Making India Economically Great again: The 7-D approach

15 May 2023 , 09:44 AM

It is said that the best way to get a perspective of the current situation is to look at history. It may surprise a lot of people to learn that up to 1000 AD, India accounted for 33% of world GDP, a level no country can even think of today. Even in 1820, just before the British Raj took roots, India accounted for a full 16% of world GDP. Between 1820 and 1947, Indian GDP had fallen to just 4% of world GDP. Post-independence; years of socialist planning and state ownership, meant that by the 1980s, India’s share of world GDP dropped to below 2%. Today, India’s share of GDP is back to above 3.5% and it is already the fifth largest economy in the world. Where does the Indian economy go from here?

The 7-D approach to making India great again

In an interesting speech delivered at the Indira Gandhi Institute for Developmental Research (IGIDR), the RBI Deputy Governor, Michael Patra, outlined a rather bold and comprehensive 7-D model, which could put India back to its high GDP era. Over the last 300 years, India has seen the global mantle of economic leadership shifting from Europe to the United States, Japan and then to China. However, India has been found wanting for several reasons. In the view of Michael Patra, this is perhaps the sweet spot when India can claim a much bigger share of global GDP and obviously a greater share of global influence. Here is the 7-D model that he suggests that can make a big difference to India’s economic future.

The first D – Demographics

In 2023, India overtook China to become the most populous country in the world. India has an army of people who are young, ambitious, and raring to go. That is the demographic dividend that India has been talking about for a long time. That demographic dividend is finally here and it is going to last for the next 25 years. A lot of how India reclaims its global influence would depend on how these next 25 years are utilized. 

Consider some of the data points! Today, India’s median age is 28 years and every sixth working age (15-64 years) person in the world is an Indian. This is in contrast to most of the Western nations and Japan which are struggling with aging populations. A young population is not just a ticket to more production and productivity but also a ticket to higher income levels, higher savings, and investments. 

Incidentally, India’s population is expected to keep growing for another 40 years and peak at around 1.70 billion people in year 2063. India is likely to emerge as the second largest economy in the world by year 2048. This also calls for a rethink. For example, India’s female labour force participation is among the lowest in the world and labour productivity (GDP per hours worked) is lower than peers. The thrust has to be on creation of jobs and re-skilling people. The prospects are exciting. 

The second D – Diaspora

India has not only one of the biggest NRI populations settled abroad, but most of them are extremely affluent. Outward migration can now turn into an absolute advantage as India plans the next phase of growth. The Indian diaspora is 18 million strong (according to UN estimates) and accounts for 6.5% of all global migrants. Major destinations are the UAE, followed by the US. Indians are in robust numbers in Canada, UK, and Australia.

Indian diaspora has not only done well in a competitive global environment but are also willing to bring their expertise to India. This could be in the form of funds, management expertise or technical knowhow. It is estimated that over 90 out of 1078 founders of 500 unicorns in the US are persons of Indian origin. Nearly 29% of the STEM (science, technology, engineering, and mathematics) professionals in the US are of Indian origin. 

One obvious benefit of the diaspora is remittances. In 2022, India got $108 billion as remittances from global Indians, accounting for 3% of GDP. NRIs account for bank deposits in India worth $136 billion; but that is not all. The real benefits will be seen when the labour market transforms and the line between working in India and abroad will narrow. As per a WEF report, the world will create 69 million new jobs and destroy 83 million existing jobs. Job accretion will happen in supply chains, transportation, media, entertainment, and sports industries. It is the diaspora that can help India grow ahead of the curve. 

The third D – Diversification

India’s export basket has been transforming drastically in the last few years since the pandemic. Services exports have grown at 25% CAGR since 2020 and has largely helped to keep current account deficit (CAD) in check. One big driver of this boost to services exports has been the setting up of Global Capability Centres (GCC) in India. Today, it is actually possible to unbundle the service and trade it separately. 

These GCCs are offshore offices delivering a wide array of services across IT sector verticals. Interestingly, India is home to 40% of the global GCCs and they account for 25% of overall IT exports. So, it is no longer the outsourcing basket that India has to worry about. Also, the export picture is getting less product-driven and more service-driven. NASSCOM estimates another 500 GCCs to be added by the year 2026 and could be a key driver of growth.

 

The fourth D – Digital Fintech Revolution

India has been quietly dominating the latest Fintech revolution, at least in volumes. Sample these. India accounts for 50% of all real time payments globally by volumes. The UPI (unified payment interface) handled 9 billion transactions in April 2023. India has already leveraged Fintech for financial inclusion through Aadhar, Jan Dhan bank accounts and e-KYC models for rapid verification and implementation of transactions. 

These are part of the much bigger India Stack, which is manifesting in stages. Now, UPI has expanded to Singapore and the Middle East and more nations with Indian diaspora are on the anvil. It is estimated that digital payments will touch $10 trillion by 2026 with 70% in non-cash modes. That is likely to be a big driver of the India growth story.

The Fifth D – Diplomacy

Being a topic closer to politics than to economics, we will deal with this issue in a cursory manner. Today, India is the president of the G20, an Indian is the president of the World Bank and a person of Indian origin is the prime minister of UK. All these are diplomatic advantages to begin with. In the G20, India has been making the right noises about food and energy security. At a macro level, India showed diplomatic spine to stick to its stand on buying Russian oil. Today Russia supplies more crude to India each month than Iraq and Saudi Arabia combined. India sees itself as a natural leader of the emerging world.

The Sixth D – Dynamic Federalism

This may sound political but has key economic implications. Today public policy has important implications for quality of life and for the business environment in India. In a federal structure, states must compete and that is most evident in attracting private investments. Today Indian states have reasons to have dedicated start-up policies due to start-up ranking schemes adopted by the centre. Most states have instituted processes like single-window clearance, self-certification of compliance, online filing for e-registration and transparent inspection systems. In addition, the sustainable development goals (SDG) India Index developed by NITI Aayog, in collaboration with the UN, is fostering competition among states for a more balanced growth. The overall impact is likely to be accretive.

The Seventh D – Decarbonisation

Climate change is visible at an alarming scale globally with frequent examples of extreme weather. It has a huge cost on life, property, sustainability, and economic growth. For India, the relative costs of transitioning to a greener path are higher than for advanced economies. However, India has still emerged as a leading voice on global climate action. India has committed to raising non-fossil-fuels-based energy capacity to 500 GW by 2030; generating half the energy requirements from renewable sources; and reducing carbon intensity of GDP by 45% by 2030 with net-zero target by 2070. There are also efforts to greening the financial system through green credit and sovereign green bonds.

To sum it up, Michael Patra has expressed the confidence that India is on the right track to scale much higher levels of growth and per-capital GDP in the coming years. Of course, a lot will eventually boil down to the brass tacks of implementation.