Surjit S. Bhalla
ECONOMY
ON AUGUST 15, 2022, Prime Minister Narendra Modi took a long-term view of the Indian economy by outlining an ambitious vision―India to be a developed economy by 2047. The last time an Indian prime minister had outlined a long-term vision was in 1956 when the ambitious, unrealistic, insular and disastrous second Five-Year Plan was unveiled for India’s futuristic development (a state directed investment plan later christened as the Nehru-Mahalanobis licence raj model).
This Five-Year Plan was to bring in more curtailment of economic freedom, a ‘plan’ which ended with the extinguishing of both economic and political freedom with the announcement of the Emergency in 1975. Six years earlier, in 1969, Bank nationalisation was introduced; and by 1991, India was in a severe debt crisis, pledging gold to the IMF. The year also marked the beginning of a strong reversal of the past―economic reforms and economic growth, and the dismantling of the licence raj model was to be the new future of the Indian economy.
That new and productive future is the essence of Modi’s vision of Viksit Bharat. It has its deficiencies as it is currently implemented―it is hoped that the ambition will correct the current economic policy mistakes. The determinants of growth suggest that the 2047 goals are realistic.
At the time the vision was outlined, the BJP had just recorded its second straight big victory in the elections in Uttar Pradesh, India’s largest state. The Indian economy had also recovered strongly from the Covid shock. Although there was great uncertainty about India’s expected growth rate over the next 25 years at that time, that uncertainty is less today. For the third year running, India has recorded the fastest GDP growth rate among the world economies (upwards of 7.5 per cent a year) and the IMF estimates India will retain the top spot at least until 2029.
But what does it mean to be a developed economy? An essential feature is the prevalence of political and economic freedom. Absence of poverty is another necessary attribute. India has eliminated extreme poverty, but according to the lower middle income line, we have approximately the same level of poverty (10 to 20 per cent) as the most developed and richest economy, the US, has at its own poverty line. The obvious point here is that per capita income is the best summary statistic for defining a developed or rich economy. It has its drawbacks, all indices do. But to paraphrase what Winston Churchill said on democracy, it is the best measure that we have.
And that is what the Aam Aurat around the world has accepted as a definition of whether a country is developed or not. In January 2023, I was invited by NITI Aayog to talk to government officials about the definition and prospects of India being a developed economy by 2047. That request led to a search for a country which was not “developed” earlier but became developed over time. In 1996, South Korea was invited to be a member of the OECD (Organization for Economic Cooperation and Development), a signal that its level of per capita income was befitting of a developed country. The South Korea reference benchmark has now also been used by the World Bank.
In 1996, South Korea had a per capita income level of 19,411 PPP 2017 dollars (the purchasing power parity of the won per dollar at the GDP level in 2017). The median income of an advanced economy was PPP$ 48,000 and the 10th percentile economy was South Korea (the value in a set of data that describes the point below which 10 per cent of the data falls). The two poorest rich economies were Latvia (PPP$ 9,186) and Lithuania (PPP$ 10,510). The fifth percentile per capita income level in 1996 belonged to the Slovak Republic (PPP$ 15,664). In 2023, India’s per capita income level was PPP$ 7,640.
We can now attempt to make an educated ‘guess estimate’ of what it would take for India to be considered a developed economy by 2047. The calculation is straightforward―an annual per capita growth rate of 3.1 per cent over the next 24 years will take India from 7,640 to 15,664 (Slovak Republic); an annual growth rate of 3.9 per cent will take it to 19,411 (South Korea).
How realistic is the possibility of per capita income rising at an average annual growth rate of at least 3.1 per cent? Between 1991 and 2023, India’s per capita growth rate averaged 4 per cent a year. It is well known (convergence, possibilities of a middle income slowdown) that the future will not be a replica of the past! But it does provide a guidance estimate; more evidence is needed about India growing at a minimum of 3.1 per cent per capita per year to achieve developed country status by 2047.
A World Bank publication, South Asia Development Update, 2024, uses the example of South Korea’s economic performance during its 1960-1980 growth phase as an “illustration” of how difficult it will be for South Asian countries, especially India, to replicate Korea’s long-term growth performance. The document provides evidence on the important parameters of employment and productivity growth.
“As an example, consider the Republic of Korea, which in the 1960s had per capita incomes that resembled those in 2022 of Bangladesh, India, Nepal, and Pakistan. The convergence of the Republic of Korea’s per capita income toward those in advanced economies, completed by 1987, was marked by a combination of labour productivity growth and increases in its employment ratio. Thus, between 1960 and 1980, labour productivity growth averaged 5 per cent a year and the employment ratio increased on average by 0.4 percentage points a year”.
Korean development pattern is a high standard for all countries, and as per the guidance of the World Bank document, it is useful to compare India’s development indicators with that of Korea. Our first “informative” test about India is to compare productivity growth in Korea from 1960 to 1980 and India from 1999-2000 to 2022-2023. Regarding Korea, Penn World Tables (PWT) records its total factor productivity (TFP) growth for 21 years (1960-1980) at an average of 1.39 per cent a year. For India, for the 21 years (1999-2019), India’s TFP growth was near identical at 1.36 per cent. The results for labour productivity growth are also broadly comparable. Korea 6.1 per cent a year and India 5.3 per cent a year.
Further, Korea’s female labour force participation rate (LFPR) under 25 years of age in 1984 (the year when it had the same per capita GDP level as India in 2022-2023) was 41.7 per cent, and the aggregate average LFPR was 63 per cent. India’s LFPR according to the usual status definition: female LFPR 41.9 per cent and aggregate LFPR 65.1 per cent in 2022-2023.
The results are pleasantly “shocking” since the accepted wisdom is that Korea, at the same stage of development as India in 2022-2023, was considerably ahead of India. It was not. The growth performance profile (the essence of developed country potential) for Korea then and India now is very similar.
The inputs to this performance are also encouraging. The march towards faster growth and developed-country income levels is a function of the determinants of growth. Capital formation is a big input. Today, the ratio of nominal investments to nominal GDP is around 30 per cent, much lower than the 36-38 per cent level during India’s earlier high-growth phase between 2004 and 2011. Will this not detract from the convergence path? No, for the simple reason that the nominal ratio misrepresents actual capital formation. Like all economic variables, it is only the real that matters. The real investments to real GDP ratio is today back to the levels which prevailed in the highest growth phase experienced by India. That level―between 34 per cent and 36 per cent of GDP―will likely generate 7.5 to 8.5 per cent GDP growth.
On human capital formation, there is a revolution of aspirations associated with female education expansion in India. This expansion is an important X factor in the march towards convergence. There are more women in college in India today than men, and women in STEM disciplines (about 43 per cent) are among the highest in the world (32 per cent in the US). Given the evidence on female education and STEM (two strong correlates of labour force participation), it is reasonable to expect that Indian female LFPR will reach at least 55 to 60 per cent over the next two decades.
Surjit S. Bhalla, former executive director of IMF for India, Bangladesh, Bhutan and Sri Lanka