From here to $20 trillion: India’s economic growth strategy
The NITI Aayog action plan to boost agriculture as well as job creation in modern activities fits well with what has happened over the past few decades
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The NITI Aayog has put out an action plan for the next three years. The document has been severely criticized for being a laundry list of government policies. A strategy document is to follow. It should ideally have come before the action plan—to provide a strategic backdrop for individual policies listed out in the three-year action plan. The sequencing is a bit odd.
There are some elements of strategic thinking that can be gleaned from the action plan itself. The NITI Aayog, in its discussion on transforming Indian agriculture, has dealt at length with the challenge of increasing farm productivity. It has later backed a traditional Asian strategy of creating quality jobs through the expansion of the organized industrial sectors as well as a shift within it towards more labour-intensive goods and services.
Exports have been given a central role in the transformation plan. The export market is far bigger than the domestic market. The need to compete in competitive global markets creates incentives for higher productivity. Large firms also support an ecosystem of smaller firms that provide intermediate goods through supply chains.
The implicit NITI Aayog strategy should be seen against international development experience over the past six decades. In a new paper published in January, economists Xinshen Diao, Margaret McMillan and Dani Rodrik have empirically examined the drivers of economic transformation across the world. They have decomposed growth into two categories. The first driver of economic growth is labour productivity changes within a sector. The second driver is the change in labour productivity as people move from the traditional to modern sectors. Latin American growth is better explained by higher productivity within sectors. African growth is driven by structural change as labour is reallocated.
The odd thing in this growth decomposition is that both drivers do not kick in. Latin American growth has been accompanied by weak structural change as people have moved from high-productivity work to low-productivity work. African growth has been accompanied by deterioration in productivity growth in the individual sectors of the economy. This is paradoxical, since the Asian growth experience was based on both drivers—and powered by export growth. Productivity within sectors went up even as there was a structural shift of labour from farm to factory.
Diao, McMillan and Rodrik note that the Indian growth experience has been closer to what happened in Asia rather than the record in Latin America or Africa. The NITI Aayog strategy of boosting farm productivity on the one hand and creating new jobs in modern activities on the other fits well with what has happened in the past few decades. Interestingly, the Economic Survey written this year by Arvind Subramanian also notes that India has begun to resemble Asia in terms of its fiscal balances, high savings rate and trade openness.
The Indian development strategy is clearly influenced by the work of the West Indian economist W. Arthur Lewis, who won the Nobel Prize in 1979 for his description of the development process. Lewis drew an important distinction between the traditional and modern sectors of an economy. Productivity is higher in the latter. Economic growth thus depends on how rapidly resources, and especially labour, move from the traditional to the modern sectors of an economy.
The NITI Aayog needs to make some of these issues clear in its promised strategy document. It also needs to grapple with the undeniable fact that India has not been able to pull off a Lewisian transition. In his landmark 1992 budget speech, Manmohan Singh had clearly said that the policy goal over the long term was “to evolve a pattern of production which is labour intensive and generates larger employment opportunities in productive higher income jobs….” Twenty five years later, the NITI Aayog action plan seems to be informed by the same reasoning.
The Economic Survey as well as the new NITI Aayog action plan could be read as a vote of confidence in the Asian development strategy—and a counter to the quixotic ideas about using the millions of tiny enterprises in the informal sector to drive economic transformation.
But there are challenges as well. The ability to create jobs in modern enterprises will be tested by the increasing use of automation in factories and offices. The ability to push exports will depend on whether the global system remains open in the face of growing protectionist sentiment in the developed world. These two challenges—weak job creation as well as export pessimism—have cast a long shadow on Indian development strategy at least from the days of the second Five-Year Plan.
The past 25 years have seen the Indian economy grow more than eightfold in dollar terms between 1992 and 2017, according to data from the International Monetary Fund. A $293 billion economy is now a $2.4 trillion one. Average incomes have also gone up by a factor of six over the same period—from $318 to $1,850. The big question is if, assuming the same momentum, the next 25 years will end with a $20 trillion economy where the average Indian citizen earns $7,100.
What is the strategy to get there—or even beyond?
Niranjan Rajadhyaksha is executive editor of Mint.
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Read Niranjan’s previous Mint columns at www.livemint.com/cafeeconomics