Commentary on Political Economy

Thursday 9 May 2024

 

Opinion | India’s Economy Isn’t the New China (Yet)

Indian Prime Minister Narendra Modi delivers remarks in New Delhi, April 24. Photo: Pib /Press Information/Zuma Press

Is India on the cusp of a long-awaited economic takeoff? America’s corporate titans appear to think so. JPMorgan Chase CEO Jamie Dimon recently praised Prime Minister Narendra Modi for having “done an unbelievable job.” Tim Cook, on whose watch Apple began making iPhones in India, called the country “an incredibly exciting market.” Warren Buffett said India holds “unexplored” opportunities for Berkshire HathawayElon Musk said he looks forward to visiting India later this year.

How justified is the hype? First, the glass-half-full story: The International Monetary Fund estimates that India’s economy grew a robust 7.8% in the fiscal year that ended March 31. When Mr. Modi first took office in 2014, India was the world’s 10th-largest economy by gross domestic product at market exchange rates. It’s now the fifth-largest economy, behind only the U.S., China, Germany and Japan. The IMF estimates that by 2027 India will become the world’s third-largest economy, after the U.S. and China.

India has also dramatically reduced poverty over the past two decades. At a conference on the Indian economy at George Washington University last month, Oxford economist Sabina Alkire estimated that 415 million people in India exited poverty between 2005 and 2021. In 2015-16, 27.7% of Indians were poor, according to the United Nations Development Program’s Multidimensional Poverty Index, which measures health, education and living standards. By 2019-21 this had fallen to 16.4% of the population.

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The World Bank takes an even more optimistic view of poverty reduction, estimating that in 2021, despite the pandemic, only 12.9% of India’s population was living on $2.15 or less a day, the global benchmark for extreme poverty. Indian economists Surjit Bhalla and Karan Bhasin wrote this year that “India has eliminated extreme poverty.” Regardless of whom you believe, there’s no doubt that the extreme deprivation with which India was once synonymous has diminished greatly and is on track to disappear entirely.

There are other reasons for optimism. The Modi government has presided over a large infrastructure buildout. Economists Arvind Subramanian and Josh Felman estimate that India has built 34,000 miles of national highway since 2014, and that India’s infrastructure—including ports and airports—“has been transformed.” A combination of widespread internet access, the proliferation of cellphones, and a massive rollout of bank accounts has also improved the government’s ability to deliver welfare payments to the needy.

India’s service exports have continued to boom. Messrs. Subramanian and Felman estimate that India’s share of global highly skilled services nearly doubled, from around 3% in 2005 to 5.8% in 2022. JPMorgan Chase now employs about 60,000 people in India. Toss in a youthful workforce—the median Indian is 28—and a surge in companies seeking alternative investment destinations to China, and the case for India’s impending takeoff is complete. In a speech at George Washington University, India’s chief economic adviser, V. Anantha Nageswaran, described achieving a near-term 10% annual growth rate in dollar terms as “not particularly daunting.”

Despite this progress, India still faces many challenges. Here’s the glass-half-empty version of the story: India’s economic performance looks much less impressive when contrasted with that of other countries. India’s per capita GDP ($2,730) is about 1/30th of America’s ($85,370) and about one-fifth of China’s ($13,140). Indermit Gill, chief economist at the World Bank, estimates that at current growth rates it will take 75 years before per capita GDP in India reaches a quarter of the U.S. figure.

And there’s no guarantee this will happen. According to World Bank research, most poor countries hit a wall at 10% of U.S. per capita GDP. At current growth rates, it could take decades for India simply to catch up with Indonesia, which has a per capita GDP of $5,270.

China benefited during a period of Western openness to trade. The global environment is much less benign now, and India has made it harder for its companies to become part of global supply chains by choosing to remain outside large trade blocs such as the 15-member Regional Comprehensive Economic Partnership and the 11-member Comprehensive and Progressive Agreement for Trans-Pacific Partnership. Nimbler Asian rivals such as Vietnam, Malaysia and Singapore are part of both. Mr. Modi has failed to solve India’s central economic challenge: moving tens of millions of subsistence farmers to more productive factory jobs.

Mr. Modi says he wants India to be a developed economy by 2047, when the country will celebrate 100 years of independence. Is it possible? The jury remains out on that question.

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Appeared in the May 9, 2024, print edition as 'India Isn’t the New China (Yet)'.

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