According to the IMF, the Indian economy is projected to grow by 6.8% in FY 2024-25, while China and the USA will grow by 4.6% and 2.7%, respectively. If India continues at that pace, it could surpass the stagnant economies of Japan and Germany by 2027, becoming the world’s third-largest economy in terms of GDP.
The fiscal deficit, which was at alarming levels in 2021, has been reduced to 5.1% of GDP in FY 2024-25. As for inflation, based on the consumer price index for March 2024, it reaches 4.85% annually, which is well within the mandate.
Meanwhile the country—one of the poorest in the world—is struggling with massive unemployment, and faces the threat of a severe health crisis. Still heavily dependent on carbon-intensive sectors, India lags severely in the UN’s Sustainable Development 2024, ranking 109 out of 166 countries.
Prime Minister Narendra Modi has set a goal of transforming India into a developed nation by 2047, in time for the centenary of its independence. However, even the current rapid economic growth might not suffice to reach this goal.
IMPORTANT REFORMS
The past ten years, meanwhile, have seen some important economic reforms come through. One significant achievement, in 2017, was the implementation of the Goods and Services Tax (GST), which has unified India as a single market by replacing 17 different taxes levied by various local government bodies.
In 2020, Modi’s government played a crucial role in integrating identity, transfers, and payments into a single digital stack, pushing them to a huge scale. The move, unprecedented for a country as large as India, has inspired countries like France, the UAE, and Singapore.
Efforts are being made to revamp the country’s transport infrastructure, a part of which is collapsing. The introduction of semi-fast trains and rapid expansion of the urban transit network in recent times are much-needed moves to decongest urban areas and achieve more balanced growth geographically.
EMPLOYMENT AND PRODUCTIVITY CHALLENGES
A part of the current growth is due to what economists refer to as demographic dividend and catch-up growth. In simple terms, an economy benefits from a demographic dividend when it has fewer people to support and more people in the labour force.
India currently has nearly 600 million people in the labour force, which is roughly the same as the population of Europe. By 2036, it is expected that almost a billion Indians will be in the labour force. While such favourable demographics offer the potential for significant growth, much depends on how effectively the labour force will be employed, and in which sectors.
In order to become a developed nation by 2047, India needs to maintain its current high growth rates at the very least1, which implies creating a significantly larger number of employment opportunities. But the country is currently facing a severe job crisis: there are not enough good jobs available, especially for the youth.
Even more concerning is the current nature of employment. Usually, as countries develop, employment slowly transitions from farming to non-farming sectors. This was the case in India from 2000 to 2019; however, during the pandemic, almost 56 million people shifted back to the agriculture sector. A similar reversal of trend is observed in many East Asian economies, including China.
The return to farming itself is not necessarily negative, unless individuals are compelled to do so. But in India’s case, this can be attributed to a lack of work opportunities outside farming. Many individuals are forced to take up non-remunerative and highly risky farming activities.
Currently, the agriculture sector, which contributes 18% to the GDP, employs 42% of the workforce, compared with 53% and 32%, respectively, in the service sector. And a considerable proportion of those employed in agriculture lack the necessary skill set to find jobs in the service sector.
Much of the current growth in GDP is driven by highly productive big corporations, which tend to be capital-intensive and employ a smaller number of people relative to their size. Micro, small and medium enterprises (MSMEs), which provide large employment opportunities at considerably low levels of capital, have seen a severe decline in recent times. The pandemic significantly contributed to the current state of MSMEs, but most of the damage occurred long before 2019 due to very low productivity levels, high indebtedness and a series of policy errors by the Modi government.
In summary, for India to grow as fast as required, it needs to revive its MSMEs and transition its workforce from low-value-added sectors like agriculture to high-value added sectors like services. And the concerning current state of the labour market indicates that these challenges will not be easily overcome.
WRONG MODEL?
The current budget provides much- needed relief as it takes several steps in the required direction. However, the choices of sectors to prioritise for support are debatable. The government allots enormous capital subsidies to set up manufacturing plants when the lack of skill is a serious concern. For the sake of comparison, the capital subsidies promised to chip manufacturing plants are 150% of the higher education budget.
On August 15, 2024, in his 98-minute Independence Day address, Modi lengthily praised his government’s achievements and pledged to make India a manufacturing hub like China. But he said very little about the associated environmental challenges, while India is ranked seventh on the list of countries most affected by climate change.
China’s industrial growth model from two decades ago is unlikely to serve as a viable blueprint for India.
Firstly, because there is not much to be gained in low-skill manufacturing. Secondly, because China’s growth was accompanied by a fourfold increase in its per capita carbon footprint. The world has no space for another industrial China.
India is at a pivotal point in its development. The current policies are neither sufficient nor always relevant to retrain the workforce, modernise and support MSMEs, and scale its globally competitive services sector while achieving sustainable development goals. A substantial political and economic shift appears to be necessary to put the country on the right track.
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(1) The current growth rate might not even be sufficient. Considering China’s GDP when it was at the same level as India, and making an assumption that development status means having a per capita nominal GDP of $50,000 in 2047, the Indian economy might need to grow by some 10% annually, above the current 6-7%.
By Sandeep Achary
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