India Not Yet Facing "Late Converger Stall"

The Union Minister for Finance and Corporate Affairs, Shri Arun Jaitley tabled the Economic Survey 2017-18 in Parliament today. In one of the chapters the Survey examines how far the apprehensions of an impending Late Converger Stall are true for India and whether the stall is likely to affect India's growth in the coming years.

The Survey notes that the present era is one of economic convergence whereby poorer countries including India have grown faster than richer countries and closed the gap in standards of living. India moved from being a low income country in 1960 to a lower middle income country in 2008, and is now attempting to make a transition to middle income status. However, there are fears that this process of convergence may slow down for the late converger countries like India, who are trying to make this transition after the global financial crisis. It notes that India needs to take on four challenges in order to ward off the fears of an impending Late Converger Stall in the process of economic development. The four challenges that the Survey points to include: the backlash against globalization which reduces exporting opportunities, the difficulties of transferring resources from low productivity to higher productivity sectors (structural transformation), the challenge of upgrading human capital to the demands of a technology-intensive workplace, and coping with climate change-induced agricultural stress.

 

a. Hyper globalization repudiation or backlash against globalization -

Early convergers like Japan, South Korea and China were able to post average export growth rates of over 15% for thirty years of their convergence periods. However, the trading environment has changed for late convergers like India. A backlash in advanced countries against rapid globalization has led to a fall in world trade GDP ratios since 2011. This means a decline in exporting opportunities, especially since politics in advanced countries is moving de facto in the direction of seeking and forcing lower trade GDP ratios . b. Thwarted structural transformation or difficulties of transferring resources from low productivity to higher productivity sectors

For successful development, resources need to shift from low productivity to high productivity sectors. Structural transformation gets thwarted if resources shift from informal, low productivity sectors to ones that are only marginally less informal or more productive. Studies in India show a weakening correlation between overall growth and good growth.

c. Upgrading human capital to the demands of a technology-intensive workplace

Late convergers like India have failed to provide even the basic education necessary for structural transformation. This is reflected in the finding that in India, roughly 40 to 50% of rural children in grades 3 to 8 cannot meet the basic learning standards. This failure will prove increasingly costly because the human capital frontier for the new structural transformation will shift further away as technology will increasingly favour skilled human capital. There is, however, some consolation that the trend has started to improve since 2014.

d. Climate change-induced agricultural stress

Growth rates of agricultural productivity for richer countries have been consistently greater than for developing countries. For India agricultural productivity growth has been stagnant, averaging roughly 3% over the last 30 years. It is also vulnerable to temperature increase and still heavily dependent on precipitation. For late convergers, agricultural productivity is critical not just for feeding people but for ensuring human capital accumulation in those who move from agriculture to the modern sectors.

The Survey goes on to note that growth in India has occurred with limited transfer of labour resources from low productivity to high productivity and dynamic sectors, and despite relatively modest agricultural growth. Rapidly improving human capital, will be key to sustaining India's dynamic growth trajectory. Rapidly improving agricultural productivity against the headwinds of climate change and water scarcity will be another key to achieving good sustainable growth. As of now India may not be faced with a Late Converger Stall, but need to act in time to ward it off.

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