Powering up to get to the $30-trillion economy point
Source: The Hindu
For Prelims:
- India's current GDP growth rate: 7%-plus
- India's poverty rate: Reduced from approximately 50% pre-1991 to 20% by 2011
- Female labor force participation rate in India: 37%
- Percentage of labor force in agriculture: 46%
- Agriculture's contribution to GDP: 18%
- India's working-age population: 950 million
- Growth of exports as a percentage of India's GDP: From 7% in 1990 to 25% in 2013
- Middle-income trap statistics: Out of 101 middle-income economies in 1960, only 23 attained high-income status by 2018
For Mains:
GS III: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment
- Challenges in India's economic growth trajectory
- Strategies for avoiding the middle-income trap
- Role of export-oriented manufacturing in economic growth
- Impact of trade policies on domestic industries and economic growth
- Importance of labor-intensive industries in employment generation
- Balancing rapid industrialization with social and environmental concerns
- Policies for improving ease of doing business and attracting investments
- Significance of industrial clusters in economic development
Highlights of the Article:
- India's Economic Status:
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- Fastest-growing large economy with 7%-plus GDP growth
- Aim to become a $30-trillion economy by 2047
- Historical Perspective:
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- Impact of 1991 liberalization on poverty reduction
- Shift from socialist policies to market-oriented approach
- Current Challenges:
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- Low productivity in agriculture sector
- Low female labor force participation
- Underutilization of working-age population
- Growth Strategies:
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- Focus on low-skilled, employment-intensive manufacturing
- Emphasis on export-oriented industries
- Caution against high import tariffs
- Middle-Income Trap:
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- Definition and global statistics
- India's unique position and challenges
Context:
Commentary on the India growth story often betrays a hint of premature triumphalism. Facts such as our 7%-plus GDP growth rate and India being the fastest-growing large economy in the world today, are repeated to buttress prophecies such as the 21st century being ‘India’s century’. There is a belief that in India’s case, economic growth is inevitable
UPSC EXAM NOTES ANALYSIS
1. India's Working Population
- Economic growth stands as the most effective means to alleviate poverty and enhance living standards. Despite socialist policies aimed at reducing poverty, India's poverty rate remained around 50% from Independence until 1991.
- However, from 1991, the year of economic liberalization, to 2011, this rate decreased to about 20%, lifting 350 million people out of severe poverty during this period.
- However, more Indians, especially those at the lower end of the income spectrum, are better off than ever before. Rapid economic growth inevitably leads to significant wealth creation, which drives entrepreneurship and improves overall living standards. This aspect of growth should be the primary focus.
- Addressing concerns about inequality, let’s consider additional statistics that present a more nuanced view.
- The initial benefits of the 1990s economic reforms have been realized, with the IT services boom from 2000 to 2010 fostering a prosperous middle class.
- Yet, 46% of India's labor force remains in agriculture, with low productivity and under-employment, contributing only 18% to GDP.
- Additionally, India’s female labor force participation rate (FLFPR) stands at just 37%, although this figure is somewhat misleading as it was 26% in 2019 and has seen an increase post-COVID-19 with more women returning to agricultural work. This contrasts with FLFPR rates in China, Vietnam, and Japan, which range from 60% to 70%, highlighting the need for improvement.
- To harness the potential of India's working-age population—950 million strong, with only half currently employed—there must be a focus on low-skilled, export-oriented manufacturing. South Korea, Taiwan, Japan, and Vietnam, known as the 'Asian Tigers,' achieved double-digit growth between 1960 and 1990 by emphasizing export-driven industrialization.
- This strategy, which prioritizes leveraging domestic strengths while being open to imports in other areas, underscores the importance of openness for growth. For India, exports as a percentage of GDP increased from 7% in 1990 to 25% in 2013.
- As India aims to attract global manufacturers and boost exports in the wake of China+1, it is crucial to avoid imposing high tariffs on imports
2. The middle-income trap
- In our efforts to shield domestic industries from international competition, we may end up fostering overly protected and inefficient manufacturers. The temptation to impose import tariffs must be avoided, as these can disadvantage Indian producers, such as a mobile phone manufacturer relying on components from China.
- Tariffs would artificially increase the cost of these essential parts, leading to higher prices for finished products and, ultimately, for Indian exports. This creates a detrimental cycle that India should avoid, particularly with the looming threat of the middle-income trap.
- Out of 101 middle-income countries in 1960, only 23 had reached high-income status by 2018, highlighting the significant challenge India faces.
- Currently a lower-middle-income economy, India needs to transition to middle-income status early in the next decade and continue progressing. Countries often fall into the middle-income trap due to a decline in competitiveness in lower-end industries and a lack of advancement in high-tech sectors.
- India’s situation is unique: we have struggled to use our surplus labor effectively in lower-end industries. Although the IT boom provided an alternative growth path, its potential is limited.
- This issue is compounded by the fact that advancing in manufacturing value chains relies on a robust foundation of low-tech manufacturing, which builds essential skills and capabilities. Successful managers and workers in basic manufacturing often transition more effectively to higher-tech challenges.
- Social and civil society campaigns that criticize low-tech manufacturing facilities as sweatshops and push for improved working conditions and wages might unintentionally harm these sectors.
- Overburdening employers with welfare requirements could lead to job losses rather than improvements in job quality, particularly for those with few employment alternatives outside of agriculture.
- To escape the middle-income trap, India needs a market-driven economy that allows private enterprises to flourish without unnecessary governmental interference or negative perceptions of factory jobs.
- Adhering to the principle of “Minimum Government, Maximum Governance,” India must persist with reforms aimed at improving the ‘ease of doing business’ and not let progress falter
3.Industrial model
- The government needs to build on its significant progress in upgrading India’s previously outdated infrastructure by creating industrial clusters comparable to those in China and Vietnam.
- These clusters should offer comprehensive plug-and-play facilities and support systems, including education, healthcare, and entertainment, to attract both employers and workers.
- Currently, Indian states encounter cost disadvantages in power, logistics, and financing, along with lower labor productivity compared to countries like Bangladesh, China, and Vietnam.
- Additionally, high compliance burdens hinder new entrants and expansion for existing businesses. A cluster-based approach, which involves easing regulations in specific areas, could help address these issues and foster a favorable manufacturing environment.
- Time is crucial; the government must harness the private sector's strengths and its own reform-driven approach to focus on low-skilled manufacturing sectors, such as electronics assembly and apparel, to create employment opportunities for many Indians.
- Tracking inter-state migration, urbanization, female labor force participation, and the decline in agriculture’s employment share will help determine if we are progressing towards the goal of becoming a $30-trillion economy by 2047.
- There is a common saying about India in policy discussions: “It’s a country with mouth-watering opportunities and eye-watering challenges.”
- We believe that the challenges represent the most exciting opportunities. Overcoming these barriers could pave the way to sustained prosperity and fulfill India’s destiny. It is time to adopt a forward-thinking and ambitious mindset worthy of a Vishwaguru
4. Conclusion
It strikes a balance between optimism and realism, emphasizing the need for strategic policy decisions and sustained efforts to achieve the ambitious goal of becoming a $30-trillion economy. The focus on leveraging India's demographic dividend through manufacturing-led growth, while being mindful of global economic trends and potential pitfalls, presents a pragmatic approach to economic development
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Mains Practice Questions
1.India's path to becoming a $30-trillion economy by 2047 requires a delicate balance between rapid growth and inclusive development." Discuss the challenges and strategies in achieving this goal
2.The 'middle-income trap' poses a significant challenge to developing economies. Analyze the factors that contribute to this phenomenon and suggest measures India can adopt to overcome it
3.Critically evaluate the impact of trade liberalization on India's economic growth since 1991. How can India balance protectionism and open trade policies in the current global economic scenario?
4.Discuss the importance of female labor force participation in India's economic growth. What policy measures can be implemented to increase women's participation in the workforce?
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