The writer is chair of Rockefeller International
Today, India marks its 75th birthday, no richer relative to the rest of the world than it was at independence, but very much on the upswing.
India started out as the world’s sixth-largest economy, fell to 12th by 1990, and has since staged a comeback — to sixth place. Its average income was 18 per cent of the world average at independence, but that figure fell until the early 1990s, before climbing back up — to about 18 per cent.
This distressingly V-shaped development path is a legacy of India’s original choices. In other Asian nations, the state often granted people economic freedoms first, political freedoms later, as the country grew richer. In India, the state granted a poor nation political freedom first but in a socialist economy that has never fully embraced economic freedom.
India’s comeback started in the 1990s as, recognising its early failures, it began to ease socialist controls — partially — and to allow the private sector more room to breathe. The nation has moved up gradually in the Heritage Foundation’s economic freedom rankings, but still falls in the bottom 30 per cent.
As late as 1990, India and China were rough equals, in terms of total gross domestic product and average income. Both pushed economic reform. But China pushed harder, encouraging mass migration to more efficient jobs in cities, and mass firings at inefficient state factories. India since 1990 has seen GDP grow tenfold to $3.2tn and average income per capita rise more than fivefold to $2200. But China grew much faster on both measures, and today it is five times bigger and richer.
The era of miracle growth — 7 per cent or more — is now gone. Rising debt, declining trade, falling productivity and the decline in working-age population growth are slowing economies everywhere, including in China. As growth peaked in the mid-2000s, more than 50 economies were expanding faster than 7 per cent a year; in the 2010s that number fell to fewer than 10, mostly small ones. Today, a more plausible target for lower-income economies is 5 per cent.
That’s do-able for India. One of its main strengths is a strong entrepreneurial culture, which is reflected in one of Asia’s oldest stock markets. It has generated 12 per cent annual returns in dollar terms since 1990, more than twice the global average, drawing in more and more investors from all over the world.
Over the past decade, nearly 800 emerging market stocks rose by 500 per cent to a market value of more than $1bn. Of those, more than 150 are in India, the second-highest figure after China. Moreover, this group accounts for nearly 40 per cent of India’s $1bn-plus stocks, representing the highest concentration of big success stories in emerging markets.
Fortunes have followed this trend. The number of Indian billionaires rose last decade from 55 to 140 — now third highest after the US and China. While this fuels concern over inequality, dig deeper and it reflects competitive dynamism rather than stagnation at the top.
Strikingly, more than two out of three Indian billionaires are new to the list in the 2010s. Of the 55 on there at the start of the decade, more than a third fell off. And many of the new billionaires rose in productive industries such as technology and manufacturing, which were previously a weakness for India. But, quietly, manufacturing has been expanding and now amounts to 17 per cent of GDP — no match for China but progress all the same.
Alas, India’s private sector vitality is matched by its public sector incompetence. State-owned companies accounted for 25 per cent of the Indian stock market a decade ago, but that has fallen to 7 per cent, and not due to state-led privatisation. Government mismanagement was destroying value and taxpayer wealth.
In other ways, however, the government has made progress. In 1985, then prime minister Rajiv Gandhi observed that of every 100 rupees spent on the poor, only 15 rupees made it to those in need. The rest was lost to corruption and bureaucracy. Now, the government is digitally transferring benefits to recipients directly, via apps that have expanded rapidly to cover much of the population.
The more efficient welfare state reflects a digitising economy. Revenues from various digital services have a growth rate of faster than 30 per cent, above the emerging world average and nearly triple the developed world average — a welcome boost in a time of slowing global growth.
To grow faster than 5 per cent, India would have to adopt more radical reform. Only 20 per cent of women are formally employed and doubling that to 40 per cent — merely average for a lower-middle income country such as India — would be transformational. So would encouraging internal migration to better jobs, as China did, given that nine out of 10 rural Indians still live in the district where they were born. But India is as diverse and democratic as China is homogeneous and autocratic: imposing disruptive reform is not on the cards.
More likely, 5 per cent growth is now the base case. Even at that pace India will be a breakout star in a slowing world: on track to surpass the UK, Germany and Japan to become the third-largest economy by 2032. At that point India may not yet be a middle-income country, but it will be moving in the right direction, rising gradually in the world.
Source: Economy - ft.com
