Business Day

Indian summer must weather cold fronts for wealthier climate

• Country has good chance of being fastest-growing large economy, but challenges are huge

- MARTIN WOLF

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 of 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 GDP per head has increased about 4.5% a year over the past 37 years.

Average real incomes per head have risen from 5% to 11% 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% a year and poorer India’s at 4%, up to 2050. Suppose, too, that US GDP per head grew at 1.5% a year.

By 2050 China’s GDP per head would be 40% of US levels and India’s would be 26% — 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 would be third.

In a particular­ly illuminati­ng analysis of Indian developmen­t, the survey demonstrat­es that the country has moved from socialism to “open trade, more open capital markets and reliance on the private sector”.

What is generally known (often pejorative­ly) 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.

India’s ratio of trade to GDP is now much the same as China’s, for example. Net inflows of foreign capital are in line with those of other emerging economies. India’s public sector undertakin­gs are no longer exceptiona­lly large relative to national income. Government spending is also in line with global norms for a country at its level of developmen­t. A great effort has been made by the 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.

India also has the apparent advantage of the relatively slow ageing of its population.

Yet the survey also admits three unfavourab­le difference­s exist 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 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.

Regarding the obstacles ahead, the following seem particular­ly important over the long term, while one stands out in the short term:

● One long-term challenge 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. However, “competitiv­e federalism” — competitio­n among states — has not yet promoted needed improvemen­t in educationa­l services.

● The environmen­t is another long-term challenge. Between now and 2050, India’s real GDP could grow by 400%. 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.

● Regarding 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% (against 3.3% for China). But, given the backlash against globalisat­ion under way in highincome economies, this might not go smoothly. India will need to consider how it can promote the open-world economy.

● In the short term, the weakness of investment is disturbing. The survey attributes this phenomenon in part to the “twin balance sheet problem” — the combinatio­n of overlevera­ged companies with encumbered banks. It argues that the economy will not grow out of these debts, partly because they hinder investment and growth. The answer is a combinatio­n of recognisin­g losses, restructur­ing debts and radical reform of banking. This will be difficult but it is surely essential.

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 hurdles 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. /©

A GROWING LABOUR FORCE IS ONLY A BOON, RATHER THAN A HANDICAP, IF IT POSSESSES THE SKILLS NEEDED FOR A RAPIDLY DEVELOPING ECONOMY

 ?? /Reuters ?? Adapting: Reforms have continued under the government of Narendra Modi, notably a new bankruptcy code and a goods and services tax.
/Reuters Adapting: Reforms have continued under the government of Narendra Modi, notably a new bankruptcy code and a goods and services tax.

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