To sustain rapid economic growth over the medium term, policymakers might need to take some well-calculated risks
Neelkanth Mishra
This appeared in the Print Edition of Business Today for Sep 15, 2024 (link)
In aspiring to be a developed country by 2047, India is trying to achieve in less than 60 years what took most of the current set of advanced economies three to four times as long. That means average growth needs to be three to four times the pace at which those economies grew as they progressed to prosperity. Exact replication of social and economic choices made by them would be unwise, as they made mistakes, too, and in any case, the economic environment today is different.
Let us start with the tailwinds. First, the further away one is from the technology frontier, the easier it is to grow rapidly initially. For example, in the US, the transition from no telephony to 4G data occurred over more than a hundred years. In India, in less than a decade, rural areas went from having less than 10% of people having landline phones to 60% having 4G data. At a broad level this meant a century of productivity growth getting squeezed into a decade (some of it might still be playing out).
Not all useful technologies can be spread at scale at this pace, but the world today is much more interconnected than it ever was, easing transmission. The cost of shipping goods has fallen dramatically, particularly due to containerisation; the cost of moving people by air is down nearly 90% in real terms over the past half century; and the cost of transferring information and expertise has fallen much faster than that. It is therefore easier to ship goods, people and ideas; our priority should be to open up to accept these. Over time, we must also become a ‘product nation’ (learn to innovate and build our own brands) to not get caught in the middle-income trap.
But there are challenges, too. The return of great-power conflict will progressively make the world less open for trade and information flow and geopolitical strategy will become important. The time available to reach prosperity is also not unlimited. The pace of demographic transition today is much faster than the pace of economic transition—information and behaviour that affects reproductive choices spreads faster than economies’ ability to reorganise in more productive ways. It is very likely that our median age will cross 40 by 2050 or thereabouts and as other economies have struggled to grow rapidly after crossing that threshold, we must maximise our growth till then.
Another challenge is the access to energy—given the strong relationship between energy demand and economic growth, most major economies control their sources of dense energy: oil for the US and Russia; coal for the UK and China. Germany relied on coal and then Russian gas and oil; Japan and France depend on nuclear energy. That India’s energy mix must also be different is both an opportunity (it can be built anew without discarding much) and a challenge (financing it).
One unique challenge for India is that it must hold course through a tricky period of a rise in inequality. History points to economies inevitably seeing an increase in income inequality as they transition the workforce away from agriculture. During this period there is a surplus of labour and a shortage of capital, which forces down the labour share of income. When other economies went through this increase in inequality, they did not have universal franchise—the ‘Age of Capital’ in Europe preceded everyone getting a right to vote. Japan gave everyone the vote in 1924, and the US even later. Taiwan and Korea were dictatorships when in this phase, and China has a different political structure even today.
This is not an insurmountable challenge. Technological change provides tools to organise labour and capital differently from how the rest of the world did a century or two ago. New layers on the ‘India Stack’, which essentially means leveraging digital public infrastructure, can democratise access to capital to an extent unthinkable a few decades ago, and even today in most parts of the world.
Further, accelerating demographic transition in developed economies, digitisation and easier cross-border travel also allow India to traverse additional paths for job creation than the conventional manufacturing-led exports. While the growth of GCCs (global capability centres) that provide services from India is encouraging and should last, there is also a growing opportunity in Indian workers going to developed economies struggling with shrinking workforces and the perils of illegal immigration. Government-to-government collaboration as well as careful market-making can accelerate this.
Even as we focus on growing net exports of goods and services and Atmanirbharata (self-reliance), it is important to remember that when the economy moves from a size of $4 trillion to $20 trillion, not more than one of the additional $16 trillion of annual output would come from growing exports or substituting imports. The rest would come from domestic demand. We must learn to manage important drivers of economic cycles in India like real estate, which is an important part of the formation of capital stock, and one where supply remains woefully short of demand.
Each of these transitions might need policymakers to take more risks—driving at 20 km an hour on a (relatively) smooth road is different from driving at 80 km an hour on a bumpy road. In the former, the potential downside from a wrong turn of the wheel (that is, a policy error) is a minor bump; the same in the latter would mean a growth derailment for several years. But given the ticking clock of demographic transition, some calculated risks may be unavoidable.