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India a “priority market" that will continue to see growth, said Salesforce’s president and COO Bret Taylor; it is a “must win" market for Royal Philips Electronics, according to its global CMO Geert van Kuyck; and it’s the “most important emerging market Bacardi is focusing on" as stated by Bacardi India’s marketing director Zeenah Vilcassim. These are only some of many corporate voices that have been making the same point over the past two years.

In another vein, several writers have argued that the world’s growth is constrained by the natural growth rate of its population. This is why the world economy is not out of the woods yet as far as a global recession is concerned. Japan, most of Europe, New Zealand and now even China, which have suffered prolonged economic weakness, all have populations that are either ageing or declining. In addition, compared to younger people, the elderly consume up to a third fewer calories. Consequently, the problem seems not one of too many people (the Malthusian trap), but also one of too few young workforces posing another constraint to economic growth.

The last observation explains the innovative immigration policies that countries are adopting today: the UK’s and Australia’s Global Talent Visa, Singapore’s Global Investment Programme, and other options like golden visas, etc.

These facts indicate that ‘people’ matter for economic growth. However, the question is: Why? Surprisingly, economic theory has no answer. The dominant Keynesian thinking is that it is income that limits consumption. Even in macro growth models, population growth is mostly exogenously given, and the role of demographics per se is not explained. But, today, income is not as much of an issue as dwindling populations. This is why Keynesian solutions that worked well in response to the Great Depression of the 1930s did not work during the Great Recession of 2008, despite massive pump-priming by the US and China, among others.

Let’s look at fundamental relationships between technology, capital and demographics. On the supply side, technology raises the productive capacity of factors of production (displaces jobs?). In addition, increased R&D and innovation often lead to new (and better) products. Thus, it also creates new jobs, at least those needed for new goods. Today’s world of automation implies there is no limit on production. Yet, if robots increasingly replace humans, or headcounts fall, there will be no one left to consume these products (unless robots start!) The conundrum, thus, lies in the asymmetric treatment of labour and capital in the analytical models of economics: while labour and capital are substitutes in production, there is no capital on the demand side.

Recently, some economists tried to show how the productivity of time (not labour) could be increased on the production side, with reference to virtual trade and offshoring. An IT firm in the US can maximize time productivity by outsourcing some tasks to Indians who work while the US sleeps. Yet, this only addresses the supply side and doesn’t solve the consumption problem.

So, what is the solution? It is critical to understand the role of ‘consumption-time’. Consumption requires not only income, but physical time. Buying something is useless if one has no time to use or consume it. Thus, if population stagnates and enlarged production must find consumers, technology must necessarily be time-saving. Empirically, this is what has happened in the West since the 1980s. Think of instant services and pre-cooked food, while saving time in sectors like electronics has worked through convergence: we use the same hand-held device for multiple needs today. Thus, demand growth in such economies depends on the extent to which technology can save people time. (The formal development of these results is shown in a publication by the authors in the B.E. Journal of Theoretical Economics).

Yet, time-saving technology is insufficient to solve a demand deficiency. Every consumer has only 24 hours a day. Hence, there is a limit to which technical progress on this score could increase aggregate disposable time. What this implies is that while time-saving technology could deal with the asymmetry on the production and demand side to some extent, it cannot offer a long-term balance of demand and supply. There are two possible options. One, shift consumers to where income is generated or advanced technology is available (i.e., the West allows immigration). Second, shift production to where consuming cohorts are in abundance, via FDI.

This is why emerging market economies matter, especially India. Data shows that our ‘young workforce’, which consumes approximately thrice as much as the older cohort, is still rising in India, while it has been falling in developed markets and even in China now. These trends are normally irreversible in the short to medium term.

The bottom line? India is valuable to the global economy because this is where consumers reside in terms of numbers and consumer cohorts. Since open immigration is unlikely to be acceptable politically in most countries, the only option is to transfer production to high-population markets. For FDI, ‘destination India’ should be the call.

Manoj Pant & Sugandha Huria are, respectively, former vice-chancellor and a faculty member at the Indian Institute of Foreign Trade.

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