Path to 2047: Can India move beyond a ‘business-as-usual’ approach?

The Economic Survey for 2012-13, the brainchild of Raghuram Rajan who was then the Chief Economic Adviser, had a chapter called ‘Seizing the Demographic Dividend’. It laid out three divergent growth scenarios for the country—one a growth acceleration under reforms, another a scenario of decline and a third middle way which he called ‘Business as usual’. In the ‘business as usual’ scenario, the Economic Survey said there would be ‘Some improvement in infrastructure but only slow improvement in education, and no change in institutional structure such as business regulation and labour laws. Some movement from agriculture to low skill services such as construction and household work, as well as to informal manufacturing, but too few quality jobs. GDP growth settles into a comfortable 6-7 per cent, the new “normal”.’ That about sums up where we are now, twelve years after that analysis. 

A few days ago, the World Bank brought out a report on India titled ‘Becoming a High Income Economy in a Generation’, telling us what it will take to become a high income country by 2047, which is the government’s stated aim. The World Bank, like the Economic Survey twelve years ago, also lays out three possible paths for the Indian economy. 

First, it points out that, in order to become a high income country by 2047, India’s annual growth rate needs to average 7.8 percent in real terms, over the coming decades. But this will only happen in the most optimistic scenario, where structural reforms and the right policies lead to investment reaching 40 percent of GDP by 2035, the female labour force participation rate (FLFPR) increases to 55 percent by 2050 and productivity improves dramatically. 

Another scenario is ‘less than business as usual’ where investment-to-GDP peaks at 35 percent in 2035 and then moderates, the share of ICT (Information and Communications Technology) capital in total investment remains broadly at current levels, the FLFPR does not improve (it was at 35.6 percent in 2023-24) and Total Factor Productivity (TFP) growth peaks at 2.5 percent by the beginning of the next decade. Under this scenario, growth remains below 6 percent, on average, until 2047. 

Under the third or Business-as -Usual scenario the momentum of reforms remaining strong. Investment reaches 37 percent of GDP by 2035 driven by an equal contribution of ICT and physical capital accumulation, and then declines; FLFPR increases to 45 percent by 2045, and TFP growth is assumed to peak at 2.7 percent by the beginning of the next decade prior to moderating thereafter. In this middle way scenario, growth averages 6.6 percent per year which is still insufficient to achieve high income status by 2047. It’s the old Raghuram Rajan’s business-as-usual scenario.

At present, what seems to be the most likely trajectory for the Indian economy? The IMF has recently published the detailed results of its Article IV consultations about the state of the Indian economy and it projects real growth of 6.5 percent per annum from 2024- 25 right up to 2029-30. That’s because it says that India’s potential growth rate is 6.5 percent. What’s more, the IMF seems to be betting that consumption rather than investment will drive this growth —investment to GDP ratio is estimated at 33.6 percent in 2024-25 and expected to slowly glide down to 32.6 percent by 2029/30. It’s well below the 37 percent ratio envisaged in the World Bank’s middle path scenario. The World Bank report states: ‘Reviving investment and creating more and better jobs, while creating the conditions for continued TFP growth will be critical for India to accelerate and sustain its growth going forward.’

What needs to be done? The World Bank has the usual laundry list of reforms, ranging from improving infrastructure to bringing down tariff and non-tariff barriers to targeting employment generation to relaxing labour laws and so on and so forth. Twelve years ago, the Economic survey had identified a very similar set of reforms. 

The question then becomes: why were these reforms not done? Perhaps finding out what has happened over the last decade will enable us to identify the bottlenecks. Here are a few that the World Bank report mentions:

1. Firm-level TFP growth is typically associated with trade and innovation, including technology adoption, but in India, the share of firms involved in international trade has been declining in the years prior to the pandemic across the manufacturing and services sectors. 
2. Openness tends to drive productivity growth, but India’s economy is less open to trade today than it was in the previous decade. 
3. Productivity gains have also been predominantly achieved through resources reallocation to large firms while small and medium firms have not managed to become more productive. 
4. Over 2000-19, three-quarters of labour productivity growth came from within sector productivity improvements, particularly in services, rather than reallocations of resources across occupations and firms. In other words, more people need to get out of agriculture into more productive occupations. 
5. Investment is a critical ingredient to sustainable growth, but India has not maintained the investment acceleration of the early 2000s. 
6. As of 2024, 33.8 percent of Indian women aged 15 years and above participated in the workforce, compared to 50-60 percent in most emerging markets. In addition, nearly 37 percent of women in the workforce were unpaid workers in household enterprises, and around 64 percent were engaged in agricultural activities. In urban areas, only 20 percent of women participated in the workforce. 

There are many other reasons, all of them well-known. The government and policy makers are all well aware of them. 

Looking ahead, though, with geopolitical fragmentation, mercantilist policies, Great Power political rivalry and tariff wars, there has been a huge increase in uncertainty recently. The IMF in its recent note on the Indian economy said, ‘Economic policy uncertainty is associated with lower investment and delayed projects. A one-standard deviation increase in uncertainty is associated with a decline in the number of new projects announced by 11 percent, which is around 66 fewer projects per quarter.’

Could India benefit from the US-China and EU-China tariff wars? The IMF is pessimistic. It says, ‘Even as bilateral tariff increases between major economies create opportunities for India and other Asian countries to fill export market niches created by sanctions, the resulting gains would be modest compared with losses from a smaller global economy.’ 

The IMF also says in its risk assessment matrix that there’s a high risk that broader conflicts, inward-oriented policies, and weakened international cooperation result in a less efficient configuration of trade and FDI, supply disruptions, protectionism, policy uncertainty, technological and payments systems fragmentation, rising shipping and input costs, financial instability, a fracturing of the international monetary system, and lower growth. 

In short, the risks to growth have increased sharply. The question is: if, as the World Bank report points out, over the two decades prior to the pandemic, India grew at an annual average rate of 6.7 percent, will it be able to grow faster in spite of the formidable new challenges?

Authored by Manas Chakravarty, Group Consulting Editor, Moneycontrol

Views published do not represent the stand of this publication.