Context
India has become the fifth largest economy in the world, overtaking the United Kingdom (UK), in the last quarter ending March (January-March, i.e., Q4) of the financial year (FY) 2021–22, according to a report of the International Monetary Fund (IMF) released on September 2, 2022. As per the IMF report, the size of Indian economy in terms of nominal gross domestic product (GDP) in Q4 was US$ 854.7 billion, as compared to the UK’s US$ 816 billion. (GDP is a metric of a country’s economic output–measured by the total value of all the final goods and services produced during a period.) In fact, IMF’s 2022 forecast expects the Indian GDP to reach US$ 3.53 trillion and the UK to US$ 3.38 trillion. So, on the whole, the Indian economy was expected to become bigger than the British economy during this year. India pushed the UK to the sixth spot, with the latter grappling with a harsh shock of high cost of living. This is the second time India has beaten the UK in terms of economy, with the first one being in 2019. India has also extended its share in the global GDP by one percentage point from 2.6 per cent in 2014 to 3.5 per cent now. Economists have projected this share to increase to 4 per cent by 2027, overtaking that of Germany. The IMF now projects India to close 2022 with a GDP of US$ 3.53 trillion, behind the US (US$ 25.35 trillion), China (US$ 19.91 trillion), Japan (US$ 4.91 trillion), and Germany (US$ 4.26 trillion).
Why the Achievement is Significant
The feat is significant, especially in the wake of the 75th anniversary of India’s independence from almost 200 years of rule of the British Colonial government. India attained independence from the colonial rulers 75 years ago, and during this time, India overtook Britain to become the fifth largest economy in the world! The triumph could not have come at a better time. The symbolic value of overtaking the former colonial master within 75 years of independence cannot be overemphasised. This is a historic moment for India. It also holds significance as a motivating and inspiring moment to convey a message to all those countries, which have freed themselves from colonial occupation, as to how they can also achieve a similar mark on the path to progress.
India has overtaken the UK in dollar terms, according to the IMF report. In fact, if the economies were ranked on the basis of purchasing power parity (PPP), which takes into the account the cost of living in a country while converting currency into dollars, India’s position would be even stronger.
India’s GDP has increased in size by more than ten times in the last 20 years whereas in the last 10 years, India has improved its rank (of countries in terms of their GDP) from 11th to 5th powered by a GDP growth rate that eclipses most of the world’s largest economies.
Implications of India’s Becoming 5th Largest Economy
India’s achieving this feat is not a sudden affair. This achievement has been the result of a number of reforms and measures undertaken by the government in the direction of improving the economic performance of the country. The new economic reforms in terms of liberalisation, privatisation, and globalisation of Indian economy, undertaken in 1991 which abolished the licence-permit-quota raj that dictated how much companies could produce and when, created a services and consumption boom that lasts to this day. Initiatives undertaken post-2014 such as Pradhan Mantri Jan Dhan Yojana, Make in India, Startup India and Stand-Up India for the promotion of micro, small and medium enterprises (MSMEs) to promote entrepreneurship and innovation in the country, Micro Unit Development and Refinance Agency (MUDRA) Yojana, Skill India, Digital India, are some of the prominent steps in this direction. With the present emphasis on creating capital investment in the economy, viz., infrastructure creation, as enunciated in the Union Budget 2022–23, as well as government taking steps to ease doing business in the country are going to yield results. Sectors of the economy such as health care, renewable energy, information technology (IT), real estate, etc., have strengthened the economy. A praiseworthy feature of Indian economy has been an almost consistent trend of stable inflation in the economy, thanks to RBI’s flexible inflation targeting (FIT) framework. As a result, inflation in the economy has remained largely under control, unlike in the UK, which has been bogged down by inflationary scenarios, resulting in reducing domestic consumption.
Most recent initiative of the government to enhance India’s manufacturing capabilities, keeping in view India’s vision of becoming aatmanirbhar, is the production linked incentive (PLI) scheme, launched in the Union Budget of 2021–22 for 14 key sectors, which has yielded positive results.
India has also made significant achievements in the field of popularising digital means of payments in the economy. Given the huge amount of payments made through the unified payment interface (UPI), an instant payment system developed by the National Payments Corporation of India (NPCI) that allows one to instantly transfer money between any two parties’ bank accounts, UPI has become now the envy of the world. UPI has revolutionised the digital payment ecosystem in India, a much needed boost towards becoming a US$ 5 trillion economy.
India becoming the fifth largest economy holds the following implications:
- The trend of India continuing to outgrow other countries (those bigger than India in terms of size of their GDP) is expected to continue for a long time. This means that India is expected to improve further in the list of the world’s largest economies. In fact, India is projected to overtake Germany and Japan to become the world’s third-largest economy around 2030 and the US by the year 2048 when it will become the world’s second-largest economy behind China.
- Given the huge population burden of India, the country needs to maintain a consistent rate of high economic growth to pull still a significant proportion of its poor population out of the menace of poverty. As is obvious, the connection between the GDP and a country’s population shows well its people are doing, economically. India is still characterised as a low per capita GDP country, in spite of being the world’s fastest growing major economy in recent times. The only way to climb the rung of per capita GDP is to grow fast. India must continue to grow like it has been growing for a long time to lift the fortunes of its vast population.
- As countries surpass the US$ 2,000 per capita GDP threshold in the lower middle income economies (between US$ 1,086 and US$ 4,255) as per World Bank classification; a stage India just passed a few years ago, in the opinion of economists, this is where a large part of its population is lifted from poverty. That is where consumption gets a significant boost and multiplies several fold as the country’s middle class population now finds the income to spend on its wants rather than needs. It is this trend that many experts believe is producing a consumption boom in the country that could last many decades, and could make India the place to be for all businesses, worldwide.
Concerns Attached
While India overtaking the UK to become the fifth largest economy presents a moment to cherish, things need to be seen in a holistic way for arriving at a valid conclusion. The finer nuances need to be taken into account.
The following points may be considered in this regard:
- As per World Bank data, UK’s population in 2021 was 67.3 million as against India’s population of approximately 1.39 billion. Data from the IMF suggests that India’s nominal GDP (in terms of current prices) during 2021 stood at US$ 3.18 trillion, compared to the UK’s at US$ 3.19 trillion. The comparison attempts to emphasise the point that the economic productivity of 1.39 billion Indians was roughly equal to that of just 67.3 million Britons! So, as a whole, the Indian economy has become bigger than that of the UK in 2022, the fact remains that the productivity or the average contribution of an Indian resident to its GDP continues to be substantially lower than that of a British resident.
- In 2021, as per IMF data, the per capita income or average income of an Indian was US$ 2,283 whereas the per capita income of a Briton stood at US$ 47,203. That is a huge gap. India has a population 20 times that of the UK and so its GDP per capita is lower. While the Indian economy might have become bigger is size, the average income of an Indian is way lower than a Briton. In fact, in 2021, on the basis of per capita income of its people, India was ranked 145th in a list of 193 countries whereas the UK was ranked 22nd.
- Though a larger economic pie (higher GDP rankings) is better than a lower economic pie, the distribution of the pie also holds importance. In case of India, the division of the pie (national income) is marked with extreme inequality, a big reason to worry! According to the World Inequality Report 2022, India stands out as a “poor and very unequal country, with an affluent elite”, where the top 10 per cent holds 57 per cent of the total national income while the bottom 50 per cent share just 13 per cent of the national income. As is obvious, if a lion’s share of economic growth is captured by the club of top earners while the common man stagnates or becomes relatively poorer, how much sense does the GDP ranking of the country make?
- While taking pride in becoming the fifth largest economy in the world, the question has to be asked whether the life of a common man, the aam aadmi, has improved. Here, we need to be more circumspect in evaluating the impact of being the fifth largest economy.
- As pointed out by an expert, economic growth in the west has been anaemic (slowing down, stagnating). Thus, even if our per capita income were stagnant, we would have eventually overtaken them in GDP terms by virtue of population growth.
The Journey Ahead
As per a research study by the Bank of America, Indian economy is poised to become the third biggest in the world by 2030. While the prospect of becoming so looks very appealing, there are many areas in the economy to be worked upon.
Some of them include the following:
- Tapping our demographic dividend: According to the Economic Survey 2018–19, India’s demographic dividend will peak around 2041, when the share of the working-age population (20–59 years) is expected to reach 59 per cent. That means, the country is currently having the demographic leverage to boost its economy. However, leveraging our favourable demographics depends upon the optimal usage of the labour force in the country through provision of adequate and remunerative employment opportunities to them. In other words, we need to tap our demographic dividend by providing them with gainful employment opportunities. However, job creation will not happen if things remain the same. Certain sectors of the economy have to be involved to engage the labour force productively, manufacturing being the chief sector among them, especially labour-intensive manufacturing sectors such as textiles, apparel, footwear, gems and jewellery, among others. Tapping the agriculture and allied sectors in the country such as food processing sector, animal husbandry, technology infusion in agriculture will increase both production and productivity, while providing employment opportunities in agriculture. E-commerce is another sector that can be a significant employment generator in the economy.
- Education and skilling holds the key: India is one of the youngest nations in the world with the average Indian being 28 years of age. As per NITI Aayog data, of the nearly 135 crore Indians (in 2021), nearly 46.42 crore (34 per cent) were below the age of 19 years and nearly 75.16 crore (56 per cent) were in the age group of 20–59 years. With such a favourable demography, India could be the world’s largest pool of human resources. To convert this pool of human resource into human capital, it will require policymakers to have a steadfast focus on education and skilling. With an aging society in the industrialised world, the labour force in these economies is expected to decline by 4 per cent. On the other hand, labour force in India is expected to increase by 20 per cent in the time to come. It can be a perfect moment for India to tap the window of opportunity and become the global supplier of talent and skills. It will require the country to equip its labour force across different age groups with employable skills that matches the requirements of an exponentially changing technological ecosystem. The proportion of workforce in India that had undergone a formal skill training stood at a low of about 4.7 per cent of the total workforce in the country, as per a 2015 report on the National Policy on Skill Development and Entrepreneurship, against 52 per cent in the US, 80 per cent in Japan, and 96 per cent in South Korea. The National Skill Development Mission, launched in 2015 to rapidly scale up skill development efforts in India, estimated that 40 crore Indians need to be skilled by 2022.
- Healthcare system needs to be strengthened: Economic growth does not automatically translate itself into better human development unless specific measures are taken in that direction. For economic growth to translate into better human development, investment in social sectors, viz., education and health is the key as human capital is critically intertwined with economic growth. Investment in education and health, in particular, makes the labour force more productive, healthy, competitive, and efficient, all of which taken together contribute to higher economic growth. A higher spending on healthcare services in the country is essential to increase the labour force participation rate (LFPR) in the economy, currently at 40 per cent in the country, as opposed to 50–60 per cent in developing economies. Equally important is to increase the female LFPR in the economy to tap the missing women in India’s growth story. Quality healthcare services are needed to optimise the labour force participation in the economy.
- Trade policy of the country needs to be oriented towards competition: A new trade policy is called for to imbibe competitive spirit in the Indian manufactures so as to get them linked to the global value chain based on gains in productivity through competition. Unlike the earlier instances of trade protection to domestic manufacturers (infant industry argument), the new trade policy should emphasise on competition through productivity enhancements to help establish Indian manufacturers on the global platform. This became especially called for after the global COVID-19 pandemic disrupted global supply chain and hampered economic activities across a number of countries greatly.
- Competitive federalism: As pointed out by experts, cooperative federalism has to be given way to competitive federalism in the country. There are many states in the country such as Uttar Pradesh, Maharashtra which hold the potential to achieve the economic heft of certain countries (in terms of GDP). If a competitive spirit is promoted among states in the country to boost their respective economies in a competitive spirit, it will provide the much needed boost to the national economy. For example, the latest event of Vedanta–Foxconn project to manufacture semiconductor chips in the country. The plant, initially proposed to be set up in Maharashtra, got shifted to Gujarat on the grounds of Gujarat government offering a better deal for the plant!
India has been making rapid strides in increasing its exports to the world market, penetrating markets earlier monopolised by China. According to a report of the newspaper The Strait Times, seaborne shipments of festival goods and accessories to the United States of America (USA) almost tripled to US$ 20 billion in September 2022 from a year ago. Exporters in India are witnessing a significant uptick in demand from European and American markets, especially for low-cost and labour-intensive products such as apparel, handicrafts, and other consumer goods.
China’s continued decoupling from the global economy, necessitated by COVID-19 induced lockdown of the economy to contain the spread of the virus, offers India the perfect opportunity to capture the space vacated by China by focusing its investments in winnable sectors of the economy through imbibing long-term competitiveness and cost efficiency in them.
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