- [Narrator] This is India, the fifth largest economy in the world and a country which will soon
be the most populous on Earth. India's intense manpower is a big part of what has made it such an economic force on the world stage. While countless other countries are struggling with aging populations, equipped with skills that are misaligned from what is really needed, India still has a very young
and very productive workforce. It's that manpower that
has enabled this economy to capitalize on world events that might look like problems to us, but are presenting great
opportunities to India. In the last five years, the
country has made headlines for scoring a lot of manufacturing jobs that have previously gone
to China almost by default. Today as China's period
of intense economic growth appears to be coming to an end, it might seem as if it's now India's turn to become the workshop of the world and enjoy the wealth that
comes with that role. This would certainly fall in line with the Indian government's plan to have a $5 trillion economy by 2025. But it still has a long way to go. India is currently generating 1/6 the output per capita as China and for all of its success
in the last three decades, China is still far from
a wealthy country itself, but that just means that success
in both of these countries stands to do a lot of
good on a human level. For all of the geopolitical problems that China's economic growth has created, it has been responsible for lifting hundreds of millions of
people out of poverty, and that can only ever be a good thing. A good thing that can also
be replicated in India. So, could India become the
next economic superpower to rival China and the USA? What are the advantages
that it could utilize to grow its economy to that level? And of course, what are the
challenges its likely to face that could hold it back? Once we have done all of
that, we can put India, the fastest growing major
economy in the world, on the Economics Explained
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in the video description below. India's current economic trajectory started around the same time
as China's in the early 1990s. Before this time, India's
economy was a loose hybrid of the Soviet-style
centrally planned economy and a free market system left
over from British colonialism. However, the collapse of the Soviet Union, which was their primary
international trading partner at the time, combined with
overall poor economic performance under their system, meant
that the country faced such a huge international debt problem that it barely avoided going bankrupt due to a last minute loan from the International Monetary Fund. When an economy effectively
has to be brought back from the dead, the IMF uses what is called the Washington Consensus. Now, we have looked at the
Washington Consensus before and a few other videos
covering national economies that needed to be given a kickstart, so I don't wanna repeat too much here, but effectively, the Washington Consensus is just a list of policies that
open up the economy to trade and private business. The biggest thing on the
chopping block in India's case were its protectionist policies
for its domestic industries and its incredibly
complicated system of licenses and restrictions that all
businesses needed to adhere to. Now, protectionist policies
are not always a bad thing. These are policies that
governments will put in place to well, protect their local industries. Protectionist policies come in many forms, but the most common are trade restrictions like import taxes or quotas. If India wanted to defend
its local car industry, it could put an import
tax on all foreign cars shipped to the country, which
would increase their price relative to domestically made cars. The imported cars would
still be available, but they would be a luxury. The benefit here is that most
consumers would simply elect to purchase the domestically made goods, even if they were slightly inferior to their international competitors for no other reason
than they were cheaper. This means that domestic businesses will almost always have a consumer market, which means that they
will stay in business and keep people employed. Sounds great in theory, but
there are two major problems with protectionist policies. The first problem is
that they make everything more expensive for consumers. Obviously, the imported goods
are gonna have their prices artificially inflated, and that cost is going to be
passed along to consumers, but that also leaves headroom
for domestic manufacturers to raise their prices while
still remaining competitive. Depending on the extensiveness
of import taxes and levies, it can also mean that
businesses end up paying more for component parts that
go into end products. To be an advanced economy or even a developing
economy in today's world, it's almost impossible to make
everything you need in-house. Using the example of a car, you need to consider the raw materials, the component parts, the computer chips, as well as the machinery
that makes the machinery that makes the parts that makes the cars. Some economies theoretically
could get close to being totally independent, but it would come at a huge cost, which means almost inevitably, economies need to import things. If a manufacturer has to pay import taxes on all of the components
they end up putting into their final product, they are also going to
need to pass this expense along to the end consumer. Now, for certain industries, especially those that can
employ a lot of people or provide a benefit to the economy beyond just dollars and
cents or rupees I suppose, this can be worthwhile. You are effectively trading higher prices for higher employment
and self-sufficiency, but this will make those
goods less cost competitive, which will show up as price
inflation in domestic markets. We are experiencing firsthand the impacts of trade restrictions today with Russian sanctions
in the China trade war. Obviously extreme examples,
but exactly the same process. Now, economies can deal with
higher prices within reason. If we are judging the
performance of an economy purely off how cheap everything is, then Somalia would be the
world's foremost superpower. What economies can't deal with though is how this artificially inflated price impacts their export competitiveness, which is the second big problem
that protectionist policies in the form of trade
restrictions can cause. A car company that makes inferior products that it can only get away
with selling domestically because all of its
competitors are heavily taxed is not gonna have much
luck marketing their cars outside of this uneven playing field. This means that the economy
is foregoing the chance to create an export market for itself, which has the opportunity
to create more employment in the long term than the
protectionist policies could ever hope to save. Now, there is a way to
protect local industries which doesn't cause these problems, which is instead of penalizing imports that government will
subsidize local manufacturers with grants, tax breaks, direct payments or guaranteed purchases. The best example of this
is probably the USA, which subsidizes farmers
because it wants to maintain that local industry, both for
the employment that it brings, but also for the strategic
advantage that comes with being able to independently
feed its own population. Whilst subsidy protectionist policies don't make things more expensive
for consumers directly, they require the government
paying more money instead of receiving money like they would through import taxes, which
means that eventually, the taxpayer is going
to have to foot the bill no matter what, whether it's through higher
taxes or higher prices. No matter how they are implemented, protectionist policies
are a direct intervention in the free market, and
anytime that is done, it is inevitably going to
cause some inefficiencies, and this is why typically,
economies tend to start growing when they embrace free trade. Now, to be fair, the inefficiencies caused by protectionist trade
policies in India's case were relatively insignificant, compared to the strain on the economy caused by the extreme level
of government intervention in almost all business activity. As I mentioned earlier,
India and the decades following independence
drew a lot of inspiration from the Soviet Union's
command style planned economy. The economy was run according
to a series of five-year plans that would target specific industries like agriculture and heavy industry. It wasn't a direct copy, however, because private industry
could still exist, it was just heavily regulated. Large, heavily subsidized
state-owned companies dominated most large industries, which made it impossible
for private companies to compete in those markets,
and even in smaller markets, as small even as a corner store, it was almost impossible
to start a business. This was because of something
known as the License Raj, which was a system of intense licensing, regulation and red tape that
businesses had to comply with in order to operate in India. I wanna quickly mention
that this wasn't officially called the License Raj. That was just a term
applied to the extreme level of government control
over business activities, which was apparently
akin to the British Raj, another oppressive ruling system. Pretty tasteless joke, but
that's what everyone calls it. So anyway. Business regulation and even licensing isn't unique to India, and in many cases, these regulations serve
a very important purpose. You don't want just anybody
setting up a doctor's office and performing surgeries,
but in India's case, these regulations went beyond just ensuring business
competency and safety. They encroached on all
aspects of business operations to the point of being totally redundant. Depending on the business, as many as 80 individual
government agencies had to be satisfied before
a business could even start to produce anything, and
they needed to be kept happy for as long as the business
wanted to stay open. This was very limiting
to any small business that wanted to get started because this system of
licenses and regulations was practically impossible for
a regular person to navigate without the help of a team of lawyers, which priced out most
people from even trying. Really, the only practical
way to get around the Licensing Raj was
to completely ignore it and run a business as an
unofficial, unregulated entity. If someone came along to enforce the law, it was cheaper and easier
to just pay them a bribe than it was to set up everything correctly in the first place. This was fine for small businesses that could fly under the radar, but it meant that large
international companies would not even begin to consider India as a center of operations because it was simply too
difficult to work with. Now, I have spent a long
time talking about systems that were effectively abolished
over three decades ago because they went on to
show the potential of India. Simply removing economic restrictions is not enough to get an
economy going just by itself. We can look at the experiences
of countries like Russia, which saw its GDP fall significantly following the collapse
of the Soviet Union, despite adopting free market systems. But since 1991 and
particularly since 2000, India has been on a very
strong growth trajectory, effectively doubling in
size every five years. Most of that is because, without these government
restrictions in place, India has been a very
good place to do business for a number of really important reasons. It is the second largest
English speaking nation in the world with 125 million speakers. This is a big deal for a lot of companies because international business agreements overwhelmingly get handled in
English as a neutral language. In the 1990s and 2000s, this was mostly used to set
up cost saving call centers. I'm sure you've all
called a company before only to be connected
with someone in India. It might not sound like a
particularly glamorous job, but it created a lot of
value in the country. Economics at its core
is a study of how people interact with things of value. On a macro scale, this leads to questions about how systems add or subtract value from the national or even global economy. A country can add value by
harvesting raw materials like resource, which countries do by digging stuff outta the ground. This generates a lot of wealth, but it is by its very nature unsustainable because eventually, those
resources are going to run out. Resource extraction also
requires very little manpower, which means that margins are high and the potential for those
resources to be exploited by ruling class and some
fossil fuel companies is high. Look at the list of the
most oil rich countries in the world, and you'll quickly realize that natural resource
wealth does not guarantee economic prosperity. Countries can also add value by importing those raw materials and
turning them into components or end products. This is just manufacturing. Manufacturing is great
for economic wellbeing because it also requires more manpower per unit output of value when compared to most
natural resource extraction. This means more jobs spread
out amongst more people, which creates a middle class that makes outright exploitation harder. Manufacturing is also
much more sustainable than resource extraction
because it doesn't depend on selling off a pool of finite resources. If a country has a steady
flow of material imports and consistent international demand for the products they produce, then they could create an
income from this sector almost endlessly. Unfortunately, of course, the real world doesn't
always work like that, and manufacturing based
economies are exposed to international economic conditions, both on the side of material imports, as well as product exports. Pure manufacturing without the addition of more advanced services
like R&D, design and marketing is also a perpetual race to the bottom. Product companies like Apple or Samsung can outsource their manufacturing
pretty much anywhere, and more often than not, they
will just go to the country with the lowest labor costs and the least restrictive
manufacturing laws. Building an economy around an industry that only remains viable if the workforce is paid very little and
companies can get away with doing whatever they want
is almost as unsustainable as just digging things outta the ground. Of course, outsource manufacturing
can be a viable industry as a stepping stone of sorts to an economy that runs primarily on services. Every advanced economy in the world derives a majority of
their output from services that include everything
from schools to banks. If something in the
economy is adding value without digging it out of the ground or making it in a factory, it's most likely going
to be broadly categorized as the service sector. The service sector is so
important to advanced economies because it is very sustainable and it can make other sectors
much more profitable as well. Imagine two countries
that had one factory each. One country focuses
exclusively on manufacturing. They invest a lot into infrastructure to make it as easy as
possible to bring materials in and ship products out. They also house a labor force
that demands very low wages, so they can become the logical choice for international companies looking to outsource their manufacturing. They will get a lot of business, but they are going to be the
victim of their own success if this process starts to make
their workforce rich enough to start demanding higher wages. Compare this with the other country that still has the factory, but also has a strong
service sector with companies that have in-house R&D, design
and marketing departments. These companies will be able
to make their own products and charge a premium for them because they are researched better, designed better, and marketed better. Even though most of the
value in this example is being created in the service sector, the incomes of the entire
economy will increase, which means that
manufacturing sector employees will get paid more to build
products that are more complex and add more value. We explore this theory
briefly in our video on Why Economies Can Grow Forever If They Are Properly Managed. If an economy uses basic manufacturing to turn steel into knives and forks, they're gonna be able
to sell those products at a slight markup from the
material cost of the raw steel. It's a perfectly straightforward process and there is value to be had there. At the end of the day, the
world needs knives and forks. But these goods are not special, and there is only so much a company can sell these products for
before they get undercut by another company in another country that is willing to pay their workers less. If instead an economy
uses its service sector to design a state-of-the-art and proprietary piece of
aviation or medical equipment out of that same slab of stainless steel, they will be able to sell
it for much more money, and the wages of the factory workers will be a lot less of a consideration since their pay represents
a much lower share of the end price of the goods. There is a good reason why
goods made in advanced economies like Europe or America are perceived as being of higher quality, and it's because normally they are, and that's not because Chinese
or Indian manufacturing is inherently worse. It's just because it
only really makes sense to manufacture high quality
items in these economies because the goods that only
sell because they are cheap would not be as cheap as the ones from these other countries. But what does this all
have to do with India and its potential for future growth? Well, because of its unique demographics, India has the potential
to leapfrog the typical slow economic progression an economy makes as it goes through the process of growing from an undeveloped economy to a developing economy, and then finally on hopefully
to become an advanced economy. This is, of course,
where I say the line that nobody can predict the future,
least of all economists, but it's still worth
exploring in India's case because even if this
scenario does not come true, it is a very interesting case study into the comparative
advantage of economies. Most people think that
India's biggest global rival is China, but that's not necessarily true. They can and probably will
compete in different markets. It's very hard to outsource
services to China. Ignoring for a second all
of the sovereign risks that comes with China,
particularly in recent months, most of the population
does not speak English and beyond that, their business culture is
very different from the West. But since the removal
of trade restrictions and Licensing Raj in the early 1990s, India has been a fantastic
place to outsource services to. This is where we get
back to our call centers. If we were to directly
compare call centers in India to factory floors in China, these two industries
would look pretty similar. They both pay low wages and they are both mostly for the benefit of foreign companies. These industries are the
global economic equivalent of entry level jobs, only the factory floor
is an entry level job at a fast food restaurant and the call centers
are an entry level job at a Fortune 500 company's
global headquarters. Factory floor jobs are very difficult to turn into anything other
than factory floor jobs, whereas even very basic
jobs in the service sector are much easier to turn
into more value adding jobs with training and experience. Today, Indian companies offer
far more complex services than simple customer call centers. India has been a go-to
destination for accounting, engineering, design,
and even legal services, all industries that no
other country on Earth can compete with simply
in terms of manpower and cost efficiency. To be perfectly clear, India
still has the cheap manpower to steal a lot of manufacturing
work away from China, and they will undoubtedly benefit
greatly from this industry before they themselves pass the torch down to another country that comes
along and undercuts them. But it's India's unique ability to become a service sector
hub that could make it one of the world's foremost
economic superpowers in the coming decades. But with that optimism, it's probably also worth
exploring what could go wrong. India's economy did
something it hadn't done for a long time in 2020. It shrunk. Now, obviously, global economic conditions in the wake of the coronavirus pandemic were the primary driving
force behind this, and India was hit incredibly
hard by these outbreaks, but even before that, the country's growth had
shown signs of slowing. A popular explanation for
this amongst economists is that India's economy
is both over-regulated andunder-regulated at the same time. Despite the changes
made in the early 1990s, some government bureaucracy remained, specifically in the financial
sector where even today, the biggest banks operating in the country are state-owned and operated. These banks have been slow
to offer credit to businesses and consumers, which means that good ideas are hard to get off the ground, and consumer spending is stifled because it's hard to get a
loan for something like a car or a house or education. Government regulation
has also been implemented rather haphazardly in certain instances. In 2020, the government had
to reverse a major decision to deregulate the agricultural industry because of intense backlash by farmers who fear that they would
not remain profitable without government guaranteed prices. Remember, this is effectively a form of protectionist trade intervention, which were the same policies
that stifled economic growth prior to the 1990s. Another example of severe overreach was the government's decision
to make certain denominations of their currency
unusable after a set date just two months in the future. This meant that people had to
rush to deposit these notes at banks before they became useless, which had people standing
in line for hours. Outside of just the lost and
wasted man hours this caused, it created significant doubts
about the nation's currency. Unbacked fear currency only works if people believe it has value, and by demonstrating that the government was willing to wipe out
certain denominations of its own currency on a whim, it created ongoing doubts about
how safe it was to conduct serious business in Indian rupees. As strangers this de-monetization sounds, the government thought it was necessary because of another hangover
from the era of the License Raj, which is all of those businesses
that decided it was easier to operate outside of
official government control. In 2018, informal gray market
businesses by most estimates, constituted more than half
of India's total output. Raising taxes off informal
businesses and workers is obviously very difficult, so the government hoped
that by forcing people to deposit their cash, that they would be forced
into reporting their income and paying their taxes. It didn't work, but it
did highlight the problem of the informal economy. Many workers are
reluctant to take the leap into more value adding formal roles because they will be
taxed and their income would end up lower than
what they would've made working informal jobs for cash in hand. Large multinational corporations do not do cash in hand work, which means that certain
companies are finding it surprisingly hard to attract labor in a country of almost one
and a half billion people. The divide between the
formal and informal sector also threatens to create
a two-speed economy where skilled workers
who can speak English will become a class of their own, earning significantly more
than the rest of the population working in the informal economy. While this wouldn't necessarily
impact headline GDP figures, the reason we want economic
growth in the first place is to improve the living
conditions of the participants in that economy. There is good news here though. A report published by
the State Bank of India found that the informal economy had shrunk from 52% of total economic output in 2018 to just 20% in 2021. Part of this reduction was
due to government efforts to make it easier to find work and run a business legitimately, but another driving
force was the fact that many informal workers were
just put outta business during COVID outbreaks, while their formal economy
peers could work from home or out of controlled offices. India's economy is nothing
but pure potential. It has a young and skilled population. It has the potential to capitalize off the stagnation of China, and it can move seamlessly into industries that other developing economies would find it very hard
to make the jump to. The deciding factor is going to be if the government can convince
businesses and investors that India is a safe and
lucrative place to invest, while also giving its
population the financial tools that they need to grow
wealthy independently, while the nation grows
wealthy collectively. Okay, now it's time to put India, the fifth largest economy in the world, on the Economics Explained
National Leaderboard. Starting as always with size, India has a GDP of $3.5 trillion, putting it behind only the
USA, China, Japan, and Germany. It gets a nine out of 10. That impressive figure
is spread out very thin amongst a large population, which means that it only has
a GDP per capita of $2,515, which puts it in the bottom
quarter of the global economies and gives it a three out of 10. Growth is a more positive story. The economy has had a
sustained growth rate, which has seen its size double
roughly every five years for the past three decades. It gets an easy 10 out of 10. Stability and confidence, as we have seen, has been the country's Achilles' heel. International organizations
are still tentative to do business with a country that has demonstrated multiple
times that it can make some very strange industry
changing decisions. The informal economy and the influence of state-owned companies
also have their problems, and while it's improving, the country can't get more
than a five out of 10. Finally, industry. India has enormous
potential in this field, but as we have seen in this video, it has a lot of potential
that is going unrealized. It has the capacity to be
the world's largest economy, but for now, it can't be ignored that its average citizen is
very poor by global standards because they aren't
producing as much value as they could be. Even still, as one of
the largest manufacturers and service centers in the world, it gets an eight out of 10. Altogether, that gives
India an average score of seven out of 10, which puts it here on the Economics Explained
National Leaderboard. Thanks for watching, mate. Bye.
