The fastest growing major economy in the world

India is one-sixth of the world and is now the third-largest economy by purchasing power parity. Even in terms of the nominal dollar exchange rate, India is the sixth largest economy. It has grown at an average rate of 7% per year over 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 compared to the GDP investment rate.

Until the year of the COVID-19 pandemic, India had not had a single year since 1980 when its economy contracted i.e. with negative growth.

It was constantly expanding, with peak rates of 9% to 10% in between. As we celebrate our 76th Independence Day, it is worth remembering that when it was born, the fledgling nation was greatly impoverished, thanks to centuries of colonial exploitation. He was extremely dependent on foreign aid for food and currency and had an average life expectancy of only 32 years. The illiteracy rate was very high.

The scale of this nation’s bottom-up economic transformation is nothing short of spectacular. India today is not only self-sufficient but also a food exporter. It holds the fifth-largest currency stock and is a net lender to the International Monetary Fund, far 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 accumulated half a trillion dollars in India over the past three decades after the economy opened up. This reflects their confidence in the growth potential. India is the only Asian country to have a persistent current account deficit, with imports still exceeding exports. And yet foreign investors, undeterred by the trade deficit, are pouring investment dollars into factories and businesses as well as into capital markets, leading to a steady surplus in India’s balance of payments.

The foreign investor is convinced that even with twin deficits (budgetary and external), economic growth, driven by demographics and dynamism, can pay for the deficits. Thanks to this steady economic growth, the level of extreme poverty has fallen sharply from nearly 50% to perhaps single digits, and life expectancy has more than doubled since 1947.

Politically, too, India’s robust democracy contrasts sharply with the authoritarian rule of its wealthier northern neighbour. As a democratic republic, India was the only newly independent country in the last century to embark on universal adult suffrage, giving one person a voice, from the start. To survive for seven decades, even to thrive in one piece, despite its immense diversity in every conceivable dimension, be it religion, race, language, culture or cuisine, is a small miracle in itself. Many large countries such as the USSR shattered into smaller shards. This does not mean that Indian democracy is perfect. Nevertheless, since the first national election, the country has witnessed a largely peaceful and bloodless transfer of power – 16 times – which other former colonial developing countries can only envy.

A military coup is inconceivable and unthinkable. And it can’t just be a South Asian trait. Look what happened to our twin born on the same day. This trait is embedded in the resilience, durability, as well as the malleability of the political system and the sanctity of our founding principles as well as the Constitution. India’s economic strategy after independence had to take into account extreme poverty, scarcity of capital growth, a low tax base and a pessimism towards exports engendered perhaps by distrust of the towards the colonial powers.

India was more inward looking and influenced, if not loving, by the Soviet model of development planning. One could argue, in hindsight, that it should have been abandoned much sooner than when we did. But in light of the initial conditions, the initial industrial strategy focused on import substitution, supported by low-wage goods (i.e. food prices), which in turn required subsidies to inputs for agriculture, has borne fruit in terms of infrastructure and the green revolution. He just stayed longer than necessary. India also missed the boat, unlike its East Asian neighbors, by capitalizing on growth driven by labour-intensive exports. 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 largest exporter of software and an outsourcing powerhouse.

Indian workers send nearly $100 billion in inbound transfers, which strengthens the Indian economy. In an indirect way, it is like India’s labor export earnings.

The economy has great domestic momentum, which can only grow when per capita income exceeds $3,000 or $4,000. Other signs of strength are in terms of the proliferation of unicorns (highly valued by equity investors), exponential growth in e-commerce and digital payments, and an expanding industrial base.

Agriculture is much less dependent on the vagaries of the weather and the diversification towards crops more suited to the climate, the soil and the market is evident, as is the enormous growth in livestock farming and the dairy sector. India is also meeting its very ambitious renewable energy targets, including solar power, ahead of schedule. The marriage of cheap solar electricity and the large-scale hydrogen economy holds the enticing promise of a surplus, non-deficient, import-dependent energy economy.

Negative aspects

The glass of the economy is more than half full, but we cannot ignore the negatives. Unemployment remains a huge challenge as young people are still jostling for government jobs. The government recently revealed to parliament that 220 million Indians had applied for just seven lakh government jobs in the past seven years.

In addition, the rate of participation in the labor market is low, which is alarming for women. Job creation is the number one priority, even as almost 70% of industrial jobs are likely to disappear, thanks to automation and robotics. Despite running the largest and longest running free food grain program in the world, India’s ranking in the Global Hunger Index is abysmal, signifying an unbalanced distribution of economic growth . Inequalities in income, wealth, access to quality education and health facilities are widening to unacceptable levels.

Hence the tendency towards more social spending, which increases budgetary pressure. To generate 10 million jobs a year, thousands of new businesses must emerge. This requires ease of doing business, especially in areas such as dispute resolution and contract enforcement. But the judicial system is cluttered with nearly 50 million cases. Judicial reform is as urgent as job creation. India is the fastest growing major economy, proud of its democratic foundations, but there is still much to be done in the coming decades. Happy Independence Day!

Ajit Ranade is an economist based in Pune

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