“Calculations show that if India achieves a growth rate of 7% continuously over the next two decades and more, it will dramatically change the level of the economy” | Photo credit: Getty Images/iStockphoto
The big question facing India is where its economy will be in 25 years. In 2047, India will complete 100 years after independence. At that time, will India attain the status of a developed economy, which means attaining a minimum per capita income equivalent to $13,000? We also need to know what the global situation would be because India cannot be decoupled from the rest of the world.
India’s economic journey started with independence. It is not often realized that India’s economic progress in the first half of the 20th century under British rule was dismal. According to one estimate, over the five decades, India’s annual growth rate was only 0.89%. With a population growing by 0.83%, per capita income increased by 0.06%. Not surprisingly, immediately after independence, growth became the most pressing concern of policy makers.
In the beginning, India’s development strategy had four elements: increasing the rate of savings and investment; dominance of state intervention; import substitution and domestic manufacturing of capital goods. To some extent, policy makers in India in the 1950s and 1960s were handicapped. At the time, no clear model was available for accelerating growth in developing countries. Large-scale state intervention seemed appropriate, although there were already some criticisms at the time. However, by the late 1970s it was becoming clear that the model India had chosen was not working and needed to be changed. At that time, there were a lot more criticisms of Indian strategy. But Indian policymakers have refused to acknowledge this. It was during this time that China made a big change.
It was the crisis of 1990-91 that forced policy makers to turn to an “idea whose time had come”. The break with the past has taken place in three important directions: first, by dismantling the complex regime of licenses and permits; second, by redefining the role of the state; and third, by abandoning the inward-looking trade policy.
India’s average growth until the late 1970s remained modest, with an average growth rate of 3.6%. With population growth of 2.2%, the growth rate of per capita income was extremely modest at 1.4%. However, on certain health and social parameters, such as the literacy rate and life expectancy, notable improvements have been observed. While India had to rely on large imports of food grains on a concessional basis, initially there was a breakthrough in agriculture after the Green Revolution. The industrial base has also broadened. India has become capable of producing a wide variety of goods including steel and machinery. While India’s post-independence economic performance was reassuring compared to the pre-independence period, it is not so impressive compared to that of several developing countries, even in Asia. It was also less than India’s expectations. Plan after plan, actual growth has been lower than expected. The Indian economy grew by 5.6% in the 1980s. But this was accompanied by a sharp deterioration in budget and current account deficits, and the economy suffered its worst crisis in 1991-92. It is extremely doubtful that, without a change in development strategy, growth would have accelerated.
Between 1992-93 and 2000-01, GDP at factor cost grew by 6.20% per year. Between 2001-02 and 2012-13, it increased by 7.4% and the growth rate between 2013-14 and 2019-20 was 6.7%. The best performance was between 2005-06 and 2010-11 when GDP grew by 8.8%, clearly showing what India’s potential growth rate was. This is India’s strongest growth over a sustained period of five to six years. And this despite the fact that this period included the global crisis year of 2008-09. During this period, the investment rate reached a peak of 39.1% 2007-08. There has been a corresponding increase in the savings rate. The balance of payments (BOP) current account deficit remained low at 1.9% on average. However, the growth story suffered a setback after 2011-12. The growth rate fell to 4.5% in 2012-13 according to the 2004-05 series. Since then, the growth rate has had its ups and downs. The growth rate reached the level of 3.7% in 2019-20.
Increase growth rate
After COVID-19 and the Russian-Ukrainian war, there is a need to lay out a roadmap for India’s future development. The first task is to increase the growth rate. Calculations show that if India achieves a growth rate of 7% continuously over the next two decades and more, it will bring a substantial change in the economy. India can almost touch the status of a developed economy. This in turn requires India to increase the rate of gross fixed capital formation from the current level of 28% of GDP to 33% of GDP. If, at the same time, India maintains the incremental capital production ratio at 4, which reflects how efficiently we use capital, India can comfortably achieve a growth rate of 7%.
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The increase in the investment rate depends on a number of factors. An appropriate investment climate must be created and maintained. While public investment is also expected to increase, the main component of investment is private investment, both from companies and businesses. This is what depends on a stable financial and fiscal system. The importance of price stability in this context cannot be ignored.
Strengthening social safety nets
India needs to absorb the new technologies that have appeared and will emerge. Its development strategy must be multidimensional. India needs a strong export sector. It is a test of efficiency. At the same time, India needs a strong manufacturing sector. The organized segment of this sector must also increase. As production and incomes increase, India also needs to strengthen the social safety net system. Growth without equity is not sustainable.
The rapid pace of globalization that India has experienced since the early 1990s will slow down for various reasons. Some countries that were champions of globalization are stepping back. Some countries believe that dependence on other countries for certain key inputs such as crude oil or chips can sometimes put them in difficulty. The Russian-Ukrainian war clearly exposed this problem. An open economy with certain limits remains the best way forward.
India is now the fifth largest economy. It is an impressive achievement. However, when it comes to per capita income, it’s a different story. In 2020, India’s ranking was 142 out of 197 countries. It only shows the distance we need to travel. The external environment will not be conducive. The Organization for Economic Co-operation and Development reports a secular decline in growth in developed countries. Environmental considerations can also inhibit growth. Some adjustments to the composition of growth may be necessary. However, we have no choice but to grow rapidly, given the current level of per capita income.
C. Rangarajan is former Chairman of the Economic Advisory Council to the Prime Minister and former Governor of the Reserve Bank of India