Building forward better

The biggest impediment in India securing transformative prosperity for its citizens by 2047 is the suboptimal utilisation of its resources

There is a lot of talk of the Indian economy hitting $30-35 trillion by 2047. These calculations are based on arithmetic extrapolation, backed, no doubt, by a healthy fatalism. But history tells us that progress is neither linear nor inevitable. As I am not prone to the contemporary Indian disease of bragging about the future, I ask: What kind of structural transformation will the Indian economy and society need to undergo in the next 10 years to make this happen?

At our current development juncture, there is no one answer to this question for India as a whole. This is because the Indian economy has diverged in many dimensions, especially since 1991. The divergence that worries me the most is that the majority of our population lives in the poor, uneducated, unhealthy and underdeveloped  north and east of the country, with the minority in the relatively prosperous, low-poverty, medium-human-development south and west. There are then large pockets of poverty and deprivation in the relatively prosperous regions. Kashmir and the Northeastern states, like much of Africa, are hampered by cruel geopolitical constraints imposed on them by history. To speak of a single development trajectory would, therefore, be facile.

One point solutions will not work. Export-led growth, a concept I have been lectured about throughout my professional life, would be a great idea. Except that it has not happened, and there is no hard evidence, only a lot of boasting, to indicate that it will.  Raghuram Rajan recommends structural changes that push India as an exporter of high-end services, upgrading from the low-grade information technology (IT) and support services we currently offer. But unless something changes upstream, this will only reinforce concentration of activity in the peninsula and will not help expand employment at scale.

We could also strive to raise the share of manufacturing in gross domestic product (GDP), as Arvind Subramanian  recommends. This has certain positive sociological side effects, particularly in a society like India, characterised by misogyny and low fraternity. The manufacturing shop floor has far less time for caste and gender discrimination than services. It requires a modicum of egalitarian practice and fraternal behaviour to function as manufacturing is less atomised than services. However, there is a causality problem. This is possibly one reason why India is a diminished manufacturing power, exhibiting premature deindustrialisation in Uttar Pradesh and good performance in relatively high fraternity states that have confronted upper caste hegemony like Tamil Nadu and Maharashtra. So, we may have to tackle misogyny and bigotry first before aspiring to superpower manufacturing status.

In my view, the crux of the problem is not the choice of what to produce but, rather, the extent to which the utilisation of assets we have to produce them is fit for purpose. In economics, these are called factors of production — land, labour and capital. The optimal deployment of each of these is fraught with serious institutional and social challenges, which often go unrecognised in the crafting of Indian economic strategy. Overcoming these challenges also requires considerable investment of political capital that is currently being frittered away on compensatory policies and labarthi (beneficiary-focused) politics.

Robert Solow’s path-breaking work on economic growth posited the concept of the “steady state”. When land, labour and capital in an economy are fully utilised, the growth rate is constant within a narrow range. This growth rate can only increase if there is an increase in the working population, technology and/or productivity.

But the steady state also depends on extant social and institutional conditions. Consider an economy with a low labour force participation rate, one in which there are barriers to optimal land use and ecosystem degradation, and crony capitalism, leading to high costs of capital for some and low-cost inefficient deployment of capital by the cronies. It will have a lower steady state growth rate than an economy without these features. In essence, this is the difference between countries caught in the middle-income trap and those that are not. India’s biggest constraint in securing transformative prosperity is its inability to unlock the full potential of our assets.

This not only serves as a cause but also exacerbates regional economic inequality. For example, South India is addicted to importing and exporting cheap migrant labour for low-end services, thereby facilitating the persistence of an unproductive informal sector. It is, therefore, unable to make the transition to higher productivity manufacturing. North India is unable to broaden its capitalist base to meet the huge latent demand for affordable housing and textiles. This is because we cannot profitably make apparel or homes for those earning the minimum wage. We cede our mass markets to China, Vietnam and Bangladesh because of our inability to manufacture for our own people. Misutilisation of land and ecologically wasteful cropping practices have resulted in an unprofitable agricultural sector, which agitates about subsidies, not profits.

Sub-optimal utilisation of factors of production resulting in a low steady state is not unique to India. However, its resolution is not guaranteed as the story of many middle-income countries shows. And countries in the middle-income trap do not become superpowers. They get mired in domestic squabbles, which often assume cultural ethnic or regional dimensions, a worrying feature of the current Indian political landscape.

I will analytically elaborate on pathways to unlock the full potential of each of the factors of production now, if India is to transform into a fully developed economy by 2047, in three subsequent articles.

rathinroy@outlook.com. The writer is a macro-fiscal and political economist, and former member of the Economic Advisory Council to the Prime Minister