Powering up to get to the $30-trillion economy point

India must aim for rapid economic growth using liberal policies that tap the private sector; it should not be affected by criticism of income inequality

First published in The Hindu. Co-authored with Rahul Ahluwalia.

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Commentary on the India growth story often betrays a hint of premature triumphalism. Facts such as our 7%-plus GDP growth rate and India being the fastest-growing large economy in the world today, are repeated to buttress prophecies such as the 21st century being ‘India’s century’. There is a belief that in India’s case, economic growth is inevitable. We must remember that several countries have been here before, at the very juncture where India stands today. However, most have failed to go the last mile and emerge as developed nations. For India to avoid such a fate and become a $30-trillion economy by 2047, as envisaged by the government, we must relentlessly pursue rapid economic growth built on liberal economic policies that harness the private sector. In this pursuit, many would continue to decry India’s income inequality. We must not get swayed or overly affected by such criticism.

Potential of India’s working-age population

The fact is: economic growth is the most effective tool for poverty alleviation and improving living standards. From Independence till 1991, India’s poverty rate stayed at approximately 50% despite socialist policies emphasising poverty reduction. However, between 1991, the year of liberalisation, and 2011, the poverty rate fell to approximately 20%. India’s growth pulled 35 crore people out of abject poverty during this period.

Is India more unequal today than pre-1991? Perhaps, though the data does not show much change in the gini co-efficient. But are more Indians better off than ever before, especially those at the bottom of the pyramid? Yes. In any fast-growing economy, there are bound to be a few people who generate a lot of wealth — wealth creation is inherent to economic growth and the most crucial incentive for entrepreneurship. It is also, simultaneously, the vehicle that improves everyone’s lives. We should focus on the latter.

Now that we have somewhat placated the inequality doomsayers, let us look at a few more numbers — less triumphal and more sobering.

The easier gains from the economic reforms of the 1990s have been realised. India’s high-growth years of 2000-10 were led by an IT services boom that spawned an affluent middle-class. However, 46% of our labour force remains in agriculture, characterised by low productivity and under-employment, contributing just 18% of our GDP. Another inconsistency with the trend observed in countries that grew rapidly is India’s female labour force participation rate (FLFPR) — just 37%. It’s, in fact, a figure that masks more than it reveals, as it was 26% in 2019, and post-COVID-19, several women have gone back to work as agricultural labour. Compare this with the FLFPR in China, Vietnam, and Japan, all between 60%-70%, and we know exactly where we need to be.

So, how do we unlock the immense potential of India’s working-age population – sized 950 million, only half of whom are employed — and ensure employment equity? Low-skilled, employment-intensive manufacturing with a strong focus on exports is how South Korea, Taiwan, Japan, and Vietnam came to be called the ‘Asian Tigers’, regularly achieving double-digit growth between 1960-90. Their particular brand of economic policy, focused on rapid export-oriented industrialisation, was premised on the understanding that growing exports require focusing on your advantages while being receptive to imports in other areas. Net-net, openness is needed for growth, as it was for India — between 1990 and 2013, exports as a percentage of India’s GDP grew from 7% in 1990 to 25% in 2013. Today, as India tries to capitalise on the China+1 moment to attract global manufacturers and their supply chains, and further augment its exports, we must resist the temptation of putting up huge tariff walls for imports.

The middle-income trap

In our hope of protecting industries from foreign competition, we risk giving rise to heavily coddled and inefficient manufacturers. The lure of import tariffs must also be resisted for how they will disadvantage Indian manufacturers, say a mobile phone maker who has to import components from China. Tariffs will artificially inflate the prices of the many parts needed for their finished phones, ultimately raising the prices of downstream Indian exports. It is the proverbial vicious circle that India should steer clear of, especially as the middle-income trap looms ahead.

Of 101 middle-income economies in 1960, only 23 had attained high-income status by 2018, a stern reminder of the challenge that awaits India, still a lower-middle-income economy that must graduate to middle-income status by the early part of the next decade, and then go further. There are many reasons countries get ensnared in the middle-income trap — these can be broadly summed up as economies losing their edge in lower-end sectors and not being competitive enough with more prosperous countries in high-tech sectors.

India’s problem is peculiar: We have been unable to leverage our surplus labour to grow in low-end sectors. The IT boom gave us an alternative pathway to growth, but the headroom there is limited. This is damaging as moving up the value chain in manufacturing is built on a foundation of low-tech manufacturing — ecosystems of managers and workers who get things done while ensuring scale and quality, form the backbone of any industrial sector. Even government functionaries who have helped develop simple, low-tech manufacturing at scale will find it easier to graduate to more complex challenges later.

India’s social sector and civil society should view campaigns that paint factories (hubs of low-tech manufacturing) as sweatshops, decrying their work conditions and low wages, in this regard. Forcing employers operating on wafer-thin margins to spend more on employee welfare would not improve the quality of manufacturing jobs as much as it would result in the erasure of such jobs altogether for those with very few options for employment outside of farm work.

Avoiding the middle-income trap requires a market-led economy that lets private enterprise thrive, without the government, or perceptions of factory jobs, getting in the way — Minimum Government, Maximum Governance. The Indian state must continue delivering on this decade-long promise in earnest, which means that reforms to enhance ‘ease of doing business’ must not stall.

A cluster-led industrial model

The government must also double down on its impressive achievements in revamping India’s hitherto creaky infrastructure by building industrial clusters that are on a par with those in China and Vietnam, replete with plug-and-play infrastructure and ancillary ecosystems, for education, health care and entertainment, which would attract both employers and workers. Today, Indian States face cost disabilities for power, logistics and financing, coupled with low labour productivity when compared to countries such as Bangladesh, China and Vietnam, and a compliance burden that deters new players from entering and the existing ones from expanding. Several countries have faced similar challenges; hence, a cluster-led model of industrial development, whereby stringent regulations are relaxed in designated areas, helps create a favourable environment for manufacturing.

Time is of the essence; the government must leverage the strengths of the private sector and its own penchant for reforms to focus on low-skilled manufacturing that can employ multitudes of people in sectors such as electronics assembly and apparel, as the opportunity that needs to be made more lucrative for scores of Indians. Inter-State migration and urbanisation would be important proxies here, as would FLFPR and a decline in agriculture’s share of total employment, to assess whether we are on the right path to becoming a $30-trillion economy by 2047.

There is a phrase often repeated in policy circles about India — “It’s a country with mouth-watering opportunities and eyewatering challenges.” We think the challenges here are the most exciting opportunities. The reward for breaking down these barriers to growth would be an unfettered path to prosperity till we fulfil our tryst with destiny. It is time to be as forward-thinking and ambitious as befits a Vishwaguru.