Today's Editorial

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

Relevance: GS Paper III

Why in News?

Commentary on the India growth story often betrays a hint of premature triumphalism.

More about the issue:

• 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. 
• 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, it 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.

Potential of India’s working-age population:

• Between 1991, the year of liberalization, 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 realized. India’s high-growth years of 2000-10 were led by an IT services boom that spawned an affluent middle-class. 
• However, 46% of India’s labor force remains in agriculture, characterized 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 labor force participation rate (FLFPR) — just 37%.
• India has immense potential of India’s working-age population – 950 million, only half of whom are employed.

Steps to use this potential:

• 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. 
• 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 capitalize on the China+1 moment to attract global manufacturers and their supply chains, and further augment its exports, it must resist the temptation of putting up huge tariff walls for imports.

The middle-income trap:

• 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: India has been unable to leverage its surplus labour to grow in low-end sectors. The IT boom gave India 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.
• 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.

Way Forward:

• 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. 
• A cluster-led model of industrial development, whereby stringent regulations are relaxed in designated areas, helps create a favorable 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 urbanization would be important proxies here, as would FLFPR (Female Labour Force Participation Rate) 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 eye watering challenges.” Experts 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 fulfill our tryst with destiny. It is time to be as forward-thinking and ambitious as befits a Vishwaguru.