 lakh jobs. To keep its working population employed, a growth rate of 7 per cent plus is a non-negotiable necessity. In contrast to previous times, we simply cannot afford to overlook the current opportunity. There are valuable lessons from the past that we must take heed of.
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Sell the reforms
Producing ready-to-wear garments for exports is 40 per cent more expensive in India than Bangladesh, which is now world’s second largest garment exporter. While India seems to have all ingredients for success including demand, design, raw materials, the archaic labour laws prevent manufacturers from achieving scale.
Similarly, while over 60 per cent of our population continues to be engaged in the agricultural sector, their contribution to GDP is about 17-20 per cent, implying very poor per capita incomes for this population. The lack of reforms has led to farmers owning smaller lands, and they cannot leverage any economies of scale.
The Indian political economy can be broadly termed as ‘naturally populist, seldom liberal.’ Economically liberal ideas and reform agendas are seldom implemented, but major public policy and spending flow into popular schemes.
The term socialist is part of India’s constitutional preamble and it is a general understanding that as a society, we like a pro-poor and anti-rich approach, in which the rich are perceived as evil. The country’s economy has seen significant reforms kick in only when the government has had its back to the wall. The first set of reforms came in 1991 with only a few days of foreign reserves left, and then in 2001 under the NDA government, which inherited a slowdown. Reforms usually come with a lag and don’t produce immediate electoral benefits. Therefore, political parties don’t sell them and cater to populistic tones of ‘gareeb ke saath’ to strike resonance with the common citizen.
Unfortunately, there is no shortcut to a nation’s long-term economic prosperity, and it has to traverse the reforms route. While Modi has intended to execute reforms over the past eight years, he has lacked the finesse and last mile credibility to get them implemented. It was recently seen with the much-needed agricultural reforms, which were critical for India’s economy as well as its citizens’ nutrition needs. But the government lacked the clinical skills to convince all stakeholders and ended up polarising the topic, rendering it untouchable for years to come.
PM Modi currently banks upon more political capital than ever experienced in the past decade by any prime ministers. He seems to operate with a non-permeable Teflon coat, and possess the connection with the nation to sell the idea of reforms to the masses. We need him to raise the bar, avoid defaulting to polarising instincts, and leverage his deep political resources to build a pro-reform public mindspace.
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Address the fundamentals
India has one of the biggest gaps between rich and poor. Nowhere else is the super wealthy growing faster than in India, as they control 22 per cent of national income (vs 14.8 per cent in China). Over the past decade, the Indian stock market has generated over Rs 105 trillion of wealth, but of which Rs 85 trillion has been generated by only 12 companies. Such concentration of wealth at the top is typical of low-growth and low-trust societies like ours, and can be compared to nations like Mexico and Brazil.
On the more concerning front, the size of India’s consuming middle-class remains fairly small. While there is a large debate on the true size, the latest PEW research projects that only 66 million, or 5 per cent, Indians will meet the global purchasing power criteria to be termed as middle class. This population is heavily concentrated in urban agglomerations and represents the true addressable market opportunity for modern consumer businesses. For most of the 72 per cent of the country’s rural population, access to cellphones and home appliances has increased. But their educational skillset has a phenomenal mismatch with the demand.
About 54 per cent of Indians in the 20-29 age group are currently unemployed since the manufacturing sector growth is stagnant, and these young people lack the skill set to participate in the services sector. Another fault line is the participation of women and minority groups, which has been significantly lower. Only 9 per cent of Indian women participate in the formal jobs sector owing to discriminatory barriers at the workplace, according to Bloomberg News. Similarly, while over 14 per cent of the country’s population is Muslim, they account for only 2.6 per cent in corporate roles and have inferior per-capita income levels.
We often draw parallels with China, and it is important to note that while the over-spending on infrastructure initiatives has now started to become a negative drag on its economy; the large consuming middle-class has emerged to be its true asset. The ‘Make In India’ campaign aimed to achieve manufacturing as 25 per cent of GDP but only managed to attain a 17.4 per cent share in 2020, which is not significantly better than a 15 per cent share in 2001.
Experts argue that India’s growth will be better propelled by services and specialty manufacturing compared to conventional industrialisation like in China. This gets validated as the services economy is over 50 per cent of our GDP and has a year-over-year growth of10 per cent.
Top-level wealth concentration, small size middle class, lack of employability for rural youth, and lower representation of women and other marginalised groups—all are intertwined. If we do not address these issues, we will stunt the growth of India’s middle-class. That will in-turn lead to more and more wealth accumulation by the few at the top.
Despite the Indian government’s impressive performance in physical and digital infrastructure projects, its investment and attention toward skill development and middle-class expansion initiatives have not been proportional. To avoid creating a few winners and many losers, and to achieve the potential true to the size of our population—we need the engines of rural youth, women and minority groups’ labour force to fire along.
The author works on expansion of e-commerce in emerging countries, writes on global economics and politics. Views are personal.