India is currently the world’s fastest-growing economy, and many analysts and commentators are optimistic about its growth prospects over the next few years. Reasons for optimism include stronger technological foundations, diversifying exports, improved infrastructure, and increased foreign portfolio and direct investment. The latter trend has been fuelled partly by global investors moving away from China, with India’s stock market rising while China’s fell. On the side of caution, India’s investment to GDP ratio is still not much above 30%, below its level in its peak growth years, and well below that of China or the earlier East Asian “miracle” economies when they achieved double digit growth rates. To get a sense of what that means, India’s projected annual growth is 6-8%, which is approximately 5-7% in per capita terms. At these rates, it will take India 20-30 years just to reach China’s current level of per capita income. That is not a trivial goal, but far short of what India’s leaders want to project as achievable.
Also on the positive side, India’s inflation rate and its public sector fiscal deficit are both in relatively safe territory: although both are somewhat higher than optimal, this is a post-Covid condition shared by numerous economies. But some of this macroeconomic stability has come at the cost of further shortfalls in human capital levels—the health and education status of many of India’s people remains well below where they can flourish and be productive participants in the economy. India’s financial sector also remains relatively inefficient—some of the high savings and investment rates of the early 2000s came with poorly-directed investments, problems in completing projects, and stress on financial institutions as a result. In this respect, foreign direct investment is preferable to portfolio investment, since it can come with know-how. There are shortages of knowledge and skills at all levels. Therefore, openness to foreign sources of these inputs, and even more vital, to foreign providers of domestic skilling and training, seems to be a major requirement of policy in the immediate future. India needs to create relatively more productive jobs much more quickly than it has achieved at any stage in its post-independence experience, and jump-starting that process has to be a prime policy objective. Getting technology, investment, financing, education and skilling all aligned will be needed to make any progress in this direction.
The India-China comparison remains instructive for thinking about India’s economic future. China’s growth is slowing for multiple reasons. One is its leader’s turn away from prioritising the economy to enhancing China’s non-economic clout internationally, as well as strengthening internal political control. India, as a federal democracy—albeit with many centralising features—has had a completely different political dynamic than China. National political control has required winning state elections, and concerns about national unity have been more salient and more difficult to resolve, given the constraints of a democratic system. On the other hand, fiscal centralisation has been used in India as a lever of political influence and control, in ways that have not been as necessary in China.
Also Read Inside track by Coomi Kapoor: Priyanka hesitates Ringside view by Tushar Bhaduri: Leagues-vs-country conflict finally reaches India Pilgrimage commerce and sustainability Evaluating Mintzberg’s 10 schools of thoughts for strategy formulation Ultimately, aside from the challenges of pure economic policy, one of India’s biggest challenges will be how its politics evolves. The upcoming election may cement national political control for the ruling party, along with increased control at the state level. It is possible that relieving the pressure of achieving that firmer political control will lead to more open and inclusive economic policies. India certainly has the potential to take advantage of its diversity, and the creativity that comes with being unafraid. On the other hand, political control can also lead to a more assertive pursuit of ideological goals which conflict with openness and inclusiveness, and be inimical to growth. While East Asian examples may suggest that democracy is not needed for miracle growth rates, extrapolating on that front may have limited validity. A different dimension of political economy is the role of the extremely wealthy. Even if political control is cemented, the influence of the superrich can become structurally embedded, so that the gains from growth go disproportionately to a very few. Inevitably, this leads to stunted growth in the future.
In the abstract, good economic policies and political economy challenges are similar across many countries and situations. The devil is in the details, and how the particularities of each country and each period shape policymaking. Argentina, Mexico and Turkey are just three countries with per capita incomes that now are similar to China’s, but were once relatively richer. Each of them has had a list of economic policy mistakes, often stemming from political choices. There are many ways to go wrong, and often the path to sustained growth is narrow. Staying on that narrow path requires immediate focus as well as strategic intent and clarity. In the case of India, these qualities are needed at multiple levels, not just at the centre. Aside from other countries’ examples, even the case of the second UPA government illustrates how easily things can go wrong. So, India’s economic trajectory in the next few years is contingent on many factors. Over a billion lives will depend on how those factors play out.
India is currently the world’s fastest-growing economy, and many analysts and commentators are optimistic about its growth prospects over the next few years. Reasons for optimism include stronger technological foundations, diversifying exports, improved infrastructure, and increased foreign portfolio and direct investment. The latter trend has been fuelled partly by global investors moving away from China, with India’s stock market rising while China’s fell. On the side of caution, India’s investment to GDP ratio is still not much above 30%, below its level in its peak growth years, and well below that of China or the earlier East Asian “miracle” economies when they achieved double digit growth rates. To get a sense of what that means, India’s projected annual growth is 6-8%, which is approximately 5-7% in per capita terms. At these rates, it will take India 20-30 years just to reach China’s current level of per capita income. That is not a trivial goal, but far short of what India’s leaders want to project as achievable.
Also on the positive side, India’s inflation rate and its public sector fiscal deficit are both in relatively safe territory: although both are somewhat higher than optimal, this is a post-Covid condition shared by numerous economies. But some of this macroeconomic stability has come at the cost of further shortfalls in human capital levels—the health and education status of many of India’s people remains well below where they can flourish and be productive participants in the economy. India’s financial sector also remains relatively inefficient—some of the high savings and investment rates of the early 2000s came with poorly-directed investments, problems in completing projects, and stress on financial institutions as a result. In this respect, foreign direct investment is preferable to portfolio investment, since it can come with know-how. There are shortages of knowledge and skills at all levels. Therefore, openness to foreign sources of these inputs, and even more vital, to foreign providers of domestic skilling and training, seems to be a major requirement of policy in the immediate future. India needs to create relatively more productive jobs much more quickly than it has achieved at any stage in its post-independence experience, and jump-starting that process has to be a prime policy objective. Getting technology, investment, financing, education and skilling all aligned will be needed to make any progress in this direction.
The India-China comparison remains instructive for thinking about India’s economic future. China’s growth is slowing for multiple reasons. One is its leader’s turn away from prioritising the economy to enhancing China’s non-economic clout internationally, as well as strengthening internal political control. India, as a federal democracy—albeit with many centralising features—has had a completely different political dynamic than China. National political control has required winning state elections, and concerns about national unity have been more salient and more difficult to resolve, given the constraints of a democratic system. On the other hand, fiscal centralisation has been used in India as a lever of political influence and control, in ways that have not been as necessary in China.
Ultimately, aside from the challenges of pure economic policy, one of India’s biggest challenges will be how its politics evolves. The upcoming election may cement national political control for the ruling party, along with increased control at the state level. It is possible that relieving the pressure of achieving that firmer political control will lead to more open and inclusive economic policies. India certainly has the potential to take advantage of its diversity, and the creativity that comes with being unafraid. On the other hand, political control can also lead to a more assertive pursuit of ideological goals which conflict with openness and inclusiveness, and be inimical to growth. While East Asian examples may suggest that democracy is not needed for miracle growth rates, extrapolating on that front may have limited validity. A different dimension of political economy is the role of the extremely wealthy. Even if political control is cemented, the influence of the superrich can become structurally embedded, so that the gains from growth go disproportionately to a very few. Inevitably, this leads to stunted growth in the future.
In the abstract, good economic policies and political economy challenges are similar across many countries and situations. The devil is in the details, and how the particularities of each country and each period shape policymaking. Argentina, Mexico and Turkey are just three countries with per capita incomes that now are similar to China’s, but were once relatively richer. Each of them has had a list of economic policy mistakes, often stemming from political choices. There are many ways to go wrong, and often the path to sustained growth is narrow. Staying on that narrow path requires immediate focus as well as strategic intent and clarity. In the case of India, these qualities are needed at multiple levels, not just at the centre. Aside from other countries’ examples, even the case of the second UPA government illustrates how easily things can go wrong. So, India’s economic trajectory in the next few years is contingent on many factors. Over a billion lives will depend on how those factors play out.
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