The great Indian growth miracle

The recession resulting from the lockdown imposed to contain the spread of coronavirus has brought back memories of 1979, when India’s gross domestic product (GDP) contracted by more than 5% for the first time after Independence. However, 1979 had 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 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 primarily because it directly impacts the average income levels. If, for instance, GDP grows at an average inflation-adjusted (real) rate of 8% per annum, an average Indian would roughly double her income in 10 years. A more modest 5% GDP growth would mean that the same journey would take 17 years.

If the GDP growth rate were to revert to the pre-1979 trajectory of 3% 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) (See chart 1).

Two, the trajectory of growth will influence how far can India 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 took off around the same time as India’s, after Deng Xiaoping took charge of the communist party in 1978. Till about 1990, the GDP of the two countries were roughly equal in terms of purchasing power parity (PPP).

Since then, China zoomed ahead to eclipse the US, leaving India far behind (See chart 2).

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 every year. This is important for them to lead decent lives and to raise domestic purchasing power, which will sustain India’s next cycle of growth, and to defuse the demographic time bomb that is building up with rising unemployment in the country.

Creating decent non-farm jobs is also key to raising farm incomes. In an oft-cited 1954 research paper, 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 the Lewisian transformation to shift workers from farms to factories, driving 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 lopsided and the transformation remains incomplete.

The farm sector remains the biggest employer in the country, though the share of farm jobs have shrunk over time. Unlike in other fast-growing Asian economies, the new non-farm jobs have mostly been in construction and services, rather than in factories (See chart 3).

The construction sector pays better than the farm sector, but 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, 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, it will need fast growth spread across more sectors.

The final, and perhaps the most important, reason that 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. However, periods of growth acceleration have typically led to a faster decline in poverty, the data shows (See chart 4).

Growth not only boosts average income levels, but also generates extra funds for welfare programmes. 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, with the poverty rate falling to 22%. This period saw very rapid growth, as well as increased rural spending, on schemes such as the rural employment guarantee programme, 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%, according to Mint’s calculations. The statistics ministry has contested the findings of the NSS survey, arguing that consumption could not have declined in an era of high growth. However, given that the growth numbers have come under fire from independent experts, the argument has not convinced everyone.

Writing in these pages, demographer Sonalde B. 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. 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.

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 (See chart 5).

Not only have per capita incomes grown faster in India than in most other comparable countries, it 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.