To become a developed country, India’s GDP will have to grow at 12 per cent per year for at least a decade. Technically this is within reach, since it would require the rate of investment to rise from the present 28 per cent of GDP to 36 per cent
The question before a probable Narendra Modi-led government in 2014 is whether the statistically undeniable economic slide of the last decade can be halted and a fresh impetus be given to growth in the
Indian economy.
The answer is “yes” if good governance norms are properly enforced to enable the Indian economy to grow at 12 per cent per year in GDP for a decade which means efficiently deploying resources to reduce the current incremental capital output ratio from 4.0 to 3.0, and by incentivising the people to save more to increase the current rate of investment (which is domestic saving plus net foreign investment).
The United Progressive Alliance (UPA) government, judged statistically by the dangerous level of fiscal and capital accounts deficit indicators, has squandered national financial and physical resources mainly due to a lack of accountability, corruption and high transaction costs arising for archaic bureaucratic procedures.
Modest goals within reach
This picture emerges from comparative statistics of National Democratic Alliance (1998-2004) and UPA (2004-2014) rule.
Efficient, corruption-free deployment of existing resources that implies a reduction in the capital-output ratio, means a 12 per cent GDP growth rate per year, i.e., a doubling of GDP every six years, and that of per capita income doubling every seven years.
This growth rate over a five-year period can take us into the league of the top three most populated nations of the world, i.e., of the United States, China and India — that is by 2020. Thereafter, India would be able to overtake China over the next decade. That should be the goal of governance for us today.
India is not yet an economically developed nation. India has demonstrated its prowess in the IT, biotech and pharmaceutical sectors and has accelerated its growth rate to nine per cent per year in the first decade of this century, up from an earlier 40-year (1950-90) socialist era average annual growth rate of a mere 3.5 per cent, to become the third largest nation in terms of GDP at Purchasing Power Parity (PPP) rates.
However, it still has a backward agricultural sector of 62 per cent of the people, where there are farmer suicides because of inability to repay loans. There is a national unemployment rate that is of over 15 per cent of the adult labour force, a prevalence of child labour arising out of nearly 50 per cent of children not making it to school beyond standard five, a deeply malfunctioning primary and secondary educational system, and 300 million illiterates and 250 million people in dire poverty.
India’s infrastructure is pathetic, with frequent electric power breakdowns even in metropolitan cities, dangerously unhealthy water supply in urban areas, a galloping rate of HIV infection, and gaping potholes that dot our national highways.
For a second generation of reforms
To become a developed country, therefore, India’s GDP will have to grow at 12 per cent per year for at least a decade. Technically this is within India’s reach, since it would require the rate of investment to rise from the present 28 per cent of GDP to 36 per cent, while productivity growth will have to ensure that the incremental output-capital ratio declines from the present 4.0 to 3.0.
These are modest goals that can be attained by an efficient decision-making structure, tackling corruption, increased Foreign direct investment (FDI) and use of IT software in the domestic industry. But for that to happen, what is required are more vigorous market-centric economic reforms to dismantle the remaining vestiges of the Soviet model in Indian planning, especially at the provincial level.
The Indian financial system also suffers from a hangover of cronyism and corruption which has left government budgets on the verge of bankruptcy. This too needs fixing. It cannot be rectified by a Reserve Bank of India vitiating the investment climate with an obsession to contain inflationary pressure. It is like killing a patient to lower his body temperature.
India’s infrastructure requires about $150 billion to make it world class, while a new innovation climate requires investment in the education system of six per cent of GDP instead of 2.8 per cent today. But an open competitive market system can find these resources provided the quality of governance and accountability is improved. Auctioning of natural resources such as spectrum, coal, oilfields, and land for commercial exploitation can largely substitute for tax impositions. Obviously, a wide-ranging second generation of reforms is necessary for all this to accelerate India’s growth rate to 12 per cent per year. India has many advantages today to achieve a booming economy. We have a young population (an average of 28 years compared to the U.S.’ 38 years, and Japan’s 49 years) that could be the base for it to usher in innovation in our production process (a demographic dividend); an agriculture sector that has internationally the lowest yield in land and livestock-based products, and also, at the lowest cost of production, a full 12 months a year of farm-friendly weather, and an internationally competitive, skilled and low wage rate, semi-skilled labour at the national level. The advantages are already being proved to the world by the outsourcing phenomenon of skills in the developed world and the cheap supply of labour to oil-rich countries.
Demography as an advantage
Since the world view of economic development has now completely changed, economic development is no more thought of as being capital-driven, but knowledge-driven instead.
For application of knowledge, we need innovations, which means more original research which in turn needs more fresh young minds — the cream of the youth — to be imbibed with learning and at the frontier of research.
For decades since independence in 1947 we had been told that India’s demography was its main liability, that India’s population was growing too fast, and what India needed most was to control its population, even if by coercive methods.
Globally, India today leads in the supply of youth, i.e., persons in the age group of 15 to 35 years, and this lead will last for another 40 years. Therefore, we should not squander away this “natural resource.” We must, by proper policy for the young, realise and harvest this demographic potential.
China is today the second largest world leader in terms of having a young population. But the youth population there will start shrinking from 2015, i.e., less than a decade from now because of a lagged effect of the one-child policy. Japanese and European populations are already fast aging. The U.S. will however hold a steady trend thanks to a liberal policy of immigration, especially from Mexico and the Philippines. But, even then, the U.S. will have a demographic shortage in skilled personnel. All developed countries will experience a demographic deficit. India will not have to experience this if we empower our youth with multiple intelligences. Our past liability, by a fortuitous turn of fate, has now become our potential asset.
Thus, India — by unintended consequences of a relatively unfettered population growth — is now gifted with a young population. If we educate this youth to develop cognitive intelligence to become original thinkers, imbibe emotional intelligence to have a team spirit and develop a rational risk-taking attitude, inculcate moral intelligence to blend personal ambition with national goals, cultivate social intelligence to defend the civic rights of the weak, gender equality, have the courage to fight injustice, and the spiritual intelligence to tap into the cosmic energy (Brahmand) that surrounds the earth, we can then develop an intellectually more advanced species of human being; an Indian youth who can be relied on to contribute to make India a global power within two decades. Only then will our demographic dividend not be wasted.
This goal thus has to be at the core of the economic agenda for the rest of this decade for a new government in 2014.