The Indian economy has good reason to step into the new decade brimming with confidence. India should be able to double its dollar per capita income over the next 10 years, going by purely linear extrapolation from the current trends in economic and population growth. But in case we have sustained double-digit growth and an appreciating currency, then the average Indian in 2020 could be earning what an average Chinese does today: around $3,500 a year.

That will result in a huge transformation in standards of living and national strength as long as these gains are spread among hundreds of millions of people rather than sucked up by a narrow elite. The risks are not just moral but political as well, going by the way the Naxalites have managed to tap into tribal alienation.

Illustration: Jayachandran / Mint

High growth will generate tax revenues that the state could use to build a welfare system and to improve governance. Inclusive growth is right now fallaciously equated with government programmes such as the National Rural Employment Guarantee Scheme. These are at best safety nets for the poorest but may have little relevance in an India that has trebled average incomes. The more relevant form of inclusive growth is job creation to help millions get away from low-productivity farming work.

Structural macroeconomic reforms will be less of an issue in the coming decade. India already has low import tariffs. The goods and services tax and the new direct taxes code will finally cement a stable and low-tax regime in India. More tax revenues will help repair public finances, though special interest coalitions could increase their demands for government largesse to pamper their vote banks and oil their party machines. The more important reforms will be sectoral: in finance, power, infrastructure and education.

Economist Simon Kuznets showed how countries with growing economies report growing inequality in the early years and such inequality drops after a certain income threshold is reached. One reason is that different groups move into the modern and high-growth sectors at different speeds, as is happening in India as well. But there is a danger that India may follow Latin America, in the sense that high inequality solidifies into crony capitalism. It will thus be important to protect open markets in the coming years, especially to remove obstacles to entrepreneurs who build new businesses.

In short, the challenges of a middle-income country will be different from those of a poor country.

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