Powering up to get to the $30-trillion economy point
- Commentary on the India growth story often betrays a hint of premature triumphalism.
- 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.
India’s working-age population
- 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.
- 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%.
- Even this is 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.
- 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.
- 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
- 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.
Issues with India
- 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.
Way forward
- 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.
- 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 of 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.
- 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
- 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.
- 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.
- We must relentlessly pursue rapid economic growth built on liberal economic policies that harness the private sector.