PM's 'guarantee', cyclists, and the challenge of long-run economic growth

The important question is whether India can also get rid of multi-dimensional poverty - a modest concept that stipulates a bare-bones minimum income, education and quality of life, writes T N Ninan

Cyclists in a long-distance race usually form a peloton formation, like flying geese. The lead cyclist provides a slipstream that helps those at an angle behind to experience reduced drag. Every once in a while, some other cyclist takes up the burden of leading. Long-run economic growth has similarities with such a peloton, in that the lead sector which sets the pace keeps changing and thereby allows everyone in the peloton to sustain the pace. So it has been for India in the past three or four decades.

Following the acceleration of economic growth, from about 2.5 per cent in the crisis-ridden 1970s to about 5.5 per cent in the 1980s, a nascent middle class was born. This created the demand for a variety of consumer goods—consumables as well as durables. The automobile industry was among those that benefited as demand for both small cars (think Maruti) and contemporary two-wheeler models exploded.

The next phase, in the 1990s, saw the infotech boom as technological changes and India’s low-cost engineering workforce enabled offshoring. Other changes (in patent regimes, for instance) enabled the pharmaceutical industry to exploit the generics market in the US and grow rapidly. All three sectors also generated an export boom, which became another driver of growth. The opening up to private enterprise, as part of the reforms of the 1990s, spurred the growth of supporting sectors like banking/finance and aviation, in turn fuelling demand for housing, car purchases and travel.

If growth has been slowing down in recent years, it is because no sector comparable in scale has emerged to play the role of lead cyclist. Meanwhile the pharma sector lost momentum prematurely because of poor industry practices and regulatory failures. Now the infotech boom has eased into a slower, mature phase. And in the wake of successive shocks (demonetisation, Covid, etc), domestic consumer demand growth has levelled off. For instance, two-wheeler sales have stagnated. One reason could be that the consumer debt burden is now high for India’s income level. As for aviation, India has just one viable (and one potentially viable) airline company that can invest for growth. Meanwhile, merchandise exports have done poorly in the last decade, following the economy’s failure to develop a competitive manufacturing base vis-a-vis rivals like Vietnam and Bangladesh.

So the question is: Which sector(s) can lead the field for the next phase of India’s growth? The government has taken a bold bet on the area of failure: Manufacturing. The initial “Make in India” gambit did not deliver on its objectives, so what is on offer now are financial incentives for both investment and production, with particular emphasis on the electronics sector. While we wait for the results of this essentially import-substitution initiative, the growth engine has been kept running by massive public investments in the physical infrastructure, which has led to large private investments in associated industries like metals and cement.

Both the infrastructure investment and the manufacturing incentives will put pressure on government finances. More importantly, much (not all) of the new thrust is capital-intensive in nature. This means that you need more units of capital invested for every unit of output growth, and that unit of output growth will create fewer jobs. In turn, the resulting loss of consumption momentum could translate into possibly slower growth. But in a slowing world economy India needs to grow no faster than a moderate pace of 5.5 - 6 per cent to keep foreign investment flowing into the capital pool.

And so, to take up the subject of the prime minister’s “guarantee”, India can hope to grow by enough over the next five years to overtake in size the economies of stagnant Japan and slow-growing Germany. Becoming thereby the third-largest economy would be a signal achievement, and it can be done without breaking much of a sweat. But the really important question is whether India by then can also get rid of “multi-dimensional poverty”—a modest concept that stipulates a bare-bones minimum income, education and quality of life (drinking water, sanitation and electricity). If we want a real challenge, that’s the one to address.

Cyclists in a long-distance race usually form a peloton formation, like flying geese. The lead cyclist provides a slipstream that helps those at an angle behind to experience reduced drag. Every once in a while, some other cyclist takes up the burden of leading. Long-run economic growth has similarities with such a peloton, in that the lead sector which sets the pace keeps changing and thereby allows everyone in the peloton to sustain the pace. So it has been for India in the past three or four decades.

Following the acceleration of economic growth, from about 2.5 per cent in the crisis-ridden 1970s to about 5.5 per cent in the 1980s, a nascent middle class was born. This created the demand for a variety of consumer goods—consumables as well as durables. The automobile industry was among those that benefited as demand for both small cars (think Maruti) and contemporary two-wheeler models exploded.

The next phase, in the 1990s, saw the infotech boom as technological changes and India’s low-cost engineering workforce enabled offshoring. Other changes (in patent regimes, for instance) enabled the pharmaceutical industry to exploit the generics market in the US and grow rapidly. All three sectors also generated an export boom, which became another driver of growth. The opening up to private enterprise, as part of the reforms of the 1990s, spurred the growth of supporting sectors like banking/finance and aviation, in turn fuelling demand for housing, car purchases and travel.

If growth has been slowing down in recent years, it is because no sector comparable in scale has emerged to play the role of lead cyclist. Meanwhile the pharma sector lost momentum prematurely because of poor industry practices and regulatory failures. Now the infotech boom has eased into a slower, mature phase. And in the wake of successive shocks (demonetisation, Covid, etc), domestic consumer demand growth has levelled off. For instance, two-wheeler sales have stagnated. One reason could be that the consumer debt burden is now high for India’s income level. As for aviation, India has just one viable (and one potentially viable) airline company that can invest for growth. Meanwhile, merchandise exports have done poorly in the last decade, following the economy’s failure to develop a competitive manufacturing base vis-a-vis rivals like Vietnam and Bangladesh.