Blog Post

A ten-step program to tap India’s great potential

It's all about productivity. India scores poorly on indexes of economic variables that are critical for economic efficiency -- worse than Brazil, China and even Russia. To change that, it needs to do ten things.

By: Date: May 23, 2014 Topic: Global economy and trade

It’s fashionable to say the era of strong emerging-market growth is over. As the U.S. recovers, the global cost of capital will rise, holding back investment – against this background, avoiding the next crisis is the best that most emerging economies can do. If you take this view, India might seem a perfect example, with its widening current account deficit, heavy public borrowing, persistent inflation and weak currency.

I don’t think so. As a general matter, emerging-market gloom is overdone. India, in particular, could teach the pessimists a lesson.

Last year I made a quick visit to see the then chief minister of Gujarat, Narendra Modi. He’d asked me to give a presentation on how India could realize its still-enormous potential. I went through points I’d first discussed in a paper I co-authored with Tushar Puddar in 2008: Ten Things for India to Achieve its 2050 Potential. It’s striking to me that, six years later, our recommendations don’t need revising.

Having led the former opposition Bharatiya Janata Party in this year’s general election campaign – Modi has since become prime minister. He’s a controversial figure. Detractors call him a sectarian extremist (and worse). I will say this: He’s known to be good on economics, and that’s one of the things India desperately needs in a leader.

Like all Indians, Modi loves acronyms. Me too. I admire his MG-squared — minimum government, maximum governance — and P2G2 — pro-active, pro-people, good governance. That sums it up pretty well. I don’t think it’s a coincidence that Gujarat has avoided the slowdown which has almost halved India’s national rate of growth. The state just keeps on growing at double-digit rates.

Long-term growth depends ultimately on just two things — the number of workers and how productive they are. India’s demographics are remarkable. The country is on track to grow its workforce by 140 million between 2000 and 2020. That increase is the equivalent of the working population of France, Germany, Italy and the U.K. combined.

Even with unspectacular growth of a little more than 6 percent a year, by 2050 India’s economy could be 40 times bigger than it was in 2000 — about as big as the U.S. economy will probably be by then (though not as big as China). But it could do so much better than that. Growth of 8.5 percent over the entire period is possible — with growth of more than 10 percent over the next 15-20 years not out of the question — provided it makes some changes.

It’s all about productivity. India scores poorly on indexes of economic variables that are critical for economic efficiency — worse than Brazil, China and even Russia. To change that, it needs to do ten things:

  1. Improve its governance. This is probably the hardest and most important task — the pre-condition for the rest. Modi is right: Whoever leads the next government in 2014, India needs maximum governance and minimum government. There is no point having the world’s largest democracy unless it leads to effective government.
  2. Fix primary and secondary education. There’s been some progress here, but a huge number of young people still get little or no schooling. I sit on the board of Teach for All, a global umbrella organisation for groups that encourage the brightest graduates to spend at least 2 years teaching. Today India has about 350 teachers in these programs. They could do with 350,000 or more.
  3. Improve colleges and universities. India has too few excellent institutions. Its share of places in the Shanghai Index of the world’s top Universities should be proportional to its share of global gross domestic product. Make that an official goal.
  4. Adopt an inflation target, and make it the center of a new macroeconomic policy framework.
  5. Introduce a medium to long-term fiscal-policy framework, perhaps with ceilings as in the Maastricht Treaty — a deficit of less than 3 percent of GDP and debt of less than 60 percent of GDP.
  6. Increase trade with its neighbours. Indian exports to China could be close to $1 trillion by 2050, nearly the size of its entire GDP in 2008. But India has little trade with Bangladesh and Pakistan. There’s no better way to promote peaceful relations than to expand trade — and that means imports as well as exports.
  7. Liberalize financial markets. India needs huge amounts of domestic and foreign capital to achieve its potential — and a better-functioning capital market to allocate it wisely.
  8. Innovate in farming. Gujarat isn’t a traditional agricultural producer but it’s improved productivity with initiatives like its "white revolution" in milk production. The whole nation, still greatly dependent on farming, needs enormous improvements.
  9. Build more infrastructure. I flew in to Ahmedabad via Delhi, and out via Mumbai, all in a day. I got where I needed to go — but it’s obvious how much more India needs to do. Adopt some of that Chinese drive to invest in infrastructure.
  10. Protect the environment. India can’t achieve 8.5 percent growth for the next 30-40 years unless it takes steps to safeguard environmental quality and use energy and other resources more efficiently. Encouraging the private sector to invest in sustainable technologies can boost growth in its own right.

I’ll have a lot more to say about the details as this project moves forward. For now, suffice to say that India’s potential is vast — and given the will, it can be tapped. 


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