India represents one sixth of the world and is today the third largest economy in terms of purchasing power parity. Even in terms of nominal exchange rate of the dollar, India is the sixth largest economy. It has grown at an average rate of 7% per annum 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 when compared with the investment rate of the GDP.
Until the year of the COVID-19 pandemic, India did not have a single year since 1980 when its economy contracted, i.e., with negative growth.
It was continuously expanding, with peak rates of 9% to 10% in between. As we celebrate our 76th Independence Day, it is worth reminding that at birth, the newborn nation was highly impoverished, thanks to centuries of colonial exploitation. It was critically dependent on foreign aid for food and forex and had an average life expectancy of only 32 years. The level of illiteracy was very high.
The sheer scale of economic transformation of this nation from bottom to top league is nothing short of spectacular. Today’s India is not only self-sufficient but also an exporter of food. It holds the fifth largest stock of foreign exchange and is a net lender to the International Monetary Fund, a far cry from having to go with a begging bowl to the IMF on the brink of forex bankruptcy in 1991.
Confident foreign investor
Foreign investors have cumulatively poured in half a trillion dollars into India in the past three decades, after the economy opened up. This reflects their confidence in the growth potential. India is the rare Asian country with a persistent current account deficit, as imports always exceed exports. And yet, foreign investors, undeterred by trade deficit, pour investment dollars into factories and businesses as well as into capital markets, leading to a consistent balance of payment currency surplus for India.
The foreign investor is confident that even with twin deficits (fiscal and external), the growth of the economy, driven by demography and dynamism, can pay for the deficits. Thanks to that consistent economic growth, the level of extreme poverty is down sharply from nearly 50% to possibly single digits, and life expectancy has more than doubled since 1947.
On the political front too, India’s robust democracy stands in sharp contrast to the authoritarian regime of its more affluent northern neighbour. As a democratic republic, India was the only newly independent country from the past century to embark on universal adult suffrage, to give one person one vote, from the very beginning. Surviving for seven decades, nay flourishing in once piece, despite its immense diversity in every conceivable dimension, be it religion, race, language, culture or cuisine, is a minor miracle in itself. Many large countries such as the USSR broke up into smaller splinters. That is not to say that India’s democracy is perfect. Nevertheless, since the first national election, the country has witnessed largely bloodless and peaceful transfer of power — 16 times — something that other former colonial, developing countries can only envy.
Military coup is inconceivable and unthinkable. And this cannot be merely a South Asian trait. Look at what happened to our twin born on the same day. This trait is inbuilt into the resilience, the durability, as also the malleability of the polity and the sanctity of our founding principles as well as the Constitution.India’s early post-Independence economic strategy had to factor in the extreme poverty, the scarcity of growth capital, a low tax base and an export pessimism begotten possibly by suspicion of colonial powers.
India was more inward looking and influenced, if not enamoured, by the Soviet planning model of development. One could argue, with hindsight, that it should have been abandoned much earlier than when we actually did. But in light of early conditions, the initial import substitution-led industrial strategy, supported by low wage goods (i.e., food prices), which, in turn, necessitated input subsidies to agriculture, did pay dividends in terms of infrastructure and green revolution. It just stayed longer than it needed to. India also missed the bus, unlike her East Asian neighbours, on capitalising on labour intensive export-led growth. But after the shock of 1991, the economy opened up dramatically.
India’s trade to GDP ratio, an indicator of its openness is higher than the United States. It is now the world’s leading exporter of software and an outsourcing powerhouse.
Indian workers send nearly 100 billion dollars of inbound remittance, which strengthens the Indian economy. In an indirect way, it is like India’s labour export income.
The economy has a large domestic momentum, which can only grow once per capita income rises above $3,000 or $4,000. The other signs of strength are in terms of proliferation of unicorns (valued highly by equity investors), exponential growth of e-commerce and digital payments, and a widening industrial base.
Agriculture is much less dependent on the vagaries of the weather, 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 meeting its very ambitious targets of renewable energy, especially of solar energy, ahead of schedule. The marriage of cheap solar electricity and of large-scale hydrogen economy holds the tantalising promise of an energy surplus, not deficient, and import-dependent economy.
The economy’s glass is more than half full, but we cannot ignore the negative aspects. Unemployment remains a huge challenge, as the youth still scramble for government jobs. The government disclosed in Parliament recently that 220 million Indians had applied for just seven lakh government jobs in the past seven years.
Besides, labour force participation rate is low, alarmingly so for women. Job creation is priority number one, even as nearly 70% of industrial jobs are vulnerable to becoming extinct, thanks to automation and robotics. Despite running the world’s biggest and longest-running free foodgrain distribution programme, India’s ranking in the world hunger index is abysmal, signifying the lopsided distribution of economic growth. Inequality in income, wealth, access to quality education and health facilities is widening to unacceptable levels.
Hence the tilt towards more welfare spending, which increases fiscal pressure. To generate 10 million jobs annually, we need lakhs of new enterprises to be born. That calls for ease of doing business, especially in areas such as dispute resolution and contract enforcement. But the judiciary is clogged with nearly 50 million cases. Judicial reform is as urgent as job creation. India is the fastest-growing large economy, proud of her democratic foundations, but much work remains to be done in the coming decades. Happy Independence Day!
Ajit Ranade is an economist based in Pune