On the fast lane, but miles to go

From a closed economy leaning towards socialism and satisfied with a sedate ‘Hindu rate of growth’, the Indian economy has come a long way over the past 25 years to rank the sixth-largest in GDP size. The fastest-growing global economy is well on the path of globalisation and holds far more promise than its peers.

It is, however, too soon to rest on our laurels. India still ranks around 120 when measured in per-capita GDP terms, according to the World Bank. The uneven growth across sectors and the country’s poor record in human development indicators are among the areas that need urgent attention over the next 25 years.

The road travelled

By the time BusinessLine was born in January 1994, the effects of the reforms unleashed in 1991 — including abolishing industrial licensing, opening the country to foreign investors and paving the way for PSU disinvestment — had already begun showing results.

GDP growth that had plunged to 1.05 per cent in 1991, picked up to 6.6 per cent in 1994, and both current account and fiscal deficits were reined in. With successive governments continuing the reforms and giving impetus to private investments, the economy stabilised in the ’90s to enter a high-growth phase in the first decade of the new millennium; GDP growth moved above 9 per cent in this period. This was also the time when both the government and the private sector massively invested in infrastructure — one of the causes behind the bad loan mess in the banking sector.

The global financial crisis in 2008 yanked back growth to 3.8 per cent, but thanks to the fiscal stimulus by the government, economic growth was back above 8 per cent by 2009. But excess capacities set up between 2004-2007, mounting debt burden of corporate India, slowing global trade, commodity melt-down and regulatory logjam in many sectors have made growth moderate since 2010.

However, the bigger worry for the country is that sectors that employ a larger portion of the workforce have been recording sluggish growth.

The service sector has been the key driver of the economy over the last quarter century, with India emerging the global back-office hub for IT and IT-enabled services since the ’90s.

Rapid growth in other services including real estate, trade, hospitality and financial services has made services’ share in GDP grow from 45 cent in 1994 to over 53 per cent now.

But agriculture, which employs 58 per cent of the workforce, has been stagnating at an annual growth rate of under 2 per cent, with its share in GDP shrinking to 15 per cent from 28 per cent in 1994. Manufacturing, which employs another good chunk of the workforce, has also been struggling with regulatory problems, rising finance costs and an inability to face global competition.

The heavy tilt towards services, away from agriculture, has resulted in people migrating to urban areas, putting pressure on the shaky utilities and infrastructure in cities and towns. The positive is that the services boom has put more money in the hands of Indians — per capita income has increased from ₹29,162 in 1994 to ₹97,103 in 2017 at an annual growth rate of 5.3 per cent. This has, in turn, led to strong private consumption of consumables, automobiles and housing. Final consumption expenditure of households has recorded an average growth of 7.3 per cent since 2004, up from 3.4 per cent prior to 1990.

This lopsided growth is, however, increasing income inequality. According to Oxfam, the top 1 per cent of the population holds 51.5 per cent of the national wealth. The country also ranks an appalling 130th out of 189 countries in UNDP’s human development index, as a vast swathe of the population still does not have basic facilities such as education, healthcare and social security.

Next 25 years

The good news is that India is expected to grow faster than its peers over the next 25 years as well, though growth is expected to taper after 2020.

PwC, which periodically publishes long-term growth forecasts for leading economies, projects the Indian economy to grow 7-8 per cent until 2020, around 5 per cent between 2021 and 2030, and to taper down to around 4 per cent between 2030 and 2050. India’s demographic advantage, coupled with its higher working-age population and lower initial income levels, is expected to drive this growth.

OECD’s long-term forecast, too, is in line with PwC’s, with growth projection around 6 per cent in 2020s to taper to around 3 per cent by 2050. The faster growth in population will keep domestic demand strong in future, too, but the government needs to focus more on job creation, skill training, making the education system more meaningful, making farming a viable livelihood and creating sufficient infrastructure. Food security, environment protection and water management are other areas that need a strategic road map if the country has to grow in a healthy manner in the future.

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