Will India continue to be an underdeveloped lower middle-income country?

Given the realities, the prospects of India becoming something more seem bleak, unless transformational change occurs soon

At this time each year India obsesses about growth, budgets and deficits. As usual, the 2018-19 Budget is being overplayed, though budgets are but passing fancies. The critical question is: Where is India going? Will it become a rich “developed” nation in the foreseeable future? Ever?

China grew at 10 per cent for three decades (1979-2009). India has grown at 7 per cent from 1991 to 2016. Its growth trajectory has been interrupted by politics of a kind that China avoids, and by a continuing hesitancy about economic reform. Current performance (of a government elected for vikas) in 2014-17 is disappointing. The twin own-goals — of demonetisation and appalling GST implementation — have cost India 1-2 percentage points in growth. The latter may have done more medium-term damage than is generally acknowledged. 

Initial confidence in Narendra Modi’s competence is now shaken by the experience of four years. The government’s mixed record in executing many of its programmes has become clear. Crucial reforms have not been attempted. India now knows that Modi also acts impulsively, against good advice. If this track record persists, how long will India take to become a “developed” nation?

The question about the long term is pertinent. Argentina and Brazil were thought in the 1800s most likely to become “developed”. When the 19th century ended, most thought they would pull South and Central America to become “developed” in the 20th century.  Even in the mid-20th century, their per capita incomes were about five times that of South Korea. But Brazil is still caught in the “middle-income trap”. Though Argentina is technically a high-income economy, it remains less than “developed”.

Instead, it was the poorer countries of East Asia (South Korea, Taiwan, Singapore, Hong Kong) — about whose prospects nobody seemed optimistic — that broke through. These “flying geese” are now “developed”. China has become a second superpower. That is sooner than China expected or is prepared for, since it is not yet “developed”. Its premature rise is partly due to the doom spiral (in geostrategic power as well as global credibility) that Donald Trump has triggered for the USA.

This is mind-bending when one considers that in 1950 (after Partition), India’s per capita income (PCI) was almost the same as that of China, while Korea and Taiwan were only 50 per cent ahead (Angus Maddison). In 1950, India was thought to have greater public capacity, a more developed “polity” and more social stability than East Asia. Those views seem bizarre in the retrospect of post-Independence reality.

Whereas it was almost equal in 1950, India’s PCI at around US$1,852 in 2017 is (according to the IMF) more than four times lower than China’s. It is also 13 times lower than Taiwan’s, and 16 times lower than S Korea’s. Some smaller countries (for instance, the UAE, Kuwait) in the Arabian Gulf have achieved the same PCI as Singapore and Hong Kong. These artificial, expatriate-dependent, monarchies are “rich” and have first-world infrastructure. But, they are not “developed” — when judged by ethical, social and cultural values, quality of jurisprudence and delivery of justice, respect for individual freedom, human rights, gender equality, behavioural standards, and corporate or public institutional capacity, that prevail in liberal democracies of the kind that India once aspired to be. Neither is China “developed” although it is much richer than India.

Between 1960 and 2000, the developing world largely embraced a faux western “democratic” model. With its success over a generation, China offers an alternative. It is not an attractive one for a pluralistic, individualistic, chaotic, undisciplined (secular?) country like India, where an authoritarian, autocratic model is unlikely to appeal widely. One can see it being adopted in West/Central Asia and even Central Europe, as the relative power of the West recedes; perhaps in some African democracies that are messier than India’s.

Illustration by Binay Sinha

Under its present dispensation, India is transmogrifying “democracy” into its own peculiar version of a majoritarian country with bouts of mobocracy, a Hindu version of the Pakistan that it so despises. That alone suggests that the trajectory India is now on might not be conducive to its becoming a developed country. Why so?

Anecdotal evidence abounds about what stops countries — even those with natural resource endowments — from generating enough “escape-velocity” to avoid the middle-income trap. But there is no compelling economic theory that explains causality.

Yet, it is clear from the evidence available that a country cannot escape the lower middle-income country (LoMiC) trap when its governmental system perpetuates a politics that is self-serving to politicians by enriching them through rent extraction; owns or interferes in large parts of finance and business; favours crony capitalism that buys politicians and regulators; damages institutional capacity with lower standards of efficiency, ethics and morality; does not invest enough in human capital through health and education; nor in science, technology and R&D; and cannot cope with the consequences of growth but instead chokes on it. Modi talks of addressing these deficiencies in India but does too little to correct them.

India’s PCI is often projected (arithmetically but mindlessly) to double every 13 years if it sustains 5.5 per cent real annual growth (7 per cent GDP growth less population increase). But 5.5 per cent is not good enough; the countries of East Asia did better. And as Brazil and Argentina show, you can have periods of rapid growth interspersed with periods of stagnation.

Even if the doubling happens, India’s PCI will be US $3,700 in 2030, US $7,400 in 1943 and US $14,800 in 2056, measured in 2017 dollars, not allowing for intervening exchange rate ructions. That is barely half of South Korea today. And, by 2056, a high-income developed country will have a PCI of over US $100,000. But, will India achieve a PCI of close to US $15,000 (slightly more than Hungary or Argentina today), and can it hope to become “developed” even four decades from now?

That seems unlikely. Growth has to be not just sustained but accelerated. But India’s public institutional capacity for sound governance is eroding. Its “steel-frame” civil services cannot even prevent rioting over a film. Rule-making is prolific, but enforcement and regulatory capacity are overstretched. Private sector capacity, though indisputably higher, leaves much to be desired. Too many corporate titans have feet of clay.

Given those realities, obscured by excessive self-congratulation, the prospects of India becoming more than an LoMiC seem bleak, unless transformational change occurs soon. Modi promised it. So far, he has neither conceptualised nor delivered it.

The author is chairman, Oxford International Group