In India, state holds back nation

India’s economic fundamentals and demographic composition are well-positioned to make widespread prosperity a reality in the next two decades or so. However, the road to mass prosperity has to run through a market-based economic system, which is not easy for a country that travelled too far down the socialistic lane in its first 30 years of independence. Growth and distribution: A key metric of mass prosperity of any country is its per capita income. For India to come close to upper-middle-income countries on this metric, it needs a fourfold increase in its per capita income. To achieve that in the next 25 years, the country will need an average annual growth rate of 7%. Also, states like Bihar and Uttar Pradesh must grow at a much higher rate to catch up with more prosperous states like Gujarat and Haryana. Therefore, the issue of mass prosperity in India boils down to two core issues: (a) Will India’s GDP grow at 6-8% over the next 25 years; and (b) How will that economic prosperity be shared across different regions of the country? Drivers of growth: At its core, the long-run economic growth of a country depends on two key factors: technological progress and capital accumulation. Therefore, economic systems that provide strong incentives for productivity gains through technological innovation and remove barriers to large-scale deployment of physical and human capital are more likely to achieve sustained economic growth. medium nocaption93505483 A market-based system, with selective involvement of the government in sectors that enhance the productivity of the private sector, has proven to be the most reliable framework to do so. Can India achieve productivity gains and capital formation that can set it on a 7% growth rate path? It is not easy, but it is undoubtedly achievable, especially when we look at some key trends in the Indian economy today. The most immediate of these trends is the irreversible move towards a market-based system that the country has adopted since the 1991 liberalisation. While the speed of reform has been uneven and slow at times, the pace of privatisation has picked up in recent years. State must exit banking: We still need work to speed up the privatisation of the loss-making public sector banks. A market-based banking sector will be in a solid position to allocate capital efficiently and productively across different sectors of the economy. Moreover, increased private ownership of banks and corporations will allow creative destruction of underperforming companies, provide the right set of incentives to managers, and eventually pave the way for sustained economic growth. In addition to privatising existing government-owned undertakings, India will also need a lot of new private enterprises spread across the country to meet its growth target of 7%. Impressive growth in the country’s startup ecosystem and VC funding in recent years is a welcome sign. In addition, policy initiatives on infrastructure development, digitisation of the economy, and a push towards rural development have created a conducive environment for inclusive growth. India’s transportation infrastructure has been improving steadily. Air passenger traffic increased at an annual rate of 13% between 2012 and 2019. Much of this growth has come from the rural and semi-urban areas of the country. Cities and towns in remote parts of the country are now much better connected with the rest of the country than ten years ago. Increased mobility of labour, capital and raw materials should spur economic growth even in most interior parts of the country. India’s payment revolution: In terms of digitisation of the economy, India is by far the world leader in digital payments and transactions. In 2021, the number of real-time digital payment transactions in India was almost threefold that of China. By cutting down the intermediaries’ commission and speeding up economic transactions safely and securely, the digital revolution has the potential to unlock the country’s entrepreneurial spirit, even in the poorest segment of society, in unprecedented ways. Finally, the country has made commendable progress in improving the quality of life of its rural population. For example, rural India’s access to clean fuel for cooking increased from 18% of the population in 2012 to 54% in 2020. Similarly, 56% of the rural population had access to safe drinking water in 2020 compared to 46% in 2012. Access to essential sanitation services also went up over this period. Though much work remains to be done, these investments will surely have positive long-term health outcomes for the masses. A healthy workforce contributes to economic development through increased labour supply and higher productivity. When global economic growth faces headwinds from a declining population, investment in its rural human capital can be precious for India. No doubt, there will be bumps in the road towards economic progress. Pandemics, wars, and other socio-political events will intermittently create periods of economic uncertainty. But if the country continues to push towards technological advancement, productivity gains, and capital formation, mass prosperity is very likely in the next 25 years.Illustration by Ajit Ninan