India represents one sixth of the world and today is the third largest economy in terms of purchasing power parity. India is also the sixth largest economy in terms of dollar sign exchange rate. It has grown at an average rate of 7% per year for the past 40 years, growing from a size of $189 billion in 1980 to nearly $3 trillion today.
This growth rate is about 2% lower than that of China over the same period but represents a higher rate of return than the investment rate of GDP.
Until the year of the COVID-19 pandemic, India had not had a single year since 1980 when its economy had contracted, that is, with negative growth.
It was expanding steadily, with peak rates of 9% to 10% in between. As we celebrate our 76th Independence Day, it is worth reminding that at birth, the nascent nation was extremely poor due to centuries of colonial exploitation. It was severely dependent on foreign aid for food and foreign exchange and had an average life expectancy of only 32 years. The level of illiteracy was very high.
The sheer scale of this country’s economic transformation from bottom to top is nothing short of spectacular. Today’s India is not only self-sufficient but also an exporter of food grains. It holds the fifth-largest stock of foreign exchange and is a net lender to the International Monetary Fund, far from going to the brink of foreign exchange bankruptcy in 1991, begging the IMF.
Confident foreign investors
In the last three decades since the economy opened up, foreign investors have put in a total of half a trillion dollars in India. This shows their belief in growth potential. India is a rare Asian country with a persistent current account deficit, as imports always exceed exports. And yet, foreign investors, unaffected by the trade deficit, pour investment dollars into factories and businesses as well as capital markets, creating a persistent balance of payments currency surplus for India.
The foreign investor is confident that even with double deficits (fiscal and external), the growth of the economy, driven by demographics and dynamics, can pay for the deficit. Thanks to that continued economic growth, extreme poverty levels have dropped sharply from about 50% to possibly single digits, and life expectancy has more than doubled since 1947.
On the political front too, India’s strong democracy stands in stark contrast to the authoritarian rule of its more prosperous northern neighbour. As a democratic republic, India was the only newly independent country since the last century to have adopted universal adult suffrage from the outset giving one person one vote. Surviving for seven decades, flourishing in one go, despite its vast diversity in every imaginable dimension, be it religion, caste, language, culture or cuisine, is a small miracle in itself. Many big countries like the USSR broke up into small pieces. This does not mean that India’s democracy is perfect. Yet, since the first national election, the country has seen largely bloodless and peaceful power transfers – 16 times – something that other pre-colonial, developing countries can only envy.
The military coup is unthinkable and unimaginable. And it cannot be just a South Asian feature. Look what happened to our twins born on the same day. This characteristic is inherent in the resilience, permanence, as well as the flexibility of politics and the sanctity of the Constitution along with our founding principles. India’s early post-independence economic strategy was to factor in extreme poverty, lack of development. Capital, low tax base and export pessimism probably arose from the suspicion of colonial powers.
India was more introverted and influenced, if not enamored, of the Soviet planning model of development. One could argue, that it should have been abandoned long ago when we actually did. But in light of the initial conditions, an early import substitution-based industrial strategy supported by low-wage goods (i.e., food prices), which, in turn, required input subsidies to agriculture, infrastructure and dividends in the context of the Green Revolution. paid. It lasted longer than necessary. India too, unlike its East Asian neighbours, missed out on capitalizing on labor intensive export-led growth. But after the 1991 shock, the economy opened up dramatically.
India’s trade to GDP ratio, an indicator of its openness, is higher than that of the United States. It is now the world’s leading exporter and outsourcing powerhouse of software.
Indian workers send inbound remittances worth about $100 billion, which boosts the Indian economy. Indirectly it is equal to India’s labor export earnings.
The economy has a large household momentum, which can only grow once per capita income rises above $3,000 or $4,000. Other signs of strength are in terms of the proliferation of unicorns (highly valued by equity investors), the exponential growth of e-commerce and digital payments, and a broad industrial base.
Agriculture is less dependent on weather uncertainties, and diversification towards more climate, soil and market-appropriate crops is evident, as is the huge growth in the animal husbandry and dairy sector. India is also prematurely meeting its very ambitious targets of renewable energy, especially solar energy. The marriage of cheap solar power and a massive hydrogen economy holds the tantalizing promise of an energy surplus, not a shortage, and an import-dependent economy.
negative aspects
The economy glass is more than half full, but we cannot ignore the negative aspects. Unemployment remains a major challenge, as youth are still looking for government jobs. The government recently disclosed in Parliament that 220 million Indians had applied for just seven lakh government jobs in the last seven years.
Furthermore, the labor force participation rate is low, worryingly so for women. Job creation is priority number one, even as nearly 70% of industrial jobs are vulnerable to extinction, thanks to automation and robotics. Despite running the world’s largest and longest-running free food distribution programme, India ranks very low on the World Hunger Index, reflecting a one-sided distribution of economic growth. Inequalities in access to income, wealth, quality education and health facilities are rising to unacceptable levels.
Hence the inclination towards more welfare spending, which adds to the fiscal pressure. To create 10 million jobs annually, we need to create millions of new enterprises. This calls for ease of doing business, especially in areas such as dispute resolution and contract enforcement. But the judiciary is surrounded by nearly 50 million cases. Judicial reform is as important as job creation. India is the fastest growing large economy, proud of its democratic foundation, but much work remains to be done in the coming decades. happy Independence Day!
Ajit Ranade is an economist based in Pune