India's ascent to becoming the world's 4th-largest economy will be a statistical milestone. It will not make us 'richer' than Japan, which has a per-capita income more than 10x India's. It doesn't bring us significantly closer to No. 2 China's GDP, which is 5x ours. But for an economy that languished in the lower-middle ranks 30 years ago, it's an achievement worth recognising.
Now, it's time to look at a few other key metrics that can help India rise from the lower-middle rung of per-capita income, the ultimate reflection of living standards.
India's quest to become a developed country by 2047 requires rapid growth, faster than roughly 6% the country has averaged since 1991. The only period in which India grew at 8-10% a year was between 2003 and 2008, when global tailwinds played a major part. That was the peak era of globalisation.
That era is now over. India will have to grow fast in an external environment vastly different from the one that propelled China, or the other star Asian economies.
The external economic environment is unfavourable. So is the external security scenario. A crumbling Pakistan is a clear and present danger. An unfriendly China, with disproportionate control over natural resources and massive trade surplus with India, is a lurking threat. America's isolationism makes the world more uncertain than at any time in the last several decades.
India has a pathway to address both its geopolitical and economic challenges. It rests on investment in three pillars: defence, R&D and natural resources.
Definitely defence India is one of the largest arms importers in the world. That dependence is not a good thing in today's world, where enemies are numerous and friendships are transactional. India isn't a product nation because it doesn't spend enough on R&D. Every successful country owns products and global brands. India is highly import-dependent on energy and minerals. It needs to be more self- sufficient to ensure no disruptions.
In this context, India needs to chase three metrics:
Def-ex It needs to raise defence spending from under 2% to 4% of GDP.
Cap-ex The capex component needs to rise faster than expenditure on salaries and pensions. The recent engagement with Pakistan showed that wars will be fought using tech and equipment more than humans. To its credit, GoI has modernised and upgraded equipment. But most of the cutting-edge stuff is bought from overseas.
Priv-ex GoI has also encouraged greater private sector participation in defence manufacturing. That has brought in efficiency and choice. Where there is less choice (fighter jets and HAL), there are challenges. It needs to continue to encourage the private sector while increasing its expenditure. It will be good for our security, manufacturing, jobs and growth.
R&D, steady, go India's R&D spending is around 0.6-0.7% of GDP, which is low by standards of any advanced country. It needs to rise 100%. Both the government and private sector underspend on R&D. Often, their priorities differ, and there is limited collaboration.
The private sector spends too much time battling regulation and other structural rigidities in land and labour, which add to its cost of doing business and distract from R&D. GoI must deregulate and give incentives for private investment in R&D. It must also institutionally align its R&D with the private sector and universities, so that the whole becomes greater than the sum of its parts.
Cook the raw India cannot afford to import energy and minerals worth almost $400 bn a year, or 50% of its total imports. This is money spent on creating jobs and growth outside India, when India has the geological potential to produce domestically. The story of dependence on oil imports may be repeated with critical minerals.
Even with limited manufacturing of EVs in India, the current Chinese clampdown on rare earth exports is set to threaten Indian auto manufacturers. Manufacturing new technologies will be key for rapid growth. It cannot flourish without a secure and affordable supply of raw materials. GoI should fully liberalise the exploration of minerals, on the model of oil.
India's growth strategy needs to be tailored to prevailing times and opportunities. There will be no stopping India's rapid rise if we adapt.
Now, it's time to look at a few other key metrics that can help India rise from the lower-middle rung of per-capita income, the ultimate reflection of living standards.
India's quest to become a developed country by 2047 requires rapid growth, faster than roughly 6% the country has averaged since 1991. The only period in which India grew at 8-10% a year was between 2003 and 2008, when global tailwinds played a major part. That was the peak era of globalisation.
That era is now over. India will have to grow fast in an external environment vastly different from the one that propelled China, or the other star Asian economies.
The external economic environment is unfavourable. So is the external security scenario. A crumbling Pakistan is a clear and present danger. An unfriendly China, with disproportionate control over natural resources and massive trade surplus with India, is a lurking threat. America's isolationism makes the world more uncertain than at any time in the last several decades.
India has a pathway to address both its geopolitical and economic challenges. It rests on investment in three pillars: defence, R&D and natural resources.
Definitely defence India is one of the largest arms importers in the world. That dependence is not a good thing in today's world, where enemies are numerous and friendships are transactional. India isn't a product nation because it doesn't spend enough on R&D. Every successful country owns products and global brands. India is highly import-dependent on energy and minerals. It needs to be more self- sufficient to ensure no disruptions.
In this context, India needs to chase three metrics:
Def-ex It needs to raise defence spending from under 2% to 4% of GDP.
Cap-ex The capex component needs to rise faster than expenditure on salaries and pensions. The recent engagement with Pakistan showed that wars will be fought using tech and equipment more than humans. To its credit, GoI has modernised and upgraded equipment. But most of the cutting-edge stuff is bought from overseas.
Priv-ex GoI has also encouraged greater private sector participation in defence manufacturing. That has brought in efficiency and choice. Where there is less choice (fighter jets and HAL), there are challenges. It needs to continue to encourage the private sector while increasing its expenditure. It will be good for our security, manufacturing, jobs and growth.
R&D, steady, go India's R&D spending is around 0.6-0.7% of GDP, which is low by standards of any advanced country. It needs to rise 100%. Both the government and private sector underspend on R&D. Often, their priorities differ, and there is limited collaboration.
The private sector spends too much time battling regulation and other structural rigidities in land and labour, which add to its cost of doing business and distract from R&D. GoI must deregulate and give incentives for private investment in R&D. It must also institutionally align its R&D with the private sector and universities, so that the whole becomes greater than the sum of its parts.
Cook the raw India cannot afford to import energy and minerals worth almost $400 bn a year, or 50% of its total imports. This is money spent on creating jobs and growth outside India, when India has the geological potential to produce domestically. The story of dependence on oil imports may be repeated with critical minerals.
Even with limited manufacturing of EVs in India, the current Chinese clampdown on rare earth exports is set to threaten Indian auto manufacturers. Manufacturing new technologies will be key for rapid growth. It cannot flourish without a secure and affordable supply of raw materials. GoI should fully liberalise the exploration of minerals, on the model of oil.
India's growth strategy needs to be tailored to prevailing times and opportunities. There will be no stopping India's rapid rise if we adapt.
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
