Posted by: Shiv Muttoo | August 4, 2011

Slow and Easy


A leading investment bank estimates that India ($ 4 trillion GDP at present, PPP basis) will continue to grow at eight percent to emerge as an $ 86 trillion economy, the world’s largest, by 2050. At that point, the country would represent 23 percent of world GDP; the US contributes 19 percent to world GDP at present. The Indian economy in 2050 would be larger than China’s; over twice the size of the US and 11 times that of Japan. Per capita GDP would exceed $ 50,000, 10 percent higher than the prevailing level of prosperity in the US. Phew!

Since the beginning of the economic liberalization process in the early 90’s, the Indian economy has tripled in size. Per capita income has doubled to over $ 3,000. However, the fruits of growth have largely evaded India’s agricultural economy that supports 60 percent of its people but contributes just 15 percent of the country’s output. Maintaining archaic practices on increasingly fragmented land holdings, the per capita GDP of the country’s 700 million still dependent on agriculture has inched up from $ 600 to $ 800 in almost 20 years. During this time, the farmer’s city cousin, participating in India’s services revolution, is significantly better off, his income growing from $ 2,800 to $ 7,000. In economic terms, while the Indian farmer lives in the jungles of Central Africa, all others are in rapidly prospering China. So much for inclusive growth!

This disparity is increasing further, a potential time bomb unless we bridge the chasm between the two dozen on Forbes’ annual billionaires’ list and the half billion living at less than one dollar a day. Here it is interesting to note that while the global poverty standard has since been revised to $ 1.25 daily, the Indian Government believes that a fourth of that number is sufficient to deliver the recommended 2,400 calories to the country’s rural poor.

What we need now is a soft landing of the agricultural economy as its contribution to both employment and output reduces to under five percent over the next few decades, the way it’s happened in every developed country worldwide.

UP, Bihar, MP, Rajasthan along with their offshoots, termed BIMARU states, account for 42 percent of India’s population and represent a sizeable portion of the demographic dividend we are likely to be blessed with. Jobs are needed in these states if we want to avoid a disastrous cross-country exodus.

India’s growth achievements have come on the back of seven million new jobs created annually as the restrictive policy environment encouraged capital rather than labor intensive growth. More recently, new job creation, obstinately steadfast over many years, is up to 10 million annually. But this meets just half the requirement as over 20 million will join the employment bandwagon every year in the near future.

Waking up to this reality, the Government now wants to increase economic contribution from manufacturing to 25 percent  by 2025 from 16 percent at present, implying 11.5 percent annual growth. World class manufacturing zones planned across the country will seek to deliver 100 million jobs over 15 years. However, the National Manufacturing Policy that will achieve all this has been cutting through the jungle of red tape for over a year now and will be with us soon, hopefully. Indian manufacturing has delivered less than seven percent growth over the last decade so there’s a lot of ground to cover.

India’s services sector has grown at 10 percent for almost a decade and now represents 57 percent of the country’s economic output, delivered by just 29 percent of the labor force. Sustained growth momentum in services requires the bandwidth of urban infrastructure. While India is now 30 percent urban, it is already the global slum capital with over 90 million living in derelict structures and gross penury. It is estimated that only 15 percent of Mumbai does not live in slums, chawls or footpaths. Other Indian cities are headed in the same direction.

The list of constraints to growth seems never ending. There’s a growing deficit of infrastructure, policy and governance as well as of thinking, inclination and propriety. Despite these issues, we have hurtled along just fine for many years but the strain is beginning to show in recent months. But no worries…  India will grow just to catch up. Look deep within and there’s realization that maybe six percent growth is sustainable, anything more an aberration that is likely to even out over time. And we can happily chug ahead once again, undaunted by basis points and fine print of economic forecasts originating out of New York or Singapore.



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Responses

  1. Very well articulated perspective. Much of what is said here is something we have intuitively known all along.

    You raised an interesting issue of defining poverty. Indeed, what is poverty and when is a person poor is a tricky thing to pin down. Many would agree that poverty involves not having enough of certain things, or doing without others that richer folks take for granted. But what is “enough”, and who should decide these questions—researchers, governments or international agencies—are less tractable questions. Perhaps the poor themselves should have the final word. But even there, diminished expectations could skew the view – some poor families could say that going without a meal once in a while is ‘normal’ for them, and so they will consider only what seems unusual penury to them!

    +

    • Abhi – Its not the poor who get to decide if they are poor or not. Their masters in the Government do that on their behalf. And in India, the decree is that 15 rupees daily is sufficient for sustenance – only 300 million Indians are below that mark and qualify for BPL benefits. I’m sure some thought would have been applied before that 15 rupees number was arrived at which is one-fourth the global benchmark of $ 1.25. BTW, US’ mark is $ 11,000 annually for a single person and double that for a 4-member household. Maybe, inability to afford Nike sneakers and McDonald’s burgers is poverty there. They really are undergoing a lot of strife out there!

  2. Shiv – Great post, comprehensively presented data and obvious passion for India’s development. However, I couldn’t make up my mind whether you were optimistic or pessimistic regarding India’s long term growth prospects and the long term prosperity of the larger populace.

    I agree that India needs to diversify into higher value-added manufacturing and commercial/ cooperative farming in order to realise the benefits of a largely employable but inefficiently utilised workforce. Also, we need to de-risk the over-reliance on the service sector which itself has been so far been reliant on the West for sustenance and growth. In this respect, it was heartening to read recently that a number of Indian companies are now getting into more sopisticated and hence value added manufacturing – a trend that needs to be consciously nurtured by policy makers.

    On infrastructure, much has been made of China’s infrastructure – to the extent that they seem to have over-created it – tales of under-utilised, unprofitable and perhaps insolvent public sector undertakings (high speed rail-roads to nowhere) abound. Perhaps India has been insulated from that kind of scenario by a combination of corruption and destiny rather than by design… but what the heck, I think India deserve a good break once in while!

    Lastly, a question – how sound a measure is the PPP? In the light of India’s economic reforms and greater integration in the global economy, the cost structure in India is moving towards being in-synch with global cost structures – is the PPP more of a feel good factor because it usually shows a better picture just like a regularly “adjusted” WPI would?

    All the best and stay positive…Sriram

    • Sriram – I left sentiments such as passion and optimism back in school. If we emerge from our cocoons of comfort and look around, there is a lot of hardship – I refer to looking around in Mumbai when you’re here next (give me a call # +919833557572). Only a small percentage of Indians has benefited from reforms undertaken over the last 20 years. It’ll be interesting to see what the per capita median GDP of the country is and how its moved in the last two decades. I’m sure that data, even if it exists, will never be located like the files in Govt departments. The key issue now is to deliver 20 million jobs to the demographic dividend coming to India. The Govt is at a loss, as usual, and is trying to make some half-hearted attempts (basically attempts at grabbing headlines). Whereas infrastructure is concerned, would rather have more than less. And even without infrastructure, we have our fair share of defunct PSUs – check Air India, there are others too. You are right – PPP is a concept created in the west to make the poor countries believe that they are much richer than they actually are – India’s GDP is $ 1.5 trillion but the US tells us that instead its $ 4 trillion so we believe them! Anyway, the PPP factor in India’s case is fast depleting because of continually high inflation – I think it used to be 4X now its 2.5X, maybe 0.8X in 20 years – that’s progress!

  3. Comprehensive,Concise and Simple perspective.
    We can do better if we can get RID of corruption. We also need to be synergise our act and stay. Not only a good policy but better focussed implementation. Quality has to become an attitude and not a lip sevice.
    I am sure we would see more from Shiv.

    • Sir, We need to register global trademarks/copyrights on our system of corruption and make money selling it to other countries that may not be as inventive. Corruption has reached such levels that its difficult to count the number of zeroes when valuing each successive scam. The Govt has carefully nurtured our corruptible heritage over the last 64 years to make it happen, kudos to them! The Govt’s planning assumes 9% growth, their own economists are now saying 8%, private sector economists are coming closer to 7%, I feel 6% is good enough given the various deficits we have to contend with!

  4. Hi Shiv,
    Very well said.
    The facts, as mentioned here in India’s case, I believe is same/similar in other developing countries too. For faster growth the acceleration always comes from tertiary sector and to a lesser extend from secondary. In the whole process primary sector gets ignored/unattended (more so if we exclude mining etc from primary).
    All the problems of imbalance starts there.
    But one problem I am stilled puzzled with is what if our 1.xbn population do in 2050, 2010 etc when they are hungry!!

  5. Whoever makes this claims have to be worlds greatest economist, ever, to predict these kind of numbers, and get them anywhere near right. Good luck – you, or whoever it is, are entitled to live in your own imaginary world. If you want people to believe what you write, provide some hard data and facts that support your claims, else they just remain lofty claims, and nothing much more.

    • No lofty claim, no imaginary world. See the dateline on my blog entry and the prediction of 6% growth when the Govt was claiming 9%. On the simple premise that you can’t run fast if all you have is an uneven, rock strewn surface… Looks like the 9% was a momentary lapse, now we are back to normal service. And I am no economist, just an ordinary man.


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