What’s missing in RBI deputy guv’s robust take on India’s future

We share the conviction that becoming the largest economy in the world is an eminently achievable goal, within a few decades. Therefore, we would like to supplement Dr Patra’s prescription on what needs to be done.

He identified four growth drivers: demographics, manufacturing, exports and internationalization. He also listed four major challenges: fixing the output drop, induced by the pandemic, compared to the level the economy would have attained; filling the infrastructure gap; building the modern workforce India would need in the emerging knowledge-intensive economy; and generating sufficient quantities of climate-friendly energy.

The demographic composition will remain on India’s side, well into the middle of the century. The United Nations projects India’s median age to be 38 in 2050, up 10 years from the current median age of 28. But that would still leave the bulk of India’s population in the working age group, making India’s the largest workforce in the world. Now, the demographic dividend depends on three factors. When the share of dependants (the elderly and the very young) in the population shrinks, and the share of those at work rises, the economy’s output would rise, even without any rise in productivity. The smaller share of the population that has to be looked after by the working and earning segment would boost savings, enabling greater investment. Women would enter the workforce, greatly expanding the number of workers, whose output adds to GDP.

The challenge here is to equip the large working age population to take part in the knowledge-intensive economy. Manufacturing today calls for a fair degree of training and accompanying dollops of capital, embodied as productivity boosting machinery. The ability of manufacturing to absorb large quantities of labour straight from the primary sector is past history, no longer available to a country like India. Technological advances, such as electric cars, will make some existing industries redundant as well: the internal combustion engine automobile is made of some 2,000 parts, but the electric car, of a motor and four wheels—which is why Tesla can offer a lifetime warranty. While a large part of India’s large auto component industry would go extinct with electrification of transport, new jobs would come up in the manufacture of batteries, in writing lines of code that regulate the electric car, its charging stations and the overall ecosystem. Added demand for the minerals that go into batteries would create fresh jobs in mining, in the Congo and Australia, and in refining the minerals, in China.

India’s aspirations to be a manufacturing powerhouse calls for deep backward integration, into the assorted components and assemblies and subassemblies, in the machines that manufacture these inputs and in the electronics, robotics and programming that will go into their production. The Fourth Industrial Revolution blurs earlier distinctions between manufacturing and services. And calls for a workforce that has learned, while in school, to learn all through their life. India needs to overhaul its education system radically, to this end.

Dr Patra was entirely right to stress the role of exports in driving growth. What he did not emphasise is the role liberal imports play in making local production globally competitive. On this, the current policy regime can be described as infantalising, rather than infant industry, protection. It needs to shift to low, uniform levels of protection for all stages of value addition, and lay out a glide path to that competitive trade regime.

Building infrastructure is less complicated than it might seem. The world’s ageing population’s savings seek profitable deployment. It can be drawn into Indian infrastructure by one, drawing up sound, detailed projects that can transparently generate decent returns; two, the capacity to execute large projects; three, global-standard financial reporting and; four, credible corporate governance. A thriving market for corporate debt is a pre-requisite for large-scale infrastructure building, of course.

To make the rupee truly international, it must become fully convertible on the capital account. Even China, the world’s largest exporter and holder of the largest foreign exchange hoard, has not yet made its currency fully convertible. India can manage the transition better, because it runs a market economy, unlike China. Here again, a pre-requisite is a fully functional market for corporate debt, complete with derivatives to hedge against currency, interest and credit risk.

On the energy front, two lacunae need to be filled. One is stamping out power theft and ending unmetered, unfunded give-aways. The other is proceeding with India’s home-grown fast breeder nuclear technology, in which thorium derived from South India’s monazite sands, is the starting material. Underfunding the nuclear energy programme in favour of solar and wind power is to go with western fashion and undermine cost-effective energy independence of the clean kind.

The ambition to become the world’s largest economy is sound, the path to achieve it is visible and we need greater debate to work out the details of the journey.

First article