At 75, India is finally ready to join the global party
The writer is president of Rockefeller International
Today India celebrates its 75th anniversary, not wealthier relative to the rest of the world than it was at independence, but in full bloom.
India started out as the sixth largest economy in the world, dropped to 12th in 1990 and has since made a comeback – to sixth place. Median income was 18 percent of the world average at independence, but that figure fell until the early 1990s, before rising again — to about 18 percent.
This disturbing V-shaped development path is a legacy of India’s original choices. In other Asian countries, the state often granted the people economic freedoms first and political freedoms later as the country got richer. In India, the state first granted political freedom to a poor nation, but in a socialist economy that has never fully embraced economic freedom.
India’s comeback began in the 1990s when, acknowledging its early failures, it began to relax socialist controls – in part – and gave the private sector more room to breathe. The nation has gradually moved up in the Heritage Foundation’s ranking of economic freedombut still falls in the bottom 30 percent.
As late as 1990, India and China were roughly equal in terms of total gross domestic product and average income. Both pushed for economic reforms. But China pushed harder, encouraging mass migration to more efficient jobs in cities and massive layoffs at inefficient state factories. India has seen GDP grow tenfold since 1990 to $3.2 trillion and average per capita income more than fivefold to $2200. But China grew much faster on both measures and today is five times bigger and richer.
The era of miraculous growth – 7 percent or more – is now over. Rising debt, declining trade, declining productivity and declining population growth in working age are slowing economies everywhere, including China. When growth peaked in the mid-2000s, more than 50 economies were growing faster than 7 percent a year; in the 2010s, that number dropped to less than 10, mostly small ones. Today, a more plausible target for lower-income economies is 5 percent.
That is doable for India. One of its key strengths is a strong entrepreneurial culture, reflected in one of Asia’s oldest stock markets. It has generated an annual return of 12 percent in dollars since 1990, more than twice the global average, and is attracting more and more investors from around the world.
In the past decade, nearly 800 emerging market stocks have risen 500 percent to a market value of more than $1 billion. Of these, more than 150 are in India, the second highest number after China. In addition, this group accounts for nearly 40 percent of India’s more than $1 billion shares, representing the highest concentration of major success stories in emerging markets.
Fortunes have followed this trend. The number of Indian billionaires has risen from 55 to 140 in the past decade – now the third highest after the US and China. While this fuels concerns about inequality, you have to dig deeper and it reflects competitive dynamism rather than stagnation at the top.
Notably, in the 2010s, more than two in three Indian billionaires are new to the list. Of the 55 that were there at the beginning of the decade, more than a third dropped out. And many of the new billionaires emerged in productive industries such as technology and manufacturing, which were previously a weakness for India. But tacitly, production is expanding and now stands at 17 percent of GDP – no match for China, but progress nonetheless.
Unfortunately, the vitality of the private sector in India is matched by the incompetence of the public sector. A decade ago, state-owned companies accounted for 25 percent of India’s stock market, but that has fallen to 7 percent, and that’s not due to state-led privatization. Government mismanagement destroyed taxpayer value and wealth.
In other ways, however, the government has made progress. In 1985, then Prime Minister Rajiv Gandhi noted that out of every 100 rupees spent on the poor, only 15 rupees reached the needy. The rest was lost to corruption and bureaucracy. Now the government is transferring benefits digitally directly to recipients, through apps that have quickly expanded to cover much of the population.
The more efficient welfare state reflects a digitizing economy. Revenues from various digital services have a growth rate of more than 30 percent, above the emerging world average and nearly triple the developed world average — a welcome boost at a time of slowing global growth.
To grow faster than 5 percent, India would need to implement more radical reforms. Only 20 percent of women are formally employed, and doubling to 40 percent — just the average for a lower-middle-income country like India — would be drastic. So is encouraging internal migration for better jobs, as China did, as nine out of ten rural Indians still live in the district where they were born. But India is just as diverse and democratic as China is homogeneous and autocratic: imposing disruptive reforms is out of the question.
More likely, 5% growth is now the base case. Even at that rate, India will be a breakthrough star in a slowing world: on track to surpass the UK, Germany and Japan to become the third largest economy by 2032. At that point, India may not be a middle-income country yet, but it will move in the right direction and gradually rise in the world.