India has the third highest Gross Domestic Product (GDP) in the world in terms of its purchasing power parity. In absolute United States Dollar (USD) terms it is fifth in the world. Its journey to reach this place is certainly creditable. For some time now, smugness has crept into the country that we are no longer impoverished and are among the rich nations. Egged on by an International narrative that China and India are the countries to watch in future, we have started feeling that other than a few nudges here and there is very little that we need to do on the economic front.
But, is that all? Countries try to increase their wealth and GDP only to ensure that its citizens lead comfortable and happy lives, to ensure that they have access to the best education and healthcare and to ensure that they are able to live with dignity and head held high. If we drill down GDP to the citizens, the metric of relevance would be the per capita GDP. This measure assumes that the total GDP of the country is equally distributed among all its citizens. The fact that it is not equal equally distributed is a very major concern and would need much more space to discuss. India’s GDP (PPP) is 43% that of China and only 59% that of Indonesia. India is much behind France, U.K. or any other European Nation.
In reality, we are still a poor country where malnutrition is rife, where children continue to drop out of school in alarming numbers every year and where millions of untrained young people enter the workforce unfit for anything more than manual labour. All this is best captured in the UN’s Human Development Index (HDI) rankings where India is a lowly 129th out of 189 countries. China, by contrast, occupies the 85th spot and Sri Lanka an even better 71st position.
IMF has announced that India’s per capita gross domestic product may be lower for 2020 than in neighbouring Bangladesh. India, which had a lead of 25% five years ago, is now trailing. More than numbers, Indians will find it very difficult to digest the fact that Bangladesh is better than us. It is a huge blow to our pride. The narrative that we have built over the past few years is that Bangladesh’s poverty drives it’s citizens to sneak into India in order to make a living. We have all believed that we are far superior to most countries in Asia and we feel that we need to compete only with Western Europe, USA and China. This sobering comparison with Bangladesh and being worse off than it is just unpalatable. This relative underperformance will dent the country’s self-confidence the capacity of its citizens in the international arena. Our influence in South Asia and the Indian Ocean and the world will wane.
Where have things gone wrong? The coronavirus pandemic is definitely to blame. But, it has been widely reported that India’s growth has been tapering for ten quarters prior to the covid-19 pandemic. The pandemic has only added to an already slowing growth. In their working paper, Chatterjee and Subramanian have concluded as follows:
A cautious conclusion is that the ability of India’s export growth to outpace that of the rest of the world as indeed it has done spectacularly for three decades—will be increasingly constrained. Both exports of manufacturing and services are skill intensive and becoming more so, and if the quality and quantity of skills available to the economy starts slowing (rising Lewis curve), exports will run into domestic supply constraints. India’s longstanding inability to export unskilled manufacturing products is an indictment but equally it is an opportunity, especially with China vacating export space in these products. An extraordinary policy effort will be required to exploit this opportunity. Equally, policies cannot afford to neglect the skill-intensive exports, which are still dynamic but are losing steam.
Chatterjee and Subramanian feel that the right way forward for India is to focus on export led growth. They feel that we have not paid attention to exports that do not need skilled labour and India’s exports have been primarily goods and services that require a skilled workforce. They feel that with passage of time, the quality and quantity of skills available will start slowing down and future exports would be would run into these supply constraints. Bangladesh is doing well because it’s following the path of previous Asian tigers. Its slice of low-skilled goods exports is in line with its share of poor-country working-age population. China held on to high GDP growth for decades by carving out for itself a far bigger dominance of low-skilled goods manufacturing than warranted by the size of its labor pool.
India, however, has gone the other way, choosing not to produce the things that could have absorbed its working-age population of 1 billion into factory jobs. India’s missing production in the key low-skill textiles and clothing sector amounts to $140 billion, which is about 5% of India’s GDP. These sectors have the potential to absorb a large population and pave the way fro bettering education and health standards for future generations, which would propel us on the next growth step. As we are unable to engage our huge unskilled population, they lose the opportunity to pull themselves out of the subsistence economy of they are part. The country too loses the opportunity of maintaining the steady growth rate required.
The government of India (GoI) does not engage adequately with states and industries in order to promote their growth as well as capacity to export outside the country. In most cases the government of India comes up with a reform measure/policy which is often intended to open up the sector and promote industries in the sector. These are decided upon with varying degrees of consultation and more often than not, fall short of the requirements. GoI does not focus much on the subsequent steps including assessing the effectiveness of the reform/policy in meeting the desired objectives. The task is entirely left to the state governments to compete against one another and attempt to promote industrialization. State governments find it very difficult, near impossible, to get the government of India to agree to any policy change that is required to make the policy/reform more effective.
In an interview with ‘The Print’, Raghuram Rajan opines that the growth trajectory of 8% and above will be possible to maintain only if there is an environment of continuous reform. In recent times, GoI has initiated some reforms including the Insolvency and Bankruptcy Code, agricultural marketing reforms, labour reforms etc. Rajan feels that these reforms are sporadic in nature and the environment of continuous reform is absent in the country. This lack of the right environment, he feels, will pull down growth in any country and we have already witnessed the same over the past several quarters.
The reform measures introduced also need to be deepened and more effective at the ground level. The issue of whether business is now easy to carry out, needs to be assessed regularly with feedback from the trade and industry.
A bigger danger is that the policy of ‘Atmanirbhar’ should us take us back to the pre-1991 closed economy days. If this policy means making our products competitive and of better quality, they would then meet the needs of the country and could export as well. Most economists feel if ‘Atmanirbhar’ means protectionism reintroduced, it would damage the country more and slow down the effort to pull out our millions from impoverishment. Firstly, it would mean that citizens of the country would have to pay more for goods of lesser quality. Secondly, it would reintroduce a system of rents where incompetent goods and services would attempt to raise barriers for outside goods that are cheaper and of better quality. Thirdly, Investors will fear that tariff and non-tariff barriers will be introduced at the behest of anyone who feels that their Trade/Business would be affected due to global factors. This takes the country back to a system of favours being doled to protect some players. Classical trade theory tells us that it would lead to inefficient allocation of resources. We would be treading on very thin ice on this route.
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