India's $10 trillion target

“I am sure that if India suddenly became a big successful manufacturing economy, it would make it (the path to $10 trillion) a lot easier, but I am not at all convinced that India will or should, given its own idiosyncrasies,” says Jim O’Neill, chair at Chatham House and former chief economist at Goldman Sachs where he authored the BRCIS report. Missing the manufacturing bus could prove a boon in hindsight; research by economist Dani Rodrik at the Kennedy School of Government at Harvard University has shown that premature de-industrialisation is hitting developing countries at lower levels of income. Madgavkar of McKinsey believes that India’s manufacturing peak could come at a per capita income level of $5,500, roughly 2.5 times today’s level of $2,045 level.

While the peak is still some way off, it’s possible that India could be the first major economy without a large manufacturing base. Consumption (services) and increased spending on infrastructure would drive growth then. At about 5 percent of GDP, India’s current spending on infrastructure needs to move up.

Its present savings rate and access to global capital could take it up to 6-7 percent of GDP. But the $5trillion investment in infrastructure number that is often spoken about would require 9 percent of GDP spending sustained for a decade. This has the potential to create employment and India has what Chokhani calls a “once in a lifetime opportunity to access a glut of global capital-seeking stable returns in a growth market.” The last five years have seen long-term investment from a host of global pension funds in India’s roads, ports and bridges. With interest rates likely to stay low, expect more such yield-seeking investments making their way to India. Private sector investments will be another significant albeit smaller boost. 

Holding up the economy would be Indian’s consumption basket that has (the recent slowdown not withstanding) proved resilient over the last two decades. While China struggles to make domestic consumption account for 40 percent of its economy, India already has two-thirds of growth coming from this engine. Add to this the fact that the Indian consumer has only in the last decade started leveraging her personal balance sheet and there is a chance that the consumption engine will continue to hum along.

Growth Risks
While catch up growth, favourable demographics and a workforce that can speak English will get India moving, the risks to the story come from India’s poor record of not being able to provide basic education and health services. O’Neill says these are prerequisites for higher growth and it is disappointing that governments have not focused on this. He cites the examples of China and South Korea that have done this successfully. China’s huge success has been in improving education in urban areas while in South Korea the improvements have been broad-based, allowing the country to leapfrog in a generation and move up from sub-Saharan levels of wealth to those of Spain and Portugal.

For now it remains to be seen if the path to $10 trillion gets hindered on account of the lack of spending. The government has tried to address these shortcomings in a piecemeal manner – school vouchers for underprivileged children and a health insurance scheme for the less well off. Expect to see more experiments in both these spaces.

Another possible pitfall is the tendency among policy makers to get into a competitive distributive mindset. India has schemes for everything from free bicycles and laptops to cheap rice and increasingly cash transfers to farmers whose holdings are under a certain size. The world over economies have expanded the social net as they’ve grown richer. And there is little doubt that it will happen in India as well. Brazil did it in the 1970s and 1980s when tax revenues were buoyant.

India started with the rural employment guarantee scheme in 2005 and tax buoyancy allowed the government to easily pay for it. Although this is hotly contested, the scheme did create productive assets (ponds, roads, irrigation canals) in rural India. The present rounds of distributive transfers being proposed will, in all likelihood, drive up consumption spending without the productive base to support it. It remains to be seen if an excess income transfers spur inflation and trip up growth.

Lastly, there’s defence. A richer India would need to up spending to counter its neighbors China and Pakistan. In 2018 the allocation moved up to $52 billion, up 9.7 percent a year over the last decade. This compares poorly with the $146 billion China spent and there is every likelihood that the number is going to rise. One way to stop defence spending spiraling out of control is for India to increase trade with its neighbours. Trade with Pakistan is a paltry $2 billion, and a recent World Bank study reckoned it could go up to $37 billion if there was more trust between the two countries. As for China-India trade, it is largely skewed, with India’s exports less than half of its imports from China, worth $76.2 billion in 2017-18. China, of late, has shown keenness to increase imports from India, and in that may well lie an opportunity not just for a better balance of trade but for defusing pent-up tensions.