India’s economy is not growing fast enough

Raghavan Parthasarthy | Updated on March 09, 2018 Published on April 30, 2017

A catalyst : For productive forces

Sustained double-digit GDP growth will lift per capita incomes, for which innovation-driven productivity increases hold the key

It is now an axiom that economic growth significantly reduces poverty. A concomitant benefit is its positive impact on standard of living. Not surprisingly, developing nations strive to achieve robust growth rapidly and in a sustained manner.

Economic growth is measured using Gross Domestic Product. GDP is the market value of all goods and services produced by a country in a year. Rate of growth is computed by examining year-over-year change in GDP. What is significant, though, is not growth in GDP per se but growth in per capita GDP — the economic value created per person. It is per capita GDP that is the true measure of prosperity and standard of living. Hence, developing nations pay more attention to per capita GDP growth, which occurs when GDP rises faster than population.

World Bank reports India’s 2016 GDP (inflation adjusted) and per capita at $2.2 trillion and $1,800. It forecasts GDP and population to grow at 7 per cent and 1.4 per cent, respectively, during the next five years. Assuming these projections come true, India’s per capita GDP by 2022 will not be meaningfully higher than what it is today. A significant rise in per capita that materially narrows the gap with China (2016 per capita, $10,500), would require India to achieve sustained double digit GDP growth during the next decade, perhaps beyond. A caveat to this proposition is that population growth stays at current levels.

Drivers of growth

Theoretically, GDP growth can be accelerated by: adding inputs to current economic activity, more efficiently processing current inputs, or strategically employing inputs to develop and implement high-value product-technologies. Thus far, India’s GDP growth has largely been achieved by incremental addition to inputs. Through a massive Skill India programme and an aggressive push in the mining and extraction industries, India has increased material and labour inputs to economic activity, fuelling moderate levels of growth. But India must move beyond the factor-driven stage to efficiency and innovation-driven stages.

The efficiency stage represents strengths in product processing and ability to add value, emerging from manufacturing size and sophistication. The majority of India’s manufacturing entities are micro enterprises. As a result, volume production and scale economies are unavailable to them. Importantly, automation of the production line that engenders processing volume and quality is still a rarity in Indian manufacturing. Consequently, manufacturing’s share in India’s GDP is a modest 16 per cent (China’s is 40 per cent.

Three years ago, India launched a Make in India initiative to vitalise manufacturing; it solicited foreign and domestic firms to invest in manufacturing. The overarching goal was to raise the manufacturing sector’s productivity and drive up GDP growth. The initiative has been well-received, evidenced by fund flows from leading multinationals; indications are that this trend would continue. But, to capture the full benefits of these investments, structural facilities to move material and finished goods must be adequate and free of bottlenecks. India is still 68th on infrastructure quality in the World Competitiveness Index.

Innovation-driven growth

Much higher GDP growth should occur for India to transition to the innovation stage. This stage is typified by strengths in fundamental knowledge-creation through scientific/technological research and exploiting that knowledge in products and processes. This strength emerges from the existence of a large body of scientific/engineering talent, an R&D ecosystem, and an entrepreneurial culture.

India is literally invisible on the world innovation stage. It ranks 66 on the Global Innovation Index. India does have a respectable pool of scientists and engineers, some of them world-class, but it is in R&D spending and entrepreneurial culture that it is relatively deficient. Its R&D spending of $66 billion in 2015 (0.9 per cent of GDP) is woefully infinitesimal, both by absolute norms and when compared to China ($409 billion). More troubling is the fact that three-fourths of it comes from the public sector. Lack of private sector enthusiasm for R&D could be explained by the ingrained anathema for risk. There is a penchant for steady and certain returns over windfall profits.

Solutions to this problem obviously lie in the academic realm: more eclectic entrepreneurship programmes that would tend to change the risk-averse mindset. Strategies that would facilitate information-sharing between universities and businesses should help.

The writer is a professor of business policy and strategy, Baruch College, City University of New York

Published on April 30, 2017

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