India has come a long way in modernizing its economy, reducing poverty and improving living standards for a large segment of its population.
Its economy has been one of the largest contributors to global growth over the last decade, accounting for about 10% of the world’s increase in economic activity since 2005, while GDP per capita in PPP (purchasing power parity) terms is today three times as high as in 2000.
Yet, this period also witnessed a rise in inequality, which has been mainly driven by income gaps between India’s states, and a growing urban-rural divide. India continues to have the largest number of poor in the world (approximately 300 million are in extreme poverty), and nearly half of the poor are concentrated in five states.
Growth has slowed in recent years and several challenges remain unsolved. Bringing more people into the process of generating growth and sharing the gains more widely will make India more resilient for the future.
With one of the largest and youngest populations in the world, India needs to create millions of good-quality jobs in the near future to ensure decent living conditions for the vast majority of its citizens.
The country is often cited as an example of an economy that is modernizing by jumping directly into services without passing through manufacturing. The weight of manufacturing in India has been relatively stable over the past two decades, at much lower levels than China and ASEAN countries. Business services – a high value added sector – represent a larger share of economic activity in India than in Europe.
Will India be able to achieve shared prosperity without a growing manufacturing sector? Agriculture accounts today for only 16% of total value added (down from 44% in 1965), but still employs about half of the Indian population. Productivity in this sector did not increase significantly in the past decades, limiting improvements in living standards in rural areas.
The competitiveness landscape
After five years of decline, India’s competitiveness improved notably this year as measured by the Global Competitiveness Report 2015-2016, where the country improves 16 ranks to 55th of 140 economies.
This improvement can be largely attributed to two main factors.
Firstly, macroeconomic conditions improved significantly. Inflation eased to 6% in 2014, down from near double-digit levels the previous year. The government budget deficit has gradually dropped since its 2008 peak, although it still amounted to 7% of GDP in 2014, one of the world’s highest.
Secondly, the country benefits from the momentum initiated by the election of Narendra Modi, whose pro-business, pro-growth, and anti-corruption stance has improved the business community’s sentiment toward the government. Infrastructure has also improved, but remains a major growth bottleneck. The fact that the most notable improvements are in the basic drivers of competitiveness bodes well for the future, but other areas also deserve attention, including technological readiness.
How inclusive is growth?
Despite India’s relatively strong record in terms of economic growth over the last decade, its middle class remains small and getting a job is no guarantee of escaping poverty.
India must take further action to ensure that the growth process is broad-based in order to reduce the share of the population living on less than $2 a day—many of whom are employed in informal and low skilled jobs. Educational enrollment rates are relatively low across all levels, and quality varies greatly, leading to notable differences in educational performance among students from different socioeconomic backgrounds.
The gender gaps in labour force participation and wages are both high, showing that India’s women are not benefiting equally from economic opportunities. India scores well in terms of access to finance for business development and real economy investment (investment channelled towards productive uses), yet new business creation continues to be held back by administrative burdens. India also under-exploits the use of fiscal transfers compared to peer countries.
Modernizing India’s public institutions
Modernizing public institutions has been high on the agenda of reforms in India in recent years, and results are starting to show. In 2015, businesses perceived lower levels of corruption among public officials and showed more trust in government’s decisions. Improved public institutions are one of the main drivers of the increase in India’s competitiveness. Yet, there is still a lot of ground to cover.
Private investment, especially from foreign firms, requires a favourable business environment, which includes strong property rights protection and also fair and speedy trials in the case of disputes. To this end, ensuring the independence of the judicial system and increasing efficiency in settling disputes will be key. Business ethics should also improve in line with that of public institutions. Reporting and accounting standards are necessary to ensure transparency in the private sector, increase trust and facilitate long-term financing and investment.
Talent, education and social mobility
Educational enrolment rates are relatively low across all levels: barely above the median for its peer group on pre-primary and primary, and below the median for secondary, vocational and tertiary levels.
Only 1.4% of secondary students are enrolled in technical and vocational programs, limiting the talent pool for skilled labor. The average level of education is only 7.3 years and a gender gap continues to persist, with boys benefiting from two more years of schooling than girls. India ranks 31st out of 37 lower middle income countries in providing equal educational opportunities for men and women, which translates into low levels of female participation in the labor force.
The gap in educational attainment between children from the top and bottom quintiles in India is 8.7 years, with those in the bottom quintile receiving only 2.8 years of education on average and those in the top income quintile receiving 11.56 years. The disparities in educational attainment by income are greater in India than in most other countries with similar income levels, and can be important in transmitting inequality down the generations. The gap is much smaller in Vietnam, Thailand, Indonesia and the Philippines and larger only in Laos. Thailand stands out for having the best educational outcomes in this peer group on average (nearly 5 more years than India).
Unequal access to finance
India scores relatively well in terms of access to finance for developing businesses and investing in the economy. India’s entrepreneurs have better access to bank accounts, credit, venture capital, and equity markets than their counterparts in most peer countries. However, access to finance remains limited for low income individuals, especially women. 400 million people remain unbanked in India and disconnected from the financial system despite impressive gains in recent years. Most unbanked are poor and female: only 27% of individuals in bottom quintiles and 37% of women have access to a bank account. Finance can help poor households optimize severely constrained resources across their lifetime.
Barriers to Entrepreneurship
Yet, only 7% used their savings account to start a business (the proportion is even smaller for those in the bottom 40% of the income distribution). A last-placed ranking on small business ownership is evidently not for want of good ideas, as India scores fourth on a measure of patent applications. But budding entrepreneurs are held back by red tape and an inefficient justice system, with relatively low rankings for indicators such as the time and cost of starting a business, enforcing a contract and resolving insolvency.
Closing the infrastructure gap in India
Infrastructure development has not keep up with the increasing needs of the economy. Since 2007, the country slipped 14 ranks to 81st worldwide in terms of overall quality of infrastructure. In a recent report, the World Bank estimates that India might need up to 1.7 trillion dollars to close its gap in infrastructure development. Such a huge challenge cannot be borne by the government alone and will require more private investments and public-private partnerships. Private infrastructure financing totalled only 2.4 % of GDP per year on average from 2009-2013.
A quarter of Indians still do not have access to electricity and almost a third of the urban population live in slums. 65% of the population does not have access to improved sanitation and access remains unevenly distributed. This is also the case for clean drinking water.
Modernizing transport infrastructure will be particularly important to increasing India’s competitiveness. The airline sector is one of the weaknesses of India’s transport system. Operational airports are still out of reach for large parts of the country given that only half of Indian roads are paved, contributing to one of the highest accident rates in the world. On the flipside, the railway system performs relatively better than other modes of transport, traversing the country for approximately 65,000 kilometers (the fourth largest in the world). Nonetheless, investments are needed to improve the speed and efficiency of the system, especially within urban areas.
Despite many clusters of excellence in the IT industry and a vibrant service sector, India is not fully leveraging ICTs (information and communication technologies) for the benefits of its entire population. Regulation of the ICT sector is among the most competitive in the world and costs are low by international standards. Yet, the uptake of ICTs in India remains very low. Fewer than one in five Indians access the Internet on a regular basis, with only 1 percent of the population having fixed broadband (more worryingly, this figure has not gone up significantly in recent years). Smartphones are the privilege of the very few, with 5 mobile broadband subscriptions for every 100 population, while less than two in five Indians are estimated to own even a basic cell phone.
India has been slipping behind other countries in developing Asia over the last decade. Until 2007, internet usage was in line with the median performance of other economies in the region. Since then, countries such as Thailand and the Philippines have experienced a tremendous increase in the uptake of ICTs. Connecting India will mean investing in both physical and human capital to bridge the gap with other emerging markets. ICT could help fulfil India’s ambition to become a global manufacturing hub. Furthermore, ICT could do wonders in improving productivity in agriculture and the services sector, while boosting access to some basic services among the rural population.
India’s tax tystem and social safety net
Some countries effectively use redistribution to reduce inequality, but India is not among them. Its Gini coefficient (a measure of income distribution) is the second highest among lower middle income countries and is barely changed by fiscal transfers. Tax revenues are extremely low and India’s tax code is regressive, meaning that the poor bear a heavier burden than the rich, which is not offset by social spending. The country spends only 2.5% of GDP on social protection compared with over 6% in many peer countries.
India has a great deal of opportunity to enhance the generosity and progressivity of its social protection system so that it can give its citizens the safety net needed to take risks and participate fully in the economy and society.
Increasing its narrow tax base can also give India more fiscal space to make these much needed social expenditures, particularly in health. India’s public health system remains limited in coverage. Out-of-pocket expenses are high, limiting affordability. This translates into poor (and unequal) health outcomes. Inequality adjusted life expectancy is 25 years while in many peer countries like Thailand and Vietnam there is only around 10 years’ difference between high and low-income individuals.
The way ahead
To achieve both economic growth and social inclusion, India should focus on a number of areas of reform, including:
Authors: Gemma Corrigan, Economist, Economic Growth and Social Inclusion Initiative, Inclusive Growth, World Economic Forum. Attilio Di Batisto is a Quantitative Economist at the World Economic Forum.
Image: Passengers ride an overcrowded bus as they head towards their village to celebrate “Dashain”. REUTERS/Navesh Chitrakar
Gemma Corrigan, Practice Lead, Inclusive Growth, Future of Economic Progress, World Economic Forum Geneva
Attilio Di Battista, Economist, World Economic Forum
The views expressed in this article are those of the author alone and not the World Economic Forum.
A weekly update of what’s on the Global Agenda
Ruth Kattumuri reviews key challenges that are of priority for India’s development in 2015, from sustainable growth to social protection to urbanisation. Look out for Raj Verma’s top 10 foreign policy challenges posts later this week.
1. Sustainable growth and development: India requires growth rates of at least 7% to cater to the needs of its large, young and aspiring population. The country’s growth rate is projected to 6.4% for 2015. Stronger economic reforms and greater investments and better resource management in multiple sectors and across the country are necessary to invigorate growth to required levels. The falling oil prices provide an opportunity to decrease energy subsidies and utilise the savings in targeted investments and improve growth prospects.
Inclusion of all people from all economic and social backgrounds to attain their full potential is crucial for India’s sustainable development. India’s growth path should align with the Sustainable Development Goals (SDGs) for ending poverty and reducing inequality; ensuring food and water security; improving health, nutrition and sanitation; providing quality education; enabling gender equality and safety; making cities clean and green; addressing climate change; and promoting peaceful societies.
2. Green growth: Green growth optimises the potential of sustainable economic growth that is efficient, clean and resilient. It thereby enables reduction in pollution, greenhouse gas emissions and environmental degradation. Green growth enables energy security through efficient use of natural resources and reduces dependence on imported fossil fuels. It enhances climate resilience through considered environmental management, maintaining biodiversity, improving health prospects, minimising waste and reduction in climate vulnerability to extreme weather hazards.
Furthermore, it has the potential to offer India tremendous opportunity for sustainable development. Improvements could be made to energy efficiency in industry, transportation, infrastructure and assets. India has already been undertaking significant initiatives to limit expected increase in emissions and greater investment is essential to mitigate risks due to climate change and safeguard her people.
There will be challenges. However, sustainable green growth is certainly achievable with existing and on-going developments in clean technologies and renewable energies but requires strong commitment by central and state governments, corporates, households and individuals.
3. Human development: The working age population is estimated to become over 64% in 2021 with the average age expected to be 29 years. India’s middle class is expected to be 200 million by 2020. These demographic factors provide opportunities as well as challenges. Higher investment is crucial to educate, skill and provide employment and entrepreneurial opportunities to keep pace and stay ahead of the growing demands and attain the potential of her people wealth.
Improving the quality of education is essential. Major gaps exist in quality and availability of teachers, particularly in rural government schools. Encouraging internship opportunities for qualified young people to volunteer in village schools can benefit interns and children. Greater efforts for counselling students and teachers, involving parent teacher associations and NGOs are essential to enhance the performance of Right to Education across public and private schools across the country.
Enhancing employability and employment through enabling opportunities in multiple sectors (including India’s expanding space programme) is essential to fulfil the aspirations of the country’s youth. Technical and vocational training programmes; creating jobs; innovation and entrepreneurship opportunities have to be expanded for working age population.
Reducing gender gaps in human development is required to ensure inclusion and equality; improve health of children and family; enable greater participation in labour force participation. Women and girls can be empowered only when they are safe and free to be able to participate equally in all activities in urban and rural areas. Large scale (through media, involvement of ambassadors, etc.) and community-based programmes to educate men, women and households are essential to improve awareness and change attitudes and behaviours.
4. Social protection: ‘In the keeping of his subjects lies the king’s happiness; in their welfare, his welfare; whatever pleases himself he shall not consider as good, but whatever pleases his subjects’ he shall consider as good’, wrote Kautilya in his Arthashastra. The culture of ensuring provision for the vulnerable has to be enhanced and sustained. Awareness and inclusion of disabled in education and jobs has been improving but requires greater commitment and resources to empower and involve them according to their capabilities.
Some improvements are being made by states in the implementation of public distribution systems using technology and better monitoring to enable all those eligible to access government benefits and prevent access by those who are ineligible. Further improvements are required through regular monitoring and evaluation, creating awareness, empowerment and involvement of local communities and leadership.
Schemes introduced under the new government have great potential, as long as they are implemented efficiently. For example, the Jan Dhan Yojanan could enhance financial inclusion and improve the distribution of government subsidies, scholarships, pensions, etc.
5. Urbanisation: About 32% of the country’s population currently lives in urban areas. It is estimated that urban population will contribute over 75% of GDP in the next 15 years. ‘Economic Corridors’ and ‘Smart Cities’ need to encourage transparency, planned efficiently; and developed with stronger co-ordination between public and private, as well as national and international collaborations to be drivers of growth and inclusion that is sustainable and enhances quality of life.
The golden quadrangle helped to fast track urbanisation of second tier cities and enabled better connectivity with rural areas. People from rural areas are now commuting for jobs and schools in nearby towns. Rural to urban migration within and between states continues to grow. Public and private sector investments in development of infrastructure and industry – Special Economic Zones, roads and other constructions have been providing alternative non-farm occupations and additional sources of income. About 61% of the rural population (500 million) belong to the working age group of 15 – 59 years (Census 2011). This population will increasingly access services and facilities in urban and peri-urban areas through migration or daily commuting for work, business or education. Public and private services and Infrastructure requirements should be projected, planned and developed in a responsible and transparent manner to be inclusive and meet the growing demands to benefit rural and urban populations.
6. Land reforms: Developing transparent land reforms for Centre and States are crucial for sustainable growth and development. The ordinance passed on 29th December to amend the Land Acquisition Act is a step forward and should reform and promptly secure approval from Parliament. The government should seek to develop feasible reforms that are fair and provide justice and equity to urban and rural landowners, together with meeting development objectives.
7. Strengthening public sector institutions: Significant human, infrastructure and capital resources already existing in several public sector institutions are accessible to the larger population. It would be resource efficient to scale up existing resources by improving their performance and enhance their potential through regular training, monitoring, evaluation and investment. Salaries for employees in public sector should be commensurate with their work and responsibilities and should provide incentives for good performance and achievements. Greater awareness programmes and disincentives for unethical practises have to be strictly implemented.
8. Centre-State co-operation: The Centre-State and State-State understanding and co-operation have gained significance in recent years. The difference in leadership, governance and cultures between the 29 states contributes richly to India’s democracy. Article 263 in the Constitution should be optimised to promote co-operative federalism. With an efficient co-operative federalism, the achievements in economic growth, governance and social inclusion of any state can easily be replicated in other states to enable equitable growth.
India – A Multitude of People and Cultures (Mosaic) Image Credit: flickr/Dinesh Cyanam CC BY-SA 2.0
9. Federal Republic of India: A beauty of the federation of India is the unity in the vast diversity of its people and places from Kashmir to Andaman Islands and Arunachal Pradesh to Gujarat. Her people comprise of the second largest Muslim population in a country and Christian population higher than the entire population of some countries (e.g. Sri Lanka). India is and will remain uniquely sovereign, socialist, secular, democratic republic, like no other country in the world.
India can become a world leader. What she requires are large-scale reforms for sustainable and inclusive development aligning with technology and developments existing in the 21st century and to become a responsible and transparent democracy.
10. Regional co-operation: The population of Asia (includes central Asia) is 4.3 billion (61% of world population in 2013). Strong co-operation between countries in the region are essential for economic growth and development. There is a growing awareness of this and occasional surmises regarding the possibility of an ‘Asian Union’ to improve standards and economic integration across the region. Greater commitment, communication and co-ordination are crucial to improve equitable multi-and-bilateral trade, security relations and sharing of resources such as water.
Note: This article gives the views of theauthor, and not the position of the India at LSE blog, nor of the London School of Economics. Please read ourcomments policy before posting.
About the Author
Ruth Kattumuri is Co-Director of the India Observatory and Asia Research Centre
Dr Kattumuri is a regular contributor to the India at LSE blog. You can view her previous posts here.
Note: This article gives the views of theauthor, and not the position of the India at LSE blog, nor of the London School of Economics. Please read ourcomments policy before posting.