The former Reserve Bank of India head, now comfortably ensconced at the University of Chicago writing at Project Syndicate, May 24:
Having recently overtaken its former colonial master to become the world's fifth-largest economy, India's star certainly appears to be rising. But if the country remains committed to the current government's development strategy, the economy could lose its momentum well before achieving escape velocity.
CHICAGO – There is a buzz in India today – a sense of limitless possibilities. India has just overtaken its former colonial master (the United Kingdom) to become the world’s fifth-largest economy. If it maintains its current growth rate of 6-7% per year, it will soon overtake stagnant Japan and Germany to take over third place.
But by 2050, India’s workforce will start shrinking, owing to demographic aging. Growth will slow. That means India has only a narrow window in which to grow rich before it grows old: with per capita income of just $2,500, the economy must grow by 9% per year for the next quarter-century. That is an extremely difficult task, and the current election may well determine whether it remains possible at all.
The China ModelIn pursuit of rapid growth, the Indian government intends to follow a tested road map: the same path that Japan took in the immediate postwar decades, and that China took after the death of Mao Zedong. During the first stage of the journey, labor flows out of the traditional agriculture sector as employment increases in low-skilled manufacturing – typically stitching garments or assembling components into electronic goods. This output is then exported to the developed world to capture the benefits of producing at scale.Cheap labor helps compensate for a country’s other deficiencies, such as excessive bureaucracy, unreliable power (especially electricity), or poor roads. As firms profit from exports, they invest in equipment to make workers more productive; and as those workers are paid more, they can afford better schooling and health care for themselves and their children. Tax revenues also grow, providing the resources to upgrade the country’s infrastructure. The result is a virtuous cycle, because higher-skilled workers and better infrastructure enable firms to make more sophisticated, higher-value-added products. That is how China has moved from assembling components to producing world-leading electric vehicles in just four decades. Unfortunately, the same strategy is unlikely to work for India today.
Why China Surged AheadIt is no accident that India failed to join China in shifting its economy to export-oriented manufacturing, even though the two countries were similarly poor in the late 1970s, when China started on that road. Even low-skilled factory employment requires a minimum level of education and skills. At the time, many Chinese workers met this standard, whereas most Indian workers did not. So, foreign employers found China and its cheap but capable workers more attractive....
