India's Economy: Economic Superpower?

this is india tip to be a future world superpower the fifth largest economy in the world is expected to be the third largest by 2030 according to the imf as the world's largest democracy india's future is bright yet its economic story has had its fair share of challenges in 1980 its gdp per capita was higher than china's but today china's is five times higher likewise neighboring bangladesh reportedly overtook india on a gdp per capita basis in 2020 so what has happened and how can india achieve economic success how india's history informs its economy today to understand modern india we must first look to history and india has a very rich one literally for over 700 years the subcontinent was estimated to have been the wealthiest place on earth accounting for an estimated quarter of global trade up until the 18th century and then as is often the case in history a colonial empire turned up in india's case this was the british empire britain wasn't the first foreign power to hold sway of the continent but its economic impact was profound over nearly 200 years of colonial rule for starters britain's interests were principally economic it's estimated that in today's money the british empire extracted a whopping 45 trillion dollars from india the infrastructure built and the institutional legacy were geared towards the efficient extraction of one thing india's incredibly vast resources which undeniably created structural problems having a lasting impact until today so following independence in 1947 india spent decades trying to survive with limited international trade on the belief that the size of its internal market and the idea that self-reliance would avoid the international exploitation which can come with capitalism as a result india was transformed into a mainly centrally planned economy where the centralized institutions of british india were easily adapted to this new command structure yet as history has revealed time and time again a top-down model of state-controlled economic growth was unsustainable especially for such a diverse nation such as india so by the 1980s the country started to really open up its businesses to drive certain sectors but and there is a big but here the state continued to manage capital flows including its exchange rate you see india had until that point always fixed its currency the rupee to others initially to the british pound and then to a basket of currencies the problem was that by 1990 continual state intervention was bankrupting the country the final push came with the collapse of the soviet union a main export market alongside increases in the price of oil during the first gulf war at which point india's pegged exchange rate had exhausted the central bank's reserves to intervene in the currency markets this forced india to seek imf assistance and unsurprisingly these bailouts came with conditions of trade liberalization and free market reforms with the currency becoming more free-floating but still subject to intervention by the bank of india and restrictions importantly it was these liberal reforms which have led to the indian economy we see today a mixed economy of private and public sectors where certain sectors such as banking and power still largely operate under government monopoly which shouldn't come as too much of a surprise given the history of state intervention though the impact of opening up to trade shouldn't be understated why india's exports have been a quiet success when most people think of india they don't consider the nation to be an exporting powerhouse particularly when it comes to manufacturing india has struggled with protectionism recording the highest tariffs of any major economy yet one phrase often quoted is that if china was the world's factory india was getting ready to be its back office highlighting the nation's stellar service sector exports particularly in it but in reality the nation's manufacturing sector has grown on average by 12 per year between 1995 and 2018 giving it the third best performance in the world after china and vietnam and nearly twice the world average now despite india's lingering protectionist policies this could start to sound like india was following the same development model as the tiger economies of east asia one based on manufacturing but before we get ahead of ourselves there is a fundamental difference india's export growth has been overwhelmingly skewed towards high-skilled manufacturing and services as opposed to low-skilled exports in things like textiles and this really is astounding as virtually all models of international trade and growth would have predicted the opposite you see india has a very large low-skilled labor force so on the surface his comparative advantage is in low-skilled exports this makes its high-skilled specialization a bit well unique one answer often floated for this is india's large english-speaking educated population but any explanation misses a fundamental point that by underserving low-skilled manufacturing the nation is estimated to be missing out on at least 140 billion dollars of unskilled activity per year and remember this isn't a country where over 90 percent of the labor force operates in the informal sector so the stability formal employment security and not to mention pensions which come with any increase in formalized manufacturing is certainly required however india's unbalanced export growth is more than just a missed opportunity it can present a real challenge to future growth why india's over reliance on skilled exports could lead to slower growth firstly let's be clear here india's excellent skilled service sector is a good thing it showcases the country's ability to compete in a highly productive and not to mention lucrative space but the over-reliance on the sector is a huge risk one which can be summed up in economic terms by the lewis curve the lewis curve highlights the process of structural transformation in any economy through the redeployment of resources particularly people from low productivity to high productivity jobs the classic example of this is actually china which experienced the transfer of labor on mass from low productive low wage agriculture to high productive higher paying manufacturing in india's case we need to look at two of its lewis curves one for high skilled tech and the other for low-skilled manufacturing over the last two decades it has rapidly climbed the high skill tech curve to the point where skilled labor is harder to come by as reflected through reported difficulties in labor supply and subsequently higher wages on the other hand india has barely climbed its lower skilled manufacturing curve as demonstrated by india's exports two-thirds of which is skilled based and only increasing in size over the last 20 years the problem here though is that the nation's engine for growth has been driven by high-skilled exports which may be unsustainable in the face of scarce skilled labor and higher wages critics have suggested that india's inability to follow the likes of vietnam or china in growing its low-skilled manufacturing base is an issue but at the same time offers an avenue for future growth and this opportunity shouldn't be overlooked especially as china transitions away from the sector alongside a decline in its workforce by 30 million over the next decade now when discussing india comparisons over whether it's going to follow china's growth model are often made but when china was at a similar stage of development as india is now it was growing much much faster so why hasn't india grown as fast as china did well if we put aside the capitalizing on its comparative advantage in low-skilled labor china has had a much higher rate of gross domestic investment estimated to be about 70 percent more than india alongside six times more patent applications filed by foreigners which is an excellent economic indicator of wider economic traits like innovation infrastructure and business climate not only has china's investment rate been higher but its difference in interest rates between borrowings and savings otherwise known as its spread has been lower and this enables money to circulate more efficiently in the system this financial advantage goes beyond interest rate spreads though with chinese banks having extended credit at two and a half times that in india corporate tax rates are also lower in china as well as how the government moves money around with china moving proportionally more tax revenues to underdeveloped regions to put this in context china transfers over 50 percent of tax revenues whilst india transfers just over a third yet things aren't all bad for india one of india's greatest advantages is its young population which is already acting as a demographic dividend india will overtake china's population by 2027. and its population is set to continue to grow over the next 30 years whilst china's declines this will provide a huge boost to domestic demand with an estimated 500 million people expected to enter the middle income class over the next decade which will provide india with the largest growth in its middle class anywhere in the world this isn't to mention that although china has been built on infrastructure investment and manufacturing india is only just getting started on these three pivotal factors the population is still largely a rural one with only a third of the country living in cities this is surprising considering there are over 300 cities with more than a million people as any economist will tell you cities tend to be more productive places than isolated poorly connected rural areas where opportunities are often limited but just as startling is where the growth of urban areas is coming from contrary to popular belief most of it isn't from farm to urban migration but due to natural growth this helps to explain india's persistently large non-urban population with a staggering 40 percent of its labor force still employed in agriculture as highlighted before in other countries urban migration comes with a host of challenges like rampant poverty and inequality the persistence of poor infrastructure and inadequate housing is a real problem which just goes to highlight how moving to an urban area is not the perfect economic solution now even before 2020 india's growth had shown signs it was stumbling which is not something you'd expect from a superpower on the rise so what about india's slowing economy this came as a bit of a shock to many commentators as india went from possessing the title of fastest growing major economy to reporting 5 growth in 2019 its lowest in a decade this is still an impressive number but not if india wants to hit its target of becoming a 5 trillion economy by 2025 which by the way would require an almost doubling of this growth rate now there are just as many explanations for why india's economy slowed as there are economic commentators but a few have been highlighted more than others one is that there's been a more bleak global economic climate particularly in the light of rising protectionism another was a slowdown in consumer demand which is worth digging into a bit deeper slowing consumption in india was seen in part through a decline in new bank lending as banks faced rising non-performing loans investment fell as market confidence declined and the unemployment rate rose so what has india been doing to propel its economy to be fair to the government it has been trying to attract new manufacturing for years launching its flagship make in india campaign back in 2014 though as alluded to earlier over 90 percent of the country's workforce operates in the informal sector which is a huge problem when providing social security collecting taxes and regulation especially considering the tens of millions of day laborers who rely on inconsistent wages their vulnerability became a real problem when the economy shut down in 2020 and is a core reason as to why india's economy was hit almost twice as hard as the world average this hasn't gone unnoticed by the indian government to help address this labor laws have been streamlined replacing 44 labor codes with four laws in an attempt to reduce red tape as you can also imagine though such a large informal sector doesn't make tax collection an easy task the best example of india trying to address its chronic tax evasion issues is the now infamous demonetization of 2016 when an unbelievable 86 percent of the country's entire physical cash base became a legal tender overnight done in order to catch tax evaders as they rushed to cash in their old notes the short-term shock of this was undeniable causing an economic slowdown yet as mentioned earlier government barriers particularly when it comes to trade are still a fundamental issue a recent example was india withdrawing from an asian-based free trade agreement called the regional comprehensive economic partnership which covers over 2 billion people in 14 asian countries who account for over 30 percent of global gdp the government had concerns over the lack of protection for manufacturing and a large absence in the free trade agreement of the service sector which as highlighted is india's key export strength but whether india can claim its place as an economic superpower after becoming the most populous country on earth will just like other countries depend on its ability to trade competitively address its bureaucracy and formalize its largely informal economy so overall india's growing economy has had its fair share of challenges for decades a closed economy the nation has seen rapid growth in its high skilled exports though the sustainability of this as a source of growth has come under question this is underpinned india's non-traditional development to date highlighting its underrepresented low-skilled manufacturing base and this is something which is likely to become a growing opportunity as the world decouples from china's supply chain and china itself seeks to rebrand its economy towards services trade has been given as a key reason for india's stellar growth over recent years yet the country has the highest tariffs of any major economy whilst comparisons of india to china are common the countries are inherently different india is still predominantly a non-urban based society yet to capitalize on this potential but things are changing demographics are on its side with a middle class set to grow by over 500 million over the next decade propelling its economy forward however the nation's slowing growth even before 2020 was a cause for concern how india manages its development over the next decade will be crucial to whether it achieves economic superpower status sooner rather than later so now it's over to you do you think india will overcome its reliance on high skilled exports in the years to come or does it really matter is india on track to become an economic superpower let us know in the comments below the old simplified team really enjoyed making this video so if you think we've earned it leave us a like and consider subscribing it really helps grow this channel and as always see you in the next video

Channel: Economics AltSimplified

Views: 275,905

Rating: 4.8067966 out of 5

Keywords: india economy, india economy 2020, india 2020, india gdp, india economic growth, india 2021, india superpower, indian economy, indian gdp, video essay

Id: lZBGnU9oHXA

Length: 16min 27sec (987 seconds)

Published: Sat Nov 21 2020