The writer is chairman of Rockefeller International
Today, India celebrates its 75th birthday, it is no richer than the rest of the world than at independence, but it is very much on the rise.
India started out as the world’s sixth largest economy, fell to 12th in 1990, and has since returned to sixth. Its average income was 18 percent of the world average at independence, but this figure declined until the early 1990s, before rising again to 18 percent.
This distressing V-shaped development path is a legacy of India’s original choices. In other Asian nations, the state often granted people economic freedoms first, political freedoms later, as the country grew richer. In India, the state granted a poor nation political freedom first, but in a socialist economy that has never fully embraced economic freedom.
India’s comeback began in the 1990s when, recognizing its early failures, it began to loosen socialist controls, partially, and to allow the private sector more room to breathe. The nation has been progressively rising to the Heritage Foundation rankings of economic freedombut still falls in the bottom 30%.
In 1990, India and China were about equal, in terms of total gross domestic product and average income. Both pushed for economic reform. But China pushed harder, encouraging mass migration to more efficient jobs in the cities and mass layoffs in inefficient state-owned factories. Since 1990, India has seen its GDP increase tenfold to $3.2 trillion and average per capita income more than fivefold to $2200. But China grew much faster by both measures, and today is five times bigger and richer.
The era of miracle growth, 7% or more, is gone. Rising debt, declining trade, falling productivity and slowing growth in the working-age population are holding back economies everywhere, including China. When growth peaked in the mid-2000s, more than 50 economies were expanding faster than 7% per year; in the 2010s, that number dropped to less than 10, mostly small. Today, a more plausible target for lower-income economies is 5%.
This is doable for India. One of its main strengths is a strong entrepreneurial culture, which is reflected in one of the oldest stock exchanges in Asia. It has generated 12 percent annual returns in dollar terms since 1990, more than double the global average, and has increasingly attracted investors from around the world.
Many of the new billionaires rose in productive industries such as technology and manufacturing
Over the past decade, nearly 800 emerging market stocks rose 500 percent to a market value of more than $1 billion. Of these, more than 150 are in India, the second highest number after China. In addition, this group accounts for nearly 40 percent of India’s $1 billion+ stocks, representing the highest concentration of large emerging market success stories.
Fortunes have followed this trend. The number of Indian billionaires rose in the past decade from 55 to 140, now the third highest after the United States and China. While this feeds concerns about inequality, it deepens and reflects competitive dynamism rather than stagnation at the top.
Shockingly, more than two out of three Indian billionaires are new to the list in the 2010s. Of the 55 at the start of the decade, more than a third fell. And many of the new billionaires rose in productive industries like technology and manufacturing, which were once a weakness for India. But quietly, manufacturing has been expanding and now accounts for 17 percent of GDP, unmatched by China, but progress all the same.
Unfortunately, the vitality of India’s private sector is matched by its incompetence in the public sector. State-owned companies accounted for 25 percent of the Indian stock market a decade ago, but that has fallen to 7 percent, and not because of state-led privatization. Government mismanagement was destroying the value and wealth of taxpayers.
In other respects, however, the government has made progress. In 1985, the then Prime Minister Rajiv Gandhi observed that out of every 100 rupees spent on the poor, only 15 rupees reached the needy. The rest was lost to corruption and red tape. Now, the government is digitally transferring benefits to recipients directly, through apps that have rapidly expanded to cover large swaths of the population.
The more efficient welfare state reflects a digitized economy. Revenues from various digital services have a growth rate of more than 30%, above the emerging world average and almost three times the developed world average, a welcome boost at a time of slowing global growth.
To grow faster than 5%, India would have to adopt more radical reform. Only 20 percent of women are in formal employment and doubling that to 40 percent, just the average for a lower-middle-income country like India, would be transformative. It would also encourage internal migration to better jobs, as China did, given that nine out of 10 rural Indians still live in the district where they were born. But India is as diverse and democratic as China is homogenous and autocratic: imposing disruptive reform is not in the cards.
More likely, 5% growth is now the base case. Even at this rate, India will be a breakout star in a slowing world: on track to overtake the UK, Germany and Japan to become the third-largest economy by 2032. At this point , India may not be a middle income country yet, but it is going in the right direction, gradually rising in the world.