Martin Wolf: India’s destiny is in its own hands

India has some major obstacles to overcome to become global economic power

Am Indian woman in a potato field. The UN forecasts India’s population might be 1.7bn by 2050

Am Indian woman in a potato field. The UN forecasts India’s population might be 1.7bn by 2050

 

On the eve of independence in 1947, Jawaharlal Nehru, India’s first prime minister, spoke of a “tryst with destiny”. This vast, diverse and impoverished country had set itself on the path to democracy and development. Seventy years later India remains a democracy and has progressed with development. The record is not without blemishes. Yet Indians have reason to feel proud of what they have achieved.

So what might lie ahead? The UN forecasts that India’s population might be 1.7 billion by 2050, against China’s 1.35 billion. This sounds unmanageable. But the population has already grown from 376 million in 1950 to 1.3 billion in 2015.

Yet the country is far more prosperous than it was at independence. As the Indian finance ministry’s excellent Economic Survey notes, real gross domestic product per head has increased by 4.5 per cent a year over the past 37 years.

Average real incomes per head have risen from 5 per cent to 11 per cent of US levels over this period. This is the second most important economic story of the era of globalisation after China’s even more dramatic rise.

Suppose that China’s GDP per head grew at the modest rate of 3 per cent a year and poorer India’s at 4 per cent up to 2050. Suppose also that US GDP per head grew at 1.5 per cent a year.

By 2050, China’s GDP per head would be 40 per cent of US levels and India’s would be 26 per cent – where China is now. By then China’s would be the biggest economy in the world (measured at purchasing power parity), India’s would be second and the US third.

In a particularly illuminating analysis of Indian development, the Economic Survey demonstrates that the country has moved from socialism to “open trade, more open capital markets and reliance on the private sector”. What is known as the “Washington consensus” is now an Indian consensus. Reforms have continued under the government of Narendra Modi, notably a new bankruptcy code and a goods and services tax.

Foreign capital

A great effort has been made by the present government to reduce the costs of doing business and create a friendlier environment for investment. The days of the bureaucratic “licence raj” are far in the past. If we look to the future, India also has the apparent advantage of the relatively slow ageing of its population.

Yet the Economic Survey also admits to three unfavourable differences between India and other market-oriented emerging economies: hesitation over embracing the private sector and protecting property rights; weak state capacity, notably in the delivery of education and health; and a redistribution of income that is both extensive and hugely inefficient.

These features, it plausibly suggests, reflect the fact that India was a precocious democracy – it was democratic long before it developed.

The optimist will argue that these handicaps will diminish as the country becomes richer. The pessimist will answer that they will ultimately throttle continued progress. But democracy is not a luxury; it is a necessary condition for India’s existence as a united country. With a bit of luck, India’s growing middle class will compel needed improvements in the quality of governance.

Obstacles

The first of the long-term challenges is education. A vast and growing labour force is only a boon, rather than a handicap, if it possesses the skills needed for a rapidly developing economy. Education is a state responsibility. Yet “competitive federalism” – competition among states – has not yet promoted needed improvement in educational services.

A second long-term challenge is the environment. Between now and 2050, India’s real GDP could grow by 400 per cent. Urbanisation will also proceed apace: today a third of India’s population is urban; by 2050 this ratio could well have doubled. Managing this successfully will require a huge amount of organisation and investment. But environmental challenges will not only be local. India will need to develop without a vast increase in its use of fossil fuels.

A third long-term challenge is the external economic environment. Under plausible assumptions the share of India’s exports of goods and services in global GDP might double over the next decade. True, that share is still very low, at 0.6 per cent (against 3.3 per cent for China). But, given the backlash against globalisation under way in high-income economies, this might not go smoothly. India will need to consider how it can promote the open world economy.

Investment

Economic Survey

India has a good chance of being the world’s fastest-growing large economy, ultimately emerging as another democratic superpower by the middle of the century. But the challenges it faces are enormous. Past successes suggest these might be overcome. But much will have to change and many of those changes will not happen automatically. Once again, India has a tryst with destiny. – Copyright The Financial Times Limited 2017

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