Hype over India’s economic boom is a dangerous myth masking real problems

Some commentators foresee a new golden age for India, but the country is on a dangerous path built on a disingenuous numbers game
There is no silver bullet that will fix weak job creation, a small and uncompetitive manufacturing sector and government schemes that fatten corporate profits

Ashoka Mody

Published: 4:45pm, 30 Mar 2023

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Indian elites are giddy about their country’s economic prospects, and that optimism is mirrored abroad. The International Monetary Fund forecasts that India’s GDP will increase by 6.1 per cent this year and 6.8 per cent next year, making it one of the world’s fastest-growing economies.

Other international commentators have offered even more effusive forecasts, declaring the arrival of an Indian decade or even an Indian century.

In fact, India is barrelling down a perilous path. All the cheerleading is based on a disingenuous numbers game. More so than other economies, India’s yo-yoed in the three calendar years from 2020 to 2022, falling sharply twice with the emergence of Covid-19 and then bouncing back to pre-pandemic levels. Its annualised growth rate over these three years was 3.5 per cent, about the same as in the year preceding the pandemic.

Forecasts of higher future growth rates are extrapolating from the latest pandemic rebound. Yet, even with pandemic-related constraints largely in the past, the economy slowed in the second half of 2022, and that weakness has persisted this year. Describing India as a booming economy is wishful thinking clothed in bad economics.

Worse, the hype is masking a problem that has grown in the 75 years since independence: anaemic job creation. In the next decade, India will need hundreds of millions more jobs to employ those who are of working age and seeking work. This challenge is virtually insurmountable considering that the economy failed to add any net new jobs in the past decade, when 7 million to 9 million new jobseekers entered the market each year.

This demographic pressure often boils over, fuelling protests and episodic violence. In 2019, 12.5 million people applied for 35,000 job openings in the Indian railways – one job for every 357 applicants. In January 2022, railway authorities announced they were not ready to make the job offers. The applicants went on a rampage, burning train cars and vandalising railway stations.

02:11

India facing an urban boom as infrastructure struggles to keep up

With urban jobs scarce, tens of millions of workers returned during the pandemic to eking out meagre livelihoods in agriculture, and many have remained there. India’s already-distressed agriculture sector now employs 45 per cent of the country’s workforce.

Farming families suffer from stubbornly high underemployment, with many members sharing limited work on plots rendered steadily smaller through generational subdivision. The epidemic of farmer suicides persists. To those anxiously seeking support from rural employment-guarantee programmes, the government unconscionably delays wage payments, triggering protests.

For far too many Indians, the economy is broken. The problem lies in the country’s small and uncompetitive manufacturing sector.

Since the liberalising reforms of the mid-1980s, the manufacturing sector’s share of GDP has fallen slightly to about 14 per cent, compared to 27 per cent in China and 25 per cent in Vietnam. India commands less than a 2 per cent global share of manufactured exports, and as its economy slowed in the second half of 2022, the manufacturing sector contracted further.

Yet it is through exports of labour-intensive manufactured products that Taiwan, South Korea, China and now Vietnam came to employ vast numbers of their people. India, with its 1.4 billion people, exports about the same value of manufactured goods as Vietnam does with 100 million people.

A worker operates a sewing machine at a garment factory in New Delhi, India, on February 26. The manufacturing sector’s share of India’s GDP is about 14 per cent, compared to 27 per cent in China and 25 per cent in Vietnam. Photo: Bloomberg

Those who believe that India stands at the cusp of greatness usually focus on two recent developments. First, Apple contractors have made initial investments to assemble high-end iPhones in India, leading to speculation that a broader move away from China by manufacturers will benefit India despite the country’s considerable quality-control and logistical problems.

While such an outcome is possible, academic analysis and media reports are discouraging. Economist Gordon H. Hanson says Chinese manufacturers will move labour-intensive manufacturing from the country’s expensive coastal hubs to its less-developed interior, where production costs are lower.

Moreover, investors moving out of China have gone mainly to Vietnam and other countries in Southeast Asia, which like China are members of the Regional Comprehensive Economic Partnership. India has eschewed membership in this trade bloc because its manufacturers fear they will be unable to compete once other member states gain easier access to the Indian market.

As its population swells, can India chart a China-like path in manufacturing?

As for US producers pulling away from China, most are “near-shoring” their operations to Mexico and Central America. Altogether, while some investment from this churn could flow to India, the fact remains that inward foreign investment fell year on year in 2022.

The second source of hope is the Indian government’s Production-Linked Incentive Schemes, which were introduced in early 2021 to offer financial rewards for production and jobs in sectors deemed to be of strategic value. Unfortunately, as former Reserve Bank of India governor Raghuram G. Rajan and his co-authors warn, these schemes are likely to end up merely fattening corporate profits like previous sops to manufacturers.

India’s run with start-up unicorns is also fading. The sector’s recent boom relied on cheap funding and a surge of online purchases by a small number of customers during the pandemic. But most start-ups have dim prospects for achieving profitability in the foreseeable future. Purchases by the small customer base have slowed and funds are drying up.

A woman municipal worker carries her son in a rickshaw walks past a painted wall, part of a flyover bridge, after sweeping the area, in Lucknow, Uttar Pradesh, on March 14. Indian policymakers should aim to power economic development through investments in human capital and by bringing more women into the workforce. Photo: AP

Looking past the illusion created by India’s rebound from the pandemic, the country’s economic prognosis appears bleak. Rather than indulge in wishful thinking and gimmicky industrial incentives, policymakers should aim to power economic development through investments in human capital and by bringing more women into the workforce.

India’s broken state has repeatedly avoided confronting long-term challenges and now, instead of overcoming fundamental development deficits, officials are seeking silver bullets. Stoking hype about an imminent Indian century will merely perpetuate the deficits, helping neither India nor the rest of the world.

Ashoka Mody, visiting professor of international economic policy at Princeton University, is the author of India is Broken: A People Betrayed, Independence to Today. Copyright: Project Syndicate