The Asian Century Could Belong to India
India has never managed to achieve three decades of 10 percent annual economic growth rates like China has. But in all its long history, India has never had a centralized regime like China has had for over 2,000 years, which could provide strong political leadership. “No single person can change India. You speak 320 different languages,” once said Singapore’s former Prime Minister Lee Kuan Yew. This diversity makes governance in India more complex than in China. However, the Indian economy has performed very well these past 25 years, and the prospects for continued development may be very good.
India is a country with huge potential. For instance, Indians who have migrated to the U.S. and their descendants, on average, earn $88,000 a year, compared to $66,000 for all Asian Americans and $50,000 for Americans overall. Indian success stories in the U.S. include the CEOs of Microsoft (Satya Nadella), Google (Sundar Pichai) and PepsiCo (Indra Nooyi). Indian companies such as Infosys, Mahindra, Mittal, Reliance, and Tata have succeeded famously in global markets. The Indian movie industry produces more films than any other country. And the Indian Premier League is the world’s most lucrative and popular cricket tournament.
The Complex Indian Story
The Indian economy was, for many years, a chronic underperformer. During India’s first four decades of independence, the economy chugged along at the “Hindu rate of growth” of about 3.5 percent (or 1.3 percent in per capita terms) from the 1950s to the 1980s. Despite a vibrant democracy, India’s economic policies drew more inspiration from the socialism of the USSR than the capitalism of East Asia or the West.
A financial crisis in the early 1990s triggered a wave of economic liberalization and reform. During the following 25 years, the Indian economy has averaged 6.5 percent annual growth and is currently the world’s fastest growing large economy with a growth of around 7.5 percent. India’s GDP per capita more than tripled over this period, with the information technology sector playing a leading role.
Thanks to India’s positive economic developments, the share of the population living in extreme poverty (less than $1.90 a day) has more than halved over the past decade to around 20 percent. But this amounts to some 270 million people who are still suffering in “Incredible India.” And despite this impressive achievement, almost 40 percent of the Indian population is caught between $1.90 and $3.10 a day in a situation of near poverty. The Indian government desperately needs to raise more taxes to provide basic services to its citizens. In fact, the OECD reports that less than 6 percent of Indians pay personal income taxes.
India’s GDP per capita remains less than half that of China and about one-tenth of America’s. India’s ranking as the world’s third largest economy, as well as its status as an emerging power, is highly dependent on its enormous population.
India has suffered from rising inequality like most Asian countries. Economists Jean Drèze and Amartya Sen observed that India looks “more and more like islands of California in a sea of sub-Saharan Africa.” And it is true that beyond the glitter of high-tech Bangalore, Bollywood and Indian cricket, India remains a rural country, with two-thirds of its population living in the countryside. However, it is also undeniable that India has made immense progress.
There are strong reasons to be optimistic about India’s future—the country could well emerge as Asia’s leading power.
In the 2014 national elections, the Bharatiya Janata Party—under the leadership of Prime Minister Narendra Modi—came to power. Prime Minister Modi has been leading the country for over four years. His pro-business leadership and impressive reforms to date helped India climb 29 positions to 100 out of 190 surveyed countries in the World Bank’s Ease of Doing Business ranking. The OECD judges Indian policies to not be “competition friendly;” however, it does note a positive trend for barriers to entrepreneurship and trade and investment. There has been another positive trend in the World Economic Forum’s Global Competitiveness Report where, after five years of decline, India has bounced back over the past two years to 39th place out of 138.
However, India’s human capital development is hampered by one of the worst education systems in Asia. By some estimates, half of the Indian population is functionally illiterate. Even at the elite level, not one Indian university figures in the world’s top 200. India spends next to nothing on public health. Improving human capital will be critical for taking advantage of the half a billion young Indians who will enter the labor force over the next decade. Already more than 30 percent of Indian youths aged 15–29 are not employed, pursuing an education or in training, highlighting the immense challenges of reaping the demographic dividend of its youth bulge.
A major element that has been lacking in India as compared with East Asia has been the development of a strong manufacturing sector. India’s manufacturing sector has been stuck at around 15 percent of GDP. Today, industrialization could play an important role in India’s development, since it faces the challenge of creating jobs for masses of semi-skilled young people entering the labor market and transforming this demographic bulge into a dividend. The services sector, especially business process outsourcing and tourism, has been a key driver of the economy.
Steps in the Right Direction
Fortunately, Prime Minister Modi’s government is making efforts to develop its manufacturing sector. Major investments are being made in improving the country’s logistics in areas such as coastal shipping, highways and railways, which would help product transportation. Inspired by the government’s “Look East” policy, these efforts are being concentrated on the eastern side of the country, which is close to fast-growing Bangladesh and Southeast Asia. Special economic zones and economic corridors are also being developed.
The timing is right for India to become an industrial power, as China is now suffering from increasing wages and investors such as Japan are looking for new low-cost locations. This is where Prime Minister Modi’s business-friendly policies are helpful. For example, the implementation of a national goods and services tax will help transform a fragmented India into a common market. The government has also liberalized some policies for FDI, with the result that flows of FDI reached $208.99 billion from April 2014 to the December 2017 period. Leading companies such as Foxconn, SoftBank, Microsoft and Huawei are all now investing in India. Korean companies in particular are very successful in India.
Overall, there are strong reasons to be optimistic about India’s future, even though it lags behind the world’s leading economies in terms of GDP per capita and economic, business and technological sophistication. As I argue in my new book, over the course of the 21st century, India could well emerge as Asia’s leading power. Already, India’s economy is growing faster than China’s, a trend that could continue. Further, India’s population will overtake China’s in 2022 and could be approximately 50 percent higher by 2100—according to the UN—providing immense demographic dividends if human capital development is prioritized.
In short, India is a slow burner compared with China, but it is moving decisively ahead. The Asian Century could well belong to India.
The author’s most recent book is Asian Century … on a Knife-Edge.