How growth reshaped India’s destiny, and why we need an encore5 min read . Updated: 20 Jul 2020, 12:00 PM IST
Three decades of rapid economic growth have changed the country but India’s economic transformation remains a work in progress
The pandemic-induced recession has brought back memories of 1979, when India’s GDP (gross domestic product) contracted by more than 5 percent for the first time since independence. But 1979 also marked a turning point for the Indian economy.
India saw an unprecedented growth surge for more than three decades since that historic contraction. The growth surge survived a balance-of-payments crisis, stock market scams, and multiple phases of political instability. It pulled millions out of poverty, and transformed our lives.
Will 2020 be a similar year for the Indian economy? Will the economy contract only to get back on a higher and firmer growth trajectory in the years to come? This is arguably the most important question the country faces, for more reasons than one.
Growth matters so much firstly because it directly impacts the average income levels. If for instance, GDP grows at an average inflation-adjusted (real) rate of 8 percent per annum, an average Indian would roughly double her income in 10 years. A more modest 5 percent GDP growth would mean that the same journey would take 17 years. And if the GDP growth rate were to revert to the pre-1979 trajectory of 3 percent per annum, it would take nearly 30 years for India’s per capita income to double. For perspective, between 1980 and 2010, India’s per capita income went up more than three times to ₹86,560 (at 2019-20 prices).
Second, it is the trajectory of growth that will influence how far India is able to stand up to external aggression and threats. As the events of the past few weeks have shown, China’s emergence as a new superpower will test India’s ability to protect its interests and those of its allies in the neighbourhood. Having greater economic firepower will make it easier to deal with such a challenge. China’s own clout springs as much from its wealth as it does from its military might.
China’s growth take-off occurred around the same time as India’s, after Deng Xiaoping took charge of the ruling communist party in 1978. Till about 1990, the GDP of the two countries were roughly equal in purchasing power parity (PPP) terms. Since then, China zoomed ahead to eclipse the US, leaving India far behind.
Getting growth back on track is important for a third big reason. Without fast evenly balanced growth, it won’t be possible to create enough decent jobs for the millions of youth who are joining India’s workforce each year. This is important for them to lead decent lives, to raise domestic purchasing power that will sustain India’s next cycle of growth, and to defuse the demographic time bomb that is building up with rising youth unemployment in the country.
Creating decent non-farm jobs is also key to raising farm incomes. In an oft-cited 1954 research paper, the Nobel-winning economist Arthur Lewis showed that by moving surplus labour from the farm to the non-farm sector, developing economies could raise productivity in both sectors, and raise overall savings and growth. Since then, several economies, including the fast-growing economies of East Asia, have followed such a Lewisian transformation to shift workers from farms to factories, driving up growth and reducing poverty at the same time.
India’s growth process over the past four decades has also witnessed a shift away from farm to non-farm jobs but the process has been lop-sided, and the transformation remains incomplete.
Even though the share of farm jobs have shrunk over time, the farm sector remains the biggest employer in the country. And unlike in other fast-growing Asian economies, the new non-farm jobs have mostly been in construction and services, rather than in factories.
While the construction sector pays better than the farm sector, it offers only slightly more productive jobs. The services sector does offer some high-productivity jobs (such as in software services) but the bulk of the new service sector jobs in India have been low-end ones, such as in trade, transport, and storage with relatively lower productivity levels, data from the Reserve Bank of India’s KLEMS database shows.
If India is to create more high-productivity jobs in the future, India will need fast growth spread across more sectors.
The final and perhaps the most important reason why India needs several more decades of rapid growth is its huge poverty challenge, aggravated now by the pandemic. Growth alone may not have been enough to lift poverty, even in the past. But periods of growth acceleration have typically led to a faster decline in poverty, the data shows.
Growth not only boosts average income levels but also generates extra funds for welfare programs. After all, the biggest ever poverty decline in India’s post-independence history occurred during the 2004-11 period when nearly 150 million people were pulled out of poverty across the country, with the poverty rate falling to 22 percent. This period saw very rapid growth as well as increased rural spending on schemes such as the rural employment guarantee program, which helped the poverty reduction effort, according to several empirical studies.
As with other aspects of India’s more recent economic history, the trajectory of poverty since 2011-12 remains mired in controversy. The most recent and buried National Sample Survey (NSS) report on consumption expenditure in 2017-18 suggests that India’s poverty rate actually inched up one percentage point to 23 percent, according to Mint’s calculations. However, the statistics ministry has contested the findings of the NSS survey, arguing that consumption could not have declined in an era of high growth. But given that the growth numbers have come under fire from independent experts, that argument has not convinced everyone.
Writing in these pages, the demographer Sonalde Desai has argued that while consumption spending indeed grew between 2011-12 and 2017-18, the rate of growth was far lower than what it was in previous years. Desai based her arguments on the results of a survey carried across three states in the same years as the NSS surveys.
Thus the actual rise in consumption may be higher than what the NSS survey showed and India’s growth may be more modest than what the statistics ministry’s data shows, Desai argued. And if that argument holds, it suggests that a leg-up to growth in the coming years would be necessary to boost consumption spending, and drive down poverty levels.
It is worth remembering that India’s growth performance has been superior to that of most other large developing economies in the world over the past few decades even if it has not been able to better China’s record so far.
Not only have per capita incomes grown faster in India than in most other comparable countries, India has also seen a relatively rapid decline in dependence on farm jobs and a faster pace of poverty decline, at least till 2011-12.
India needs a growth encore. Will it get one?
This is the first of a four-part series on India’s growth challenge.