Is India the Next China in Terms of Economic Growth ?

Much has been written and said about the emergence of India as an economic powerhouse and being the “lone bright spot” in the global economy. Considering that the Chinese economy is cooling down and the West is stagnating, investors are betting big on India being the driver of global economic growth. Some of these investors are also pinning their hopes on the new government which is supposed to be business friendly and would undertake reforms and speed up growth.

Having said that, one must also ask the question as to whether this hype is justified given the structural impediments to growth in India. Moreover, the fact that it would take India a decade or so to catch up with the Income levels of China let alone the West means that any growth that manifests in India has to be sustained over a longer period of time. In addition, India is betting big on the Make in India initiative which is in the manufacturing sector that typically has a lag time between investments and actual growth.

Manufacturing

As mentioned in the introduction, investments in the manufacturing sector result in growth after a lag time ranging from a few years to even a decade. This is because unlike the services sector, the manufacturing sector needs physical plants and factories to be built. Moreover, India’s base manufacturing sector is very low meaning that it has to necessarily ramp up the capacity as well as the supply chain efficiency in this sector. Given the state of the physical infrastructure in the country, massive investments along with strong political will to implement tough policies are needed to revive and rejuvenate the manufacturing sector.

In addition, there is no major economy in the world that has registered scorching rates of growth without the manufacturing sector contributing to the major part of such growth. Indeed, India’s rise in recent years has been mainly driven by the services sector and if India has to grow faster as well as in a sustainable manner, manufacturing has to necessarily deliver.

Agriculture

The biggest bottleneck to India’s growth is the Agricultural sector. Not only does it employ the largest workforce but is also unproductive and wasteful meaning that for the amount of money invested, the gains are indeed low. Further, the sector is dependent on the rain gods meaning that in case the monsoon fails, the growth is correspondingly lower. In addition, the Indian agricultural sector is heavily subsidized as well as inefficient and this means that any reforms must first take into account these aspects.

As many experts have put it, unless India confronts the problems with the Agricultural sector, dreams of becoming an economic powerhouse would remain just dreams and nothing more. Therefore, the euphoria about India’s emergence has to be tempered with the realities of this sector.

Services

A bright spot in the India growth story is the services sector that continues to register impressive rates of growth and increasing its capacity to create jobs. Having said that, as has been noted elsewhere in this article, India simply cannot bypass the Industrial Growth stage and use the services sector to emerge as an economic powerhouse. However, there are still some chances that services can shoulder the growth rate for a few years to come before the mismatch between it and the other sectors would manifest in overall lower growth rates.

In other words, the growth in the services sector has to be matched by a corresponding growth in the manufacturing sector and in addition, the agriculture sector must be pulled from the abyss that it is in. it is only when all these three sectors complement and supplement each other that India can hope to match the growth rates of China.

The Promise and Perils of the Demographic Dividend

Much has been written about how youthful India’s population is and how this would contribute to faster economic growth in the years to come. In other words, Demography or the age profiles of its population are in India’s favor and this is often referred to as the Demographic Dividend. Indeed, the fact that Millions of youth are entering the workforce every year means that there is much absorptive capacity to grow since there is no scarcity of workers for all the three sectors that have been discussed.

However, the Demographic Dividend can become a nightmare if not handled properly as unless there are corresponding jobs that are created for all these workers, unemployment can lead to social unrest and disaffected youth taking to the streets. Already much of the current problems stem from the fact that there is too much unemployment and underemployment. While the former refers to a lack of jobs, the latter refers to jobs being available but not enough employable workers. In other words, it is simply not enough to create jobs when workers with the right skills are unavailable. This is a problem for both the manufacturing and the services sector wherein lack of skilled workers even though there are workers means that unless the workers are trained in the right skills, mere availability of both jobs and workers would not lead to any growth.

Conclusion

Having considered all the points, it is indeed the case that there are promises of growth and the perils of not growing faster. The window of opportunity to undertake structural reforms and rejuvenate the economy is short and hence, there needs to be a concerted effort at undertaking reforms. Having said that, there are many entrenched interests who would block such reforms and hence, the ability to overcome the challenges as well as take everybody along has to be the approach that would ensure India grows modestly let alone match China.


❮   Previous  Article Next  Article   ❯


Authorship/Referencing - About the Author(s)

MSG team comprises experienced faculty and professionals who develop the content for the portal. We collectively refer to our team as - “MSG Experts”. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.

Globalization