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India's economy: Some reflections on its shaky future
Futures 56 (2014) 22–29
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India’s economy: Some reflections on its shaky future Surajit Mazumdar * Bharat Ratna Dr. B.R. Ambedkar University, Delhi (AUD), Lothian Road, Kashmere Gate, Delhi 110006, India
A R T I C L E I N F O
A B S T R A C T
Article history: Available online 16 October 2013
Contrary to many optimistic perceptions about the Indian economy’s future prospects, this paper argues that the next two decades will be a period of great uncertainty. A path pockmarked with great economic and political turmoil, rather than a sustained and smooth process of economic expansion is what is likely. These are inherent in the growth trajectory of the Indian economy – which will continue to be biased towards services and construction activities rather than manufacturing and which will bypass the majority of Indians. If there is to be any different story, it will not come from the economic trajectory endogenously producing a shift to a more stable trajectory. Rather, it is the politics of redistribution that it may give rise to that has to be the source of change. The fact that it may give rise to such a politics does not, however, mean it will. ß 2013 Elsevier Ltd. All rights reserved.
Keywords: Indian economy Growth Industrialization Services Globalization
1. Introduction In this paper, I try to look ahead at the future course of the Indian economy till 2030. I shall argue that if there is one certainty about this future it is that it is not going to be a smooth movement. Tremendous strain and instability – economic as well political – is likely to characterize the journey over this period because these are inbuilt into the current trajectory of the economy. The real issue then is whether that instability will be just instability or whether it would spur a transition to a more stable path of movement of the Indian economy. The reasons for the choice the period being considered here rather than a longer one and the general historical perspective which informs this exercise are outlined in the first section of the paper. The second section then opens up the discussion on India’s growth prospects with the next two sections highlighting important constraints. The final section preceding the short conclusion then examines the political side of the process and what implications it may have for the course of the economy. A short conclusion then sums up the argument advanced in the paper. 2. Speculating about the future: some considerations to be kept in mind Change through a process of cause and effect is an inherent feature of human life. Consequently any society’s past and present are different and yet are causally connected to each other. By extension the future must be also linked to the past and the present while being different. At any point of time, the process of the making of the future is not only under way but would have already travelled some distance. Yet while one may be able to explain, as historians do, how the past of so many thousands of years developed to the present, forecasting the future even when one is talking of a point of time just a few decades away is a different kind of exercise. While explaining the past may be constrained by the limits of historical data and
* Tel.: +91 11 23863740/43; fax: +91 11 23863742; mobile: +91 9891568324. E-mail addresses: [email protected], [email protected] 0016-3287/$ – see front matter ß 2013 Elsevier Ltd. All rights reserved. http://dx.doi.org/10.1016/j.futures.2013.10.005
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information one has at one’s command, forecasting the future has the added difficulty of having to be based on such past data alone. The past is certain while the future is inherently uncertain. The stabilities of the past which may be used to explain the other movements are known – we can say for instance that colonialism was a feature of Indian history for 200 years or that a liberal economic policy paradigm is associated with the period since 1991. With regard to the future everything in principle is variable and consequently fewer explanatory factors are available. It is not of course true that any future is possible. Many outcomes can clearly be ruled out based on present conditions and tendencies. Others may be deemed highly unlikely while those that are within the realm of possibility could be identified. However, no unique possible future may arise from such an exercise. In addition, forecasting on the basis of currently observable tendencies also has to allow for the possibility that there could be in the future critical turning points producing fundamental qualitative changes in the context. In 1927, the Congress had not even adopted the demand for complete independence but it became a reality within two decades. Would anyone observing what happened in India between 1969 and 1976 – the nationalization of banks, coal and other mining, oil and general insurance; legislation of the Monopolies and Restrictive Trade Practices (MRTP) and Foreign Exchange Regulation (FERA) Acts, etc. – have imagined what was just a decade and a half away, namely the post-1991 liberalization? Thus, there is a case for restricting our speculation about the future, even if one is making conditional forecasts, to a reasonable time limit over which some of the deep-rooted features of the present can be expected to survive. Between now and 2030, one can assume or consider highly probable that the world will not change in some fundamental ways – India will remain a single nation and its political system will survive, the US will remain the world’s dominant power and the dollar the world’s reserve currency and things like that. There are other elements – such as the current liberal economic policy paradigm – which too can be considered entrenched features of the present but not necessarily to the same degree as others. They are amongst the givens to start with but may also be affected more quickly and easily within the time-frame being considered by the consequences they produce. Taking a set of things as our givens and semi-givens then, one can try and deduce the likely scenarios that may result in the future. That is the approach underlying the speculation that follows. 3. India in the world economy: the GDP dimension One of the prominent features of the Indian economy’s recent history has been that it has grown in aggregate terms faster than the world economy for a period of more than three decades [9,13,16]. This represented a reversal of the trend observed for over two centuries prior to that in which India’s relative economic size shrunk considerably [1]. India under colonial rule was shut out of the process of rapid economic and social transformation that came to be witnessed in some parts of the world since the Industrial Revolution of the late 18th century. Things did change after independence but only to a limited extent – the Indian economy grew faster than earlier but so did the world economy. In the 1980s, India speeded up while the world economy slowed down. In the early years of this century, Indian growth rates rose to unprecedented levels. Post-global crisis, however, things have changed somewhat. However, the difference between world and Indian GDP growth remains. Thus, India’s weight in the global economy measure in terms of its GDP share has been rising along with that of another big economy, China. These have lead to speculations about a changing world economic order and of India’s ‘emergence’ based on the assumption that the trends of the last few decades will continue into the future. Changes in the world economic order will of course require more than a mere shift in the distribution pattern of world production in favour of its more populous regions. The emergence of developing country currencies as rivals to the US dollar or shifts in technological leadership, for instance, will not be automatic results of such redistribution. Even if we leave aside such things, however, there are reasons to be not sanguine about the prospects of India’s rise in the world economy. Projections about India’s future growth trends have tended to fluctuate with the upward and downward movements in observed growth rates. Thus the Goldman Sachs BRICs report assumed that India’s GDP growth rate would more or less be bound within the level of 6% per annum till 2050 [10]. A study that appeared soon after raised the projected level to 7% till 2025 [9]. Another Goldman Sachs study appearing a few years after the high growth phase began ratcheted up the projection to 8% [19]. A very recent forecast by the Conference Board [3], on the other hand, in its optimistic scenario visualizes India growing at 5.7% per annum between 2013 and 2018 and at 4.5% per annum thereafter till 2025. If these different forecasts are combined with alternative assumptions about world growth rates over the same period, we get a picture that India’s share in world GDP could be anywhere between 9 and 18% by 2030. The more optimistic projections of India’s rising weight in the world economy usually take into account the tremendous potential for structural change – in particular the shifting of a significant proportion of the workforce from agriculture to higher productivity non-agricultural activities – that still exists in the Indian economy. They further draw a simple relationship between ‘economic reforms’ and the realization of this potential. However, for this scenario to unfold either of two conditions must hold – one, that the current trajectory of India’s economy is sustainable over the period under consideration; or two, that India will be able to make the necessary shifts in the trajectory as and when they become necessary. Is there sufficient cause to be optimistic in this regard? 4. The sustainability of Indian growth: external sector constraints One issue of sustainability of Indian growth arises from its distinctive feature of being dominated by expansion of tradable and non-tradable services and construction activities rather than as is typically the case, by manufacturing
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Table 1 Industry and services in growth of GDP at 2004–2005 prices, 1990–1991 to 2012–2013. Growth rate (% per annum)
Sector
Industry excluding construction Services and construction
Contribution to increase in GDP, 1990–1991 to 2012–2013 (percentage shares)
1991–1992 to 1996–1997
1997–1998 to 2002–2003
2003–2004 to 2007–2008
2008–2009 to 2012–2013
7.12 6.27
4.28 7.53
8.58 9.49
5.71 8.54
18.40 73.14
Source: CSO [5,6,8].
Table 2 Share in world merchandise exports and imports of selected developing countries/country groups, 1990 and 2011. Country/country group
Share in world exports
Share in world imports
Export share less import share
1990
2011
1990
2011
1990
2011
All developing countries
24.18
42.75
22.21
39.83
1.97
2.92
East Asia China South East Asia South Asia India
8.07 1.79 4.14 1.35 0.52
17.58 10.43 6.81 2.72 1.66
7.41 1.49 4.53 1.66 0.66
16.6 9.48 6.26 3.52 2.52
0.66 0.3 0.39 0.31 0.14
0.98 0.95 0.55 0.8 0.86
Source: UNCTAD [20].
(Table 1). More than 70% of the real growth of the last two decades has come from services and construction. This comes in the background of India’s industrialization by comparative standards being extremely limited – even in comparison to many late-industrializing developing countries [18]. The share of the industrial sector in output for countries like China or South Korea in Asia, or Brazil in Latin America, touched levels of at least 45% before their services sectors started becoming prominent. In India, this share has not even touched 30% and in recent years has increased only on account of construction. The manufacturing sector share in output since then has not gone beyond the relatively low levels attained by the mid1990s. On the employment side, manufacturing accounts for less than 10% of total employment and that too mostly in its informal component, while agriculture still employs over half the work-force [14]. The non-industrial nature of Indian growth is complemented in the pattern of its integration into the world economy. India has not emerged as a manufacturing powerhouse for the world market. Though its share in world merchandise exports has increased in the last two decades, its imports have risen faster and it still remains a relatively small exporter. These are in contrast to the larger story of Asian developing economies in the last two decades and of course that of China (Table 2). Thus, while persistent export surpluses have characterized many developing countries India’s trade deficit has been rising steeply and has gone over 10% of the country’s GDP. Such high levels of the trade deficit have been unprecedented in India’s postindependence history – before 2005–2006, it had never crossed the 5% of GDP level and usually remained below 3%. What is significant to note is that the rising import-dependence of Indian growth is attributable much more to manufactured imports than to oil and gold imports (Fig. 1).
12.00 10.00 8.00 6.00 4.00 2.00 0.00
Manufactured Products Fig. 1. India: imports to GDP (percentage), 2001–2002 to 2011–2012. Source: RBI [15].
Oil
Gold & Silver
S. Mazumdar / Futures 56 (2014) 22–29
25
7.52
10.00 4.62
6.05
5.00 2.32 0.00 -5.00
-4.25
-2.30
-10.00 -9.81
-10.30
-15.00 Trade balance
Invisibles, net
Current account
Fig. 2. India: trade, invisibles and current balances (as % of GDP), 2001–2002 to 2011–2012. Source: RBI [15].
The picture has been different for services exports where a much more dramatic rise has happened in India’s share in world exports, from 0.56% in 1990 to 3.23% in 2011 [20]. This has been mainly on account of IT and IT-enabled services. India has also become the world’s largest recipient of remittances. Between her services exports and remittances, India has come to have an exceptionally large invisibles surplus but even this has not been sufficient to cover for her trade deficit. As a result, India’s current account deficit has been consistently rising to now highly dangerous levels (Fig. 2) – in 2011–2012 it was 4.25% of GDP and figures available so far indicate a further sharp jump in 2012–2013. At the same time, if India is not an attractive location for producing manufactures for the world market, it does not also attract efficiency-seeking and exportoriented FDI which is a characteristic feature of the globalization era. To fill its external deficit, therefore, it necessarily has to depend more on volatile capital flows. Going forward then, unless India can find a fix for its current account problem, it will be highly vulnerable on the external sector front. This would make it a prime candidate for facing a serious exchange crisis which would derail the growth process. Alternatively, its growth rate has to be maintained at a low trend level to keep it consistent with the maintenance of balance of payments equilibrium. It becomes important therefore to ask – where will the fix come from and how likely is it to materialize? India confronts certain historically given disadvantages relative to developing East Asia that will not easily change spontaneously. India’s immediate region, South Asia, is less integrated than East and South-East Asian region and the political impediments to this integration are much greater. China alone, and the region as a whole, is more populous than India and with higher average incomes. Thus it constitutes a larger market. East Asia’s industrial base has been significantly larger and more developed than that of India and its infrastructure far superior. Geography is also tilted against South Asia. Unlike not only in relation to Third World East Asia, but also Latin America, North Africa, and Eastern Europe, the geographical location of South Asia is not in proximity to any of the three advanced regions of the world. China and East Asia, however, are right next door to India. Low wages are not sufficient to overcome the disadvantages described above. Apart from the fact that India is not the only low wage economy around, it is also the case that wages are already a very small fraction of costs in manufacturing activities in India (less than 2% of the total value of factory output). In such circumstances, there is no basis to expect any strong tendency for the redistribution of world manufacturing production to favour India over East Asia. India is thus likely to remain at best a supplementary producer of manufactured products for the world market. On the other hand, there will always be the constant threat of competitive manufactured imports from East Asia. Of course, India’s manufacturing trade prospects could improve significantly if her infrastructure problems are addressed. However, improving infrastructure to a point where it could make a decisive difference to India’s relative situation represents a very tall order and there is no sign that India will be able to meet such a challenge. This situation coupled with India’s dependence on oil imports (and the insatiable demand for gold) implies that India’s economy has a strong proclivity towards a large trade deficit. If we add to this the fact that while India’s merchandise trade is moving increasingly towards the faster growing developing countries its services exports are heavily dependent on the advanced economies, the danger of current account difficulties increasing becomes all the more greater. The longer the world economy takes to recover from the global crisis, the greater would thus be the problem for India. 5. Barriers to industrialization The causal link between industrialization and manufactured exports can possibly work in either direction. If industrial expansion cannot be initially supported by external markets, however, it would have to rely on domestic market expansion and exports would follow later. Where will this expanding market come from? It cannot be assumed that growth will automatically create it. In the Indian context, the growth of consumption demand for manufactured products is critically dependent on a widening of the domestic market – bringing in a larger share of the population with incomes that are too low for them to be
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35.00 30.00 25.00 20.00 15.00 10.00 5.00 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12
0.00
Manufactured Goods
Services
Fig. 3. Private final consumption expenditure on manufactured goods and services (percentage shares), 1990–1991 to 2011–2012. Source: CSO [5,6].
significant purchasers of manufactured consumption goods. As far as the more prosperous are concerned, the evidence points towards their income growth based demand expansion diversifying increasingly towards services (Fig. 3) apart from being highly import-intensive. The widening of the market for industrial products, however, requires employment of people in activities where output grows or growth of output in activities where they are employed being combined with a rise in their incomes being somewhat proportionate to the extent of growth. Neither has been happening in the Indian case. At one end has been the very rapid growth of India’s private corporate sector, which still employs only a tiny fraction of India’s 450 million strong work-force – 12 million or so in regular employment and some more in casual work. Public sector employment is at the same time contracting. On the other hand the largest employer, the agricultural sector, is finding it increasingly difficult to sustain a process of rising incomes for the population dependent on it. The spill over from that sector is swelling the non-agricultural informal sector. Low agricultural incomes and a large labour-surplus situation in turn create a strong wage-depressing tendency so that even those employed in fast growing sectors do not necessarily benefit in the form of increasing wages. Testimony to this is the complete stagnation of real wages even in India’s organized factory sector, the segment to which labour regulations are applicable and where organized trade unions have a presence, in the last two decades (Fig. 4). Thus, the large majority of Indians are getting stuck in a low-income trap for which there is no selfcorrecting tendency. Poor agricultural performance also will contribute to the generation of inflationary tendencies which will be growth-inhibiting in nature directly by eroding incomes of those whose incomes are not indexed and indirectly by inducing demand compressing policy measures. The other source of industrial demand expansion possible is of course the asset demand generated by rising corporate incomes and those of the relatively prosperous. Corporate real investment, financed by retained earnings or from savings of households transferred to it through financial markets, and expenditure on real estate by households represent expenditures which are manufacturing-intensive in nature. Corporate investment, however, has a different character to public investment. It cannot necessarily flow easily into sectors like agriculture and even to infrastructure. Instead it tends to concentrate heavily in manufacturing activities where it also creates manufacturing capacity. Expenditure on real estate from a narrow segment of the population, whether for housing or speculation driven, also has its limits. In such circumstances, corporate investment cannot be easily sustained as there is a tendency for industrial capacity creation to 140.00 117.12
120.00 108.41
103.76
100.00 80.00 60.00 40.00 20.00 2010-11
2009-10
2008-09
2007-08
2006-07
2005-06
2004-05
2003-04
2002-03
2001-02
2000-01
1999-00
1998-99
1997-98
1996-97
1995-96
1994-95
1993-94
1992-93
1990-91
1991-92
0.00
Fig. 4. Index of real-wage per worker in India’s organized industrial sector (2002–2003 = 100), 1990–1991 to 2010–2011. Source: CSO [4,6]; GOI [11,12].
S. Mazumdar / Futures 56 (2014) 22–29
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Table 3 Annual rates of growth of investment (gross fixed capital formation) at constant prices (per cent per annum), 1994–1995 to 2011–2012. Private corporate sector At 1993–1994 prices 1994–1995 to 1996–1997 23.88
At 1999–2000 prices 1997–1998 to 2002–2003 6.1
At 2004–2005 prices
2000–2001 to 2002–2003 2.6
2003–2004 to 2007–2008 28.02
2005–2006 to 2007–2008 24.69
2008–2009 to 2011–2012 3.49
Registered manufacturing sector (at 2004–2005 prices) 1994–1995 to 1996–1997 24.16
1997–1998 to 2002–2003 6.8
2003–204 to 2007–2008 26.52
2008–2009 to 2011–2012 3.86
Source: CSO [6].
Table 4 Share of private organized sector in NDP, 1990–1991 to 2009–2010. Sector
1999–2000 base year series 1990–1991
2002–2003
2007–2008
2004–2005
2007–2008
2009–2010
2.21 6.44 5.62
2.18 8.03 7.33
1.39 6.83 10.35
1.21 7.39 14.84
0.56 6.10 12.90
0.46 6.97 16.22
0.44 6.52 15.36
14.26
17.55
18.56
23.44
19.55
23.65
22.32
Agriculture Industry excl. construction Services and construction Total
2004–2005 base year series
1996–1997
Source: CSO [6,7].
outstrip demand [17]. The very wide fluctuations that have already been seen in corporate and manufacturing investment (Table 3), and correspondingly also manufacturing growth, and the fact that the corporate sector’s rising importance in the economy has been more services and construction driven than manufacturing based (Table 4), is testimony to the fact that the real barrier is on the demand rather than the investment side. India’s potential savings and investment ratios have gone up but so have capital-output ratios in India’s industrial sector (Fig. 5). Looking ahead then, it is difficult to visualize how India’s story of limited industrialization will be really changed by the spontaneous dynamics of its economy – industrial growth is likely to continue to show volatility if not prolonged stagnation tendencies with consequences for aggregate growth. 6. Locked-in-place or will there be a turning point? The preceding discussion has indicated that that as long as India continues to traverse its current economic trajectory, instability in growth and other economic dimensions is likely to be seen in the future. It has also been hinted that the trajectory is also not generating tendencies for an appropriate change in course as its different components mutually reinforce each other. India’s services and construction dominated growth pattern is consistent with a particular distribution pattern of the incomes created by that growth and India’s position in the global division of labour. At the same time neither growth nor the instabilities associated with it will change either of these underlying realities. Is India’s economic future then locked-in-place?
manufacturing
2011-12
2010-11
2009-10
2008-09
2006-07
2007-08
2005-06
2003-04
2004-05
2001-02
2002-03
1999-00
2000-01
1998-99
1997-98
1995-96
1996-97
1993-94
1994-95
1991-92
1992-93
1990-91
9.00 8.00 7.00 6.00 5.00 4.00 3.00 2.00 1.00 0.00
registered manufacturing
Fig. 5. Average capital – output ratio in Indian manufacturing at 2004–2005 prices (years), 1990–1991 to 2011–2012. Source: CSO [5,6].
28
S. Mazumdar / Futures 56 (2014) 22–29
The one element of variability here is economic policy – which provides the scope for an intervention which can change the dynamics of the economy. If the analysis presented above is correct, the key form of such intervention has to work through public expenditure – in agriculture, in infrastructure development, and in other activities generating employment and raising incomes over a wider terrain. The currently dominant policy mindset – of keeping both taxes as well as fiscal deficits low – militates against such expenditure. It instead sets up a dynamic which may be described as follows. Because the economy’s growth process cannot be driven by public expenditure, the state has to induce the private sector to play that role. Policy has therefore had to be oriented towards encouraging private investment. This has a feedback loop reinforcing itself – tax concessions rather than public expenditure tend to become the mechanism of inducing private investment while revenues become dependent on the levels of corporate profits and incomes of high-income categories. Thus the room to use fiscal policy to change the pattern of expenditures and income distribution would be limited. There are also several additional factors at work which reinforce this fiscal policy mindset. Foreign investors and ratings agencies typically favour such a fiscal policy and if India remains open and dependent on volatile capital flows, the state will face a ceaseless pressure to maintain the policy. At the same time, since such a policy gives the Indian private corporate sector greater leverage over the state, that leverage would also be used towards ensuring its sustenance. In other words there would be powerful economic interests ranged in favour of maintaining fiscal ‘prudence’. However, the very narrow base of growth would also tend to mean the absence of any real social consensus on such an economic policy approach. This begs the question – would India’s growth trajectory remain politically sustainable over the next two decades or would its very nature generate significant political opposition? Would this opposition, working through India’s democratic political system, give rise to a ‘politics of redistribution’ [2] and compel a change in economic policy? That a growth process which bypasses large majority of the populace will generate some political discontent is a truism. Yet, as we have already seen, despite the competitive nature of Indian politics there is no automatic process by which such discontent crystallizes into a unified assertion for change. India’s majority, even the clear losers of its economic growth process, constitutes a highly differentiated group – separated by their specific economic positions, regions, languages, castes, religions, etc. Discontent can thus take many political expressions providing the playing field for multiple competing political tendencies. At the same time, the vitiation of politics by the influence of money power will also have a basis given a large private sector role in the economy also means the existence of potentially large gains in many activities to be made by securing favourable decisions of public agencies and authorities. Competitive electoral politics thus does not ensure that the common economic interests of the majority will dictate government policy – much less in the first-past-the-post system. However, the alternative to common economic interests providing the glue for the majority to come together politically is an increasingly fractured politics – the consolidation of different social groups and alliances behind diverse political formations, often promoting its own kind of social discord. This too will give rise to political instability. Moreover, there would invariably also be other social and political expressions of that context outside of the parliamentary system and elections. Looking ahead then, what direction Indian politics will take is uncertain but what is clear is the contradiction between a growth process with a narrow social base and a political system based on universal suffrage will express itself in one way or the other. If the growth trajectory is going to be sustained without creating a strong backlash, it can do so only by creating other forms of political instability. If the latter is the result, one might get a paradoxical situation that every segment of Indian society – the gainers as well as the losers – may find the political system failing to do its job. 7. Conclusion Contrary to many optimistic perceptions about the Indian economy’s future prospects, this paper has argued that next two decades will be a period of great uncertainty. Rather than a sustained and smooth process of economic expansion, frequent episodes of severe economic strain and even major crises are likely to pockmark the path traversed by the economy. The sources of economic instability lie in the mutually related imbalances associated with Indian growth and her integration with the global economy. These include imbalances between the growth of different sectors, imbalances in India’s external transactions and extreme iniquity in the distribution of the benefits of growth amongst India’s large populace. Each of these tend to also get exacerbated in periods of better growth making the growth process prone to endogenously generated fluctuations. At the same time, there is a tendency for this trajectory to get locked in place as the economic context and the disequilibria they give rise to themselves reinforce the pressure on the state from powerful interests to keep economic policy making within a conservative straitjacket. The consequent additional imbalance, between the respective roles of the state and the private sector in guiding the economy, imply that the correction of other economic imbalances through the instrumental use of fiscal policy becomes difficult unless there is a change in the social balance of power. The possibilities of such a change do exist insofar as their common exclusion from the benefits of growth provides a basis for a political consolidation of what is otherwise a socially heterogeneous majority. If such a consolidation becomes the dominant political tendency, it will mean political unrest will accompany economic difficulties. On the positive side this unrest may eventually force fundamental economic policy changes and give rise to a transition to a more stable expansion path of the Indian economy. Such a result, however, is not inevitable as the underlying economic realities may as well give rise to more fissiparous political tendencies in the form of multiple socially narrow political consolidations. So far it is the latter trend that has dominated and this generates the more unproductive form of political instability, one that does not tend to eliminate its own basis but in many ways reinforces it.
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Thus, whatever the point India reaches by 2030, the route to it will be pregnant with possibilities of both great economic and political turmoil. The probabilities associated with these are so high that India would have to be extremely fortuitous to be able to avoid experiencing serious crises along the way. References [1] A. Maddison, Monitoring the World Economy, OECD Development Centre, Paris, 1995. [2] A. Kohli, Politics and redistribution in India, in: N.G. Jayal, P.B. Mehta (Eds.), The Oxford Companion to Politics in India, Oxford University Press, New Delhi, 2010, pp. 499–509. [3] Conference Board, Global Economic Outlook, May 2013 Update, 2013 Available at http://www.conference-board.org/data/globaloutlook.cfm (accessed 08.06.13). [4] CSO, Annual Survey of Industries: Summary Results 2010–11, Central Statistical Organization, New Delhi, 2013. [5] CSO, National Accounts Statistics, Back Series 1950–51 to 2004–05, Central Statistical Organization, New Delhi, 2011. [6] CSO, National Accounts Statistics, Central Statistical Organization, New Delhi, 2013, Various years. [7] CSO, National Accounts Statistics, Factor Incomes (base year 1999–2000) 1980–81 to 1999–2000, Central Statistical Organization, New Delhi, 2008. [8] CSO, Press Note of 31 May on ‘Provisional Estimates of National Income for 2012–13, Central Statistical Organization, New Delhi, 2013. [9] D. Rodrik, A. Subramanian, Why India can grow at 7 per cent a year or more: projections and reflections, Economic and Political Weekly 39 (16) (2004) 1591– 2196. [10] D. Wilson, R. Purushothaman, Dreaming With BRICs: The Path to 2050, Goldman Sachs Global Economics Paper No: 99, 2003. [11] GOI, Economic Survey 2009–10, Government of India, Ministry of Finance, New Delhi, 2010. [12] GOI, Economic Survey 2012–13, Government of India, Ministry of Finance, New Delhi, 2013. [13] M.S. Ahluwalia, Lessons from India’s economic reforms, in: T. Besley, R. Zagha (Eds.), Development Challenges in the 1990s: Leading Policymakers Speak from Experience, Oxford University Press and The World Bank, New York, 2005, pp. 187–202. [14] NSSO, Key Indicators of Employment and Unemployment in India 2009–10, National Sample Survey Office, New Delhi, 2011. [15] RBI, Handbook of Statistics on the Indian Economy 2010–11, Reserve Bank of India, Mumbai, 2012. [16] S. Acharya, India’s growth: past performance and future prospects, in: Paper presented at the Eighth Annual Global Development Conference of the Global Development Network, January 14–16, 2007. [17] S. Mazumdar, Investment and growth in India under liberalization: asymmetries and instabilities, Economic and Political Weekly 43 (49) (2008) 68–77. [18] T.S. Papola, Emerging structure of the Indian economy: implications of growing inter-sectoral imbalances, Indian Economic Journal 54 (1) (2006) 4–25. [19] T. Poddar, E. Yi, India’s rising growth potential, in: Goldman Sachs Global Economics Paper No: 152, 2007. [20] UNCTAD, Handbook of Statistics 2012, United Nations Publications, New York, Geneva, 2012.
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Futures journal homepage: www.elsevier.com/locate/futures
India’s economy: Some reflections on its shaky future Surajit Mazumdar * Bharat Ratna Dr. B.R. Ambedkar University, Delhi (AUD), Lothian Road, Kashmere Gate, Delhi 110006, India
A R T I C L E I N F O
A B S T R A C T
Article history: Available online 16 October 2013
Contrary to many optimistic perceptions about the Indian economy’s future prospects, this paper argues that the next two decades will be a period of great uncertainty. A path pockmarked with great economic and political turmoil, rather than a sustained and smooth process of economic expansion is what is likely. These are inherent in the growth trajectory of the Indian economy – which will continue to be biased towards services and construction activities rather than manufacturing and which will bypass the majority of Indians. If there is to be any different story, it will not come from the economic trajectory endogenously producing a shift to a more stable trajectory. Rather, it is the politics of redistribution that it may give rise to that has to be the source of change. The fact that it may give rise to such a politics does not, however, mean it will. ß 2013 Elsevier Ltd. All rights reserved.
Keywords: Indian economy Growth Industrialization Services Globalization
1. Introduction In this paper, I try to look ahead at the future course of the Indian economy till 2030. I shall argue that if there is one certainty about this future it is that it is not going to be a smooth movement. Tremendous strain and instability – economic as well political – is likely to characterize the journey over this period because these are inbuilt into the current trajectory of the economy. The real issue then is whether that instability will be just instability or whether it would spur a transition to a more stable path of movement of the Indian economy. The reasons for the choice the period being considered here rather than a longer one and the general historical perspective which informs this exercise are outlined in the first section of the paper. The second section then opens up the discussion on India’s growth prospects with the next two sections highlighting important constraints. The final section preceding the short conclusion then examines the political side of the process and what implications it may have for the course of the economy. A short conclusion then sums up the argument advanced in the paper. 2. Speculating about the future: some considerations to be kept in mind Change through a process of cause and effect is an inherent feature of human life. Consequently any society’s past and present are different and yet are causally connected to each other. By extension the future must be also linked to the past and the present while being different. At any point of time, the process of the making of the future is not only under way but would have already travelled some distance. Yet while one may be able to explain, as historians do, how the past of so many thousands of years developed to the present, forecasting the future even when one is talking of a point of time just a few decades away is a different kind of exercise. While explaining the past may be constrained by the limits of historical data and
* Tel.: +91 11 23863740/43; fax: +91 11 23863742; mobile: +91 9891568324. E-mail addresses: [email protected], [email protected] 0016-3287/$ – see front matter ß 2013 Elsevier Ltd. All rights reserved. http://dx.doi.org/10.1016/j.futures.2013.10.005
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information one has at one’s command, forecasting the future has the added difficulty of having to be based on such past data alone. The past is certain while the future is inherently uncertain. The stabilities of the past which may be used to explain the other movements are known – we can say for instance that colonialism was a feature of Indian history for 200 years or that a liberal economic policy paradigm is associated with the period since 1991. With regard to the future everything in principle is variable and consequently fewer explanatory factors are available. It is not of course true that any future is possible. Many outcomes can clearly be ruled out based on present conditions and tendencies. Others may be deemed highly unlikely while those that are within the realm of possibility could be identified. However, no unique possible future may arise from such an exercise. In addition, forecasting on the basis of currently observable tendencies also has to allow for the possibility that there could be in the future critical turning points producing fundamental qualitative changes in the context. In 1927, the Congress had not even adopted the demand for complete independence but it became a reality within two decades. Would anyone observing what happened in India between 1969 and 1976 – the nationalization of banks, coal and other mining, oil and general insurance; legislation of the Monopolies and Restrictive Trade Practices (MRTP) and Foreign Exchange Regulation (FERA) Acts, etc. – have imagined what was just a decade and a half away, namely the post-1991 liberalization? Thus, there is a case for restricting our speculation about the future, even if one is making conditional forecasts, to a reasonable time limit over which some of the deep-rooted features of the present can be expected to survive. Between now and 2030, one can assume or consider highly probable that the world will not change in some fundamental ways – India will remain a single nation and its political system will survive, the US will remain the world’s dominant power and the dollar the world’s reserve currency and things like that. There are other elements – such as the current liberal economic policy paradigm – which too can be considered entrenched features of the present but not necessarily to the same degree as others. They are amongst the givens to start with but may also be affected more quickly and easily within the time-frame being considered by the consequences they produce. Taking a set of things as our givens and semi-givens then, one can try and deduce the likely scenarios that may result in the future. That is the approach underlying the speculation that follows. 3. India in the world economy: the GDP dimension One of the prominent features of the Indian economy’s recent history has been that it has grown in aggregate terms faster than the world economy for a period of more than three decades [9,13,16]. This represented a reversal of the trend observed for over two centuries prior to that in which India’s relative economic size shrunk considerably [1]. India under colonial rule was shut out of the process of rapid economic and social transformation that came to be witnessed in some parts of the world since the Industrial Revolution of the late 18th century. Things did change after independence but only to a limited extent – the Indian economy grew faster than earlier but so did the world economy. In the 1980s, India speeded up while the world economy slowed down. In the early years of this century, Indian growth rates rose to unprecedented levels. Post-global crisis, however, things have changed somewhat. However, the difference between world and Indian GDP growth remains. Thus, India’s weight in the global economy measure in terms of its GDP share has been rising along with that of another big economy, China. These have lead to speculations about a changing world economic order and of India’s ‘emergence’ based on the assumption that the trends of the last few decades will continue into the future. Changes in the world economic order will of course require more than a mere shift in the distribution pattern of world production in favour of its more populous regions. The emergence of developing country currencies as rivals to the US dollar or shifts in technological leadership, for instance, will not be automatic results of such redistribution. Even if we leave aside such things, however, there are reasons to be not sanguine about the prospects of India’s rise in the world economy. Projections about India’s future growth trends have tended to fluctuate with the upward and downward movements in observed growth rates. Thus the Goldman Sachs BRICs report assumed that India’s GDP growth rate would more or less be bound within the level of 6% per annum till 2050 [10]. A study that appeared soon after raised the projected level to 7% till 2025 [9]. Another Goldman Sachs study appearing a few years after the high growth phase began ratcheted up the projection to 8% [19]. A very recent forecast by the Conference Board [3], on the other hand, in its optimistic scenario visualizes India growing at 5.7% per annum between 2013 and 2018 and at 4.5% per annum thereafter till 2025. If these different forecasts are combined with alternative assumptions about world growth rates over the same period, we get a picture that India’s share in world GDP could be anywhere between 9 and 18% by 2030. The more optimistic projections of India’s rising weight in the world economy usually take into account the tremendous potential for structural change – in particular the shifting of a significant proportion of the workforce from agriculture to higher productivity non-agricultural activities – that still exists in the Indian economy. They further draw a simple relationship between ‘economic reforms’ and the realization of this potential. However, for this scenario to unfold either of two conditions must hold – one, that the current trajectory of India’s economy is sustainable over the period under consideration; or two, that India will be able to make the necessary shifts in the trajectory as and when they become necessary. Is there sufficient cause to be optimistic in this regard? 4. The sustainability of Indian growth: external sector constraints One issue of sustainability of Indian growth arises from its distinctive feature of being dominated by expansion of tradable and non-tradable services and construction activities rather than as is typically the case, by manufacturing
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Table 1 Industry and services in growth of GDP at 2004–2005 prices, 1990–1991 to 2012–2013. Growth rate (% per annum)
Sector
Industry excluding construction Services and construction
Contribution to increase in GDP, 1990–1991 to 2012–2013 (percentage shares)
1991–1992 to 1996–1997
1997–1998 to 2002–2003
2003–2004 to 2007–2008
2008–2009 to 2012–2013
7.12 6.27
4.28 7.53
8.58 9.49
5.71 8.54
18.40 73.14
Source: CSO [5,6,8].
Table 2 Share in world merchandise exports and imports of selected developing countries/country groups, 1990 and 2011. Country/country group
Share in world exports
Share in world imports
Export share less import share
1990
2011
1990
2011
1990
2011
All developing countries
24.18
42.75
22.21
39.83
1.97
2.92
East Asia China South East Asia South Asia India
8.07 1.79 4.14 1.35 0.52
17.58 10.43 6.81 2.72 1.66
7.41 1.49 4.53 1.66 0.66
16.6 9.48 6.26 3.52 2.52
0.66 0.3 0.39 0.31 0.14
0.98 0.95 0.55 0.8 0.86
Source: UNCTAD [20].
(Table 1). More than 70% of the real growth of the last two decades has come from services and construction. This comes in the background of India’s industrialization by comparative standards being extremely limited – even in comparison to many late-industrializing developing countries [18]. The share of the industrial sector in output for countries like China or South Korea in Asia, or Brazil in Latin America, touched levels of at least 45% before their services sectors started becoming prominent. In India, this share has not even touched 30% and in recent years has increased only on account of construction. The manufacturing sector share in output since then has not gone beyond the relatively low levels attained by the mid1990s. On the employment side, manufacturing accounts for less than 10% of total employment and that too mostly in its informal component, while agriculture still employs over half the work-force [14]. The non-industrial nature of Indian growth is complemented in the pattern of its integration into the world economy. India has not emerged as a manufacturing powerhouse for the world market. Though its share in world merchandise exports has increased in the last two decades, its imports have risen faster and it still remains a relatively small exporter. These are in contrast to the larger story of Asian developing economies in the last two decades and of course that of China (Table 2). Thus, while persistent export surpluses have characterized many developing countries India’s trade deficit has been rising steeply and has gone over 10% of the country’s GDP. Such high levels of the trade deficit have been unprecedented in India’s postindependence history – before 2005–2006, it had never crossed the 5% of GDP level and usually remained below 3%. What is significant to note is that the rising import-dependence of Indian growth is attributable much more to manufactured imports than to oil and gold imports (Fig. 1).
12.00 10.00 8.00 6.00 4.00 2.00 0.00
Manufactured Products Fig. 1. India: imports to GDP (percentage), 2001–2002 to 2011–2012. Source: RBI [15].
Oil
Gold & Silver
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7.52
10.00 4.62
6.05
5.00 2.32 0.00 -5.00
-4.25
-2.30
-10.00 -9.81
-10.30
-15.00 Trade balance
Invisibles, net
Current account
Fig. 2. India: trade, invisibles and current balances (as % of GDP), 2001–2002 to 2011–2012. Source: RBI [15].
The picture has been different for services exports where a much more dramatic rise has happened in India’s share in world exports, from 0.56% in 1990 to 3.23% in 2011 [20]. This has been mainly on account of IT and IT-enabled services. India has also become the world’s largest recipient of remittances. Between her services exports and remittances, India has come to have an exceptionally large invisibles surplus but even this has not been sufficient to cover for her trade deficit. As a result, India’s current account deficit has been consistently rising to now highly dangerous levels (Fig. 2) – in 2011–2012 it was 4.25% of GDP and figures available so far indicate a further sharp jump in 2012–2013. At the same time, if India is not an attractive location for producing manufactures for the world market, it does not also attract efficiency-seeking and exportoriented FDI which is a characteristic feature of the globalization era. To fill its external deficit, therefore, it necessarily has to depend more on volatile capital flows. Going forward then, unless India can find a fix for its current account problem, it will be highly vulnerable on the external sector front. This would make it a prime candidate for facing a serious exchange crisis which would derail the growth process. Alternatively, its growth rate has to be maintained at a low trend level to keep it consistent with the maintenance of balance of payments equilibrium. It becomes important therefore to ask – where will the fix come from and how likely is it to materialize? India confronts certain historically given disadvantages relative to developing East Asia that will not easily change spontaneously. India’s immediate region, South Asia, is less integrated than East and South-East Asian region and the political impediments to this integration are much greater. China alone, and the region as a whole, is more populous than India and with higher average incomes. Thus it constitutes a larger market. East Asia’s industrial base has been significantly larger and more developed than that of India and its infrastructure far superior. Geography is also tilted against South Asia. Unlike not only in relation to Third World East Asia, but also Latin America, North Africa, and Eastern Europe, the geographical location of South Asia is not in proximity to any of the three advanced regions of the world. China and East Asia, however, are right next door to India. Low wages are not sufficient to overcome the disadvantages described above. Apart from the fact that India is not the only low wage economy around, it is also the case that wages are already a very small fraction of costs in manufacturing activities in India (less than 2% of the total value of factory output). In such circumstances, there is no basis to expect any strong tendency for the redistribution of world manufacturing production to favour India over East Asia. India is thus likely to remain at best a supplementary producer of manufactured products for the world market. On the other hand, there will always be the constant threat of competitive manufactured imports from East Asia. Of course, India’s manufacturing trade prospects could improve significantly if her infrastructure problems are addressed. However, improving infrastructure to a point where it could make a decisive difference to India’s relative situation represents a very tall order and there is no sign that India will be able to meet such a challenge. This situation coupled with India’s dependence on oil imports (and the insatiable demand for gold) implies that India’s economy has a strong proclivity towards a large trade deficit. If we add to this the fact that while India’s merchandise trade is moving increasingly towards the faster growing developing countries its services exports are heavily dependent on the advanced economies, the danger of current account difficulties increasing becomes all the more greater. The longer the world economy takes to recover from the global crisis, the greater would thus be the problem for India. 5. Barriers to industrialization The causal link between industrialization and manufactured exports can possibly work in either direction. If industrial expansion cannot be initially supported by external markets, however, it would have to rely on domestic market expansion and exports would follow later. Where will this expanding market come from? It cannot be assumed that growth will automatically create it. In the Indian context, the growth of consumption demand for manufactured products is critically dependent on a widening of the domestic market – bringing in a larger share of the population with incomes that are too low for them to be
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35.00 30.00 25.00 20.00 15.00 10.00 5.00 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12
0.00
Manufactured Goods
Services
Fig. 3. Private final consumption expenditure on manufactured goods and services (percentage shares), 1990–1991 to 2011–2012. Source: CSO [5,6].
significant purchasers of manufactured consumption goods. As far as the more prosperous are concerned, the evidence points towards their income growth based demand expansion diversifying increasingly towards services (Fig. 3) apart from being highly import-intensive. The widening of the market for industrial products, however, requires employment of people in activities where output grows or growth of output in activities where they are employed being combined with a rise in their incomes being somewhat proportionate to the extent of growth. Neither has been happening in the Indian case. At one end has been the very rapid growth of India’s private corporate sector, which still employs only a tiny fraction of India’s 450 million strong work-force – 12 million or so in regular employment and some more in casual work. Public sector employment is at the same time contracting. On the other hand the largest employer, the agricultural sector, is finding it increasingly difficult to sustain a process of rising incomes for the population dependent on it. The spill over from that sector is swelling the non-agricultural informal sector. Low agricultural incomes and a large labour-surplus situation in turn create a strong wage-depressing tendency so that even those employed in fast growing sectors do not necessarily benefit in the form of increasing wages. Testimony to this is the complete stagnation of real wages even in India’s organized factory sector, the segment to which labour regulations are applicable and where organized trade unions have a presence, in the last two decades (Fig. 4). Thus, the large majority of Indians are getting stuck in a low-income trap for which there is no selfcorrecting tendency. Poor agricultural performance also will contribute to the generation of inflationary tendencies which will be growth-inhibiting in nature directly by eroding incomes of those whose incomes are not indexed and indirectly by inducing demand compressing policy measures. The other source of industrial demand expansion possible is of course the asset demand generated by rising corporate incomes and those of the relatively prosperous. Corporate real investment, financed by retained earnings or from savings of households transferred to it through financial markets, and expenditure on real estate by households represent expenditures which are manufacturing-intensive in nature. Corporate investment, however, has a different character to public investment. It cannot necessarily flow easily into sectors like agriculture and even to infrastructure. Instead it tends to concentrate heavily in manufacturing activities where it also creates manufacturing capacity. Expenditure on real estate from a narrow segment of the population, whether for housing or speculation driven, also has its limits. In such circumstances, corporate investment cannot be easily sustained as there is a tendency for industrial capacity creation to 140.00 117.12
120.00 108.41
103.76
100.00 80.00 60.00 40.00 20.00 2010-11
2009-10
2008-09
2007-08
2006-07
2005-06
2004-05
2003-04
2002-03
2001-02
2000-01
1999-00
1998-99
1997-98
1996-97
1995-96
1994-95
1993-94
1992-93
1990-91
1991-92
0.00
Fig. 4. Index of real-wage per worker in India’s organized industrial sector (2002–2003 = 100), 1990–1991 to 2010–2011. Source: CSO [4,6]; GOI [11,12].
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Table 3 Annual rates of growth of investment (gross fixed capital formation) at constant prices (per cent per annum), 1994–1995 to 2011–2012. Private corporate sector At 1993–1994 prices 1994–1995 to 1996–1997 23.88
At 1999–2000 prices 1997–1998 to 2002–2003 6.1
At 2004–2005 prices
2000–2001 to 2002–2003 2.6
2003–2004 to 2007–2008 28.02
2005–2006 to 2007–2008 24.69
2008–2009 to 2011–2012 3.49
Registered manufacturing sector (at 2004–2005 prices) 1994–1995 to 1996–1997 24.16
1997–1998 to 2002–2003 6.8
2003–204 to 2007–2008 26.52
2008–2009 to 2011–2012 3.86
Source: CSO [6].
Table 4 Share of private organized sector in NDP, 1990–1991 to 2009–2010. Sector
1999–2000 base year series 1990–1991
2002–2003
2007–2008
2004–2005
2007–2008
2009–2010
2.21 6.44 5.62
2.18 8.03 7.33
1.39 6.83 10.35
1.21 7.39 14.84
0.56 6.10 12.90
0.46 6.97 16.22
0.44 6.52 15.36
14.26
17.55
18.56
23.44
19.55
23.65
22.32
Agriculture Industry excl. construction Services and construction Total
2004–2005 base year series
1996–1997
Source: CSO [6,7].
outstrip demand [17]. The very wide fluctuations that have already been seen in corporate and manufacturing investment (Table 3), and correspondingly also manufacturing growth, and the fact that the corporate sector’s rising importance in the economy has been more services and construction driven than manufacturing based (Table 4), is testimony to the fact that the real barrier is on the demand rather than the investment side. India’s potential savings and investment ratios have gone up but so have capital-output ratios in India’s industrial sector (Fig. 5). Looking ahead then, it is difficult to visualize how India’s story of limited industrialization will be really changed by the spontaneous dynamics of its economy – industrial growth is likely to continue to show volatility if not prolonged stagnation tendencies with consequences for aggregate growth. 6. Locked-in-place or will there be a turning point? The preceding discussion has indicated that that as long as India continues to traverse its current economic trajectory, instability in growth and other economic dimensions is likely to be seen in the future. It has also been hinted that the trajectory is also not generating tendencies for an appropriate change in course as its different components mutually reinforce each other. India’s services and construction dominated growth pattern is consistent with a particular distribution pattern of the incomes created by that growth and India’s position in the global division of labour. At the same time neither growth nor the instabilities associated with it will change either of these underlying realities. Is India’s economic future then locked-in-place?
manufacturing
2011-12
2010-11
2009-10
2008-09
2006-07
2007-08
2005-06
2003-04
2004-05
2001-02
2002-03
1999-00
2000-01
1998-99
1997-98
1995-96
1996-97
1993-94
1994-95
1991-92
1992-93
1990-91
9.00 8.00 7.00 6.00 5.00 4.00 3.00 2.00 1.00 0.00
registered manufacturing
Fig. 5. Average capital – output ratio in Indian manufacturing at 2004–2005 prices (years), 1990–1991 to 2011–2012. Source: CSO [5,6].
28
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The one element of variability here is economic policy – which provides the scope for an intervention which can change the dynamics of the economy. If the analysis presented above is correct, the key form of such intervention has to work through public expenditure – in agriculture, in infrastructure development, and in other activities generating employment and raising incomes over a wider terrain. The currently dominant policy mindset – of keeping both taxes as well as fiscal deficits low – militates against such expenditure. It instead sets up a dynamic which may be described as follows. Because the economy’s growth process cannot be driven by public expenditure, the state has to induce the private sector to play that role. Policy has therefore had to be oriented towards encouraging private investment. This has a feedback loop reinforcing itself – tax concessions rather than public expenditure tend to become the mechanism of inducing private investment while revenues become dependent on the levels of corporate profits and incomes of high-income categories. Thus the room to use fiscal policy to change the pattern of expenditures and income distribution would be limited. There are also several additional factors at work which reinforce this fiscal policy mindset. Foreign investors and ratings agencies typically favour such a fiscal policy and if India remains open and dependent on volatile capital flows, the state will face a ceaseless pressure to maintain the policy. At the same time, since such a policy gives the Indian private corporate sector greater leverage over the state, that leverage would also be used towards ensuring its sustenance. In other words there would be powerful economic interests ranged in favour of maintaining fiscal ‘prudence’. However, the very narrow base of growth would also tend to mean the absence of any real social consensus on such an economic policy approach. This begs the question – would India’s growth trajectory remain politically sustainable over the next two decades or would its very nature generate significant political opposition? Would this opposition, working through India’s democratic political system, give rise to a ‘politics of redistribution’ [2] and compel a change in economic policy? That a growth process which bypasses large majority of the populace will generate some political discontent is a truism. Yet, as we have already seen, despite the competitive nature of Indian politics there is no automatic process by which such discontent crystallizes into a unified assertion for change. India’s majority, even the clear losers of its economic growth process, constitutes a highly differentiated group – separated by their specific economic positions, regions, languages, castes, religions, etc. Discontent can thus take many political expressions providing the playing field for multiple competing political tendencies. At the same time, the vitiation of politics by the influence of money power will also have a basis given a large private sector role in the economy also means the existence of potentially large gains in many activities to be made by securing favourable decisions of public agencies and authorities. Competitive electoral politics thus does not ensure that the common economic interests of the majority will dictate government policy – much less in the first-past-the-post system. However, the alternative to common economic interests providing the glue for the majority to come together politically is an increasingly fractured politics – the consolidation of different social groups and alliances behind diverse political formations, often promoting its own kind of social discord. This too will give rise to political instability. Moreover, there would invariably also be other social and political expressions of that context outside of the parliamentary system and elections. Looking ahead then, what direction Indian politics will take is uncertain but what is clear is the contradiction between a growth process with a narrow social base and a political system based on universal suffrage will express itself in one way or the other. If the growth trajectory is going to be sustained without creating a strong backlash, it can do so only by creating other forms of political instability. If the latter is the result, one might get a paradoxical situation that every segment of Indian society – the gainers as well as the losers – may find the political system failing to do its job. 7. Conclusion Contrary to many optimistic perceptions about the Indian economy’s future prospects, this paper has argued that next two decades will be a period of great uncertainty. Rather than a sustained and smooth process of economic expansion, frequent episodes of severe economic strain and even major crises are likely to pockmark the path traversed by the economy. The sources of economic instability lie in the mutually related imbalances associated with Indian growth and her integration with the global economy. These include imbalances between the growth of different sectors, imbalances in India’s external transactions and extreme iniquity in the distribution of the benefits of growth amongst India’s large populace. Each of these tend to also get exacerbated in periods of better growth making the growth process prone to endogenously generated fluctuations. At the same time, there is a tendency for this trajectory to get locked in place as the economic context and the disequilibria they give rise to themselves reinforce the pressure on the state from powerful interests to keep economic policy making within a conservative straitjacket. The consequent additional imbalance, between the respective roles of the state and the private sector in guiding the economy, imply that the correction of other economic imbalances through the instrumental use of fiscal policy becomes difficult unless there is a change in the social balance of power. The possibilities of such a change do exist insofar as their common exclusion from the benefits of growth provides a basis for a political consolidation of what is otherwise a socially heterogeneous majority. If such a consolidation becomes the dominant political tendency, it will mean political unrest will accompany economic difficulties. On the positive side this unrest may eventually force fundamental economic policy changes and give rise to a transition to a more stable expansion path of the Indian economy. Such a result, however, is not inevitable as the underlying economic realities may as well give rise to more fissiparous political tendencies in the form of multiple socially narrow political consolidations. So far it is the latter trend that has dominated and this generates the more unproductive form of political instability, one that does not tend to eliminate its own basis but in many ways reinforces it.
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Thus, whatever the point India reaches by 2030, the route to it will be pregnant with possibilities of both great economic and political turmoil. The probabilities associated with these are so high that India would have to be extremely fortuitous to be able to avoid experiencing serious crises along the way. References [1] A. Maddison, Monitoring the World Economy, OECD Development Centre, Paris, 1995. [2] A. Kohli, Politics and redistribution in India, in: N.G. Jayal, P.B. Mehta (Eds.), The Oxford Companion to Politics in India, Oxford University Press, New Delhi, 2010, pp. 499–509. [3] Conference Board, Global Economic Outlook, May 2013 Update, 2013 Available at http://www.conference-board.org/data/globaloutlook.cfm (accessed 08.06.13). [4] CSO, Annual Survey of Industries: Summary Results 2010–11, Central Statistical Organization, New Delhi, 2013. [5] CSO, National Accounts Statistics, Back Series 1950–51 to 2004–05, Central Statistical Organization, New Delhi, 2011. [6] CSO, National Accounts Statistics, Central Statistical Organization, New Delhi, 2013, Various years. [7] CSO, National Accounts Statistics, Factor Incomes (base year 1999–2000) 1980–81 to 1999–2000, Central Statistical Organization, New Delhi, 2008. [8] CSO, Press Note of 31 May on ‘Provisional Estimates of National Income for 2012–13, Central Statistical Organization, New Delhi, 2013. [9] D. Rodrik, A. Subramanian, Why India can grow at 7 per cent a year or more: projections and reflections, Economic and Political Weekly 39 (16) (2004) 1591– 2196. [10] D. Wilson, R. Purushothaman, Dreaming With BRICs: The Path to 2050, Goldman Sachs Global Economics Paper No: 99, 2003. [11] GOI, Economic Survey 2009–10, Government of India, Ministry of Finance, New Delhi, 2010. [12] GOI, Economic Survey 2012–13, Government of India, Ministry of Finance, New Delhi, 2013. [13] M.S. Ahluwalia, Lessons from India’s economic reforms, in: T. Besley, R. Zagha (Eds.), Development Challenges in the 1990s: Leading Policymakers Speak from Experience, Oxford University Press and The World Bank, New York, 2005, pp. 187–202. [14] NSSO, Key Indicators of Employment and Unemployment in India 2009–10, National Sample Survey Office, New Delhi, 2011. [15] RBI, Handbook of Statistics on the Indian Economy 2010–11, Reserve Bank of India, Mumbai, 2012. [16] S. Acharya, India’s growth: past performance and future prospects, in: Paper presented at the Eighth Annual Global Development Conference of the Global Development Network, January 14–16, 2007. [17] S. Mazumdar, Investment and growth in India under liberalization: asymmetries and instabilities, Economic and Political Weekly 43 (49) (2008) 68–77. [18] T.S. Papola, Emerging structure of the Indian economy: implications of growing inter-sectoral imbalances, Indian Economic Journal 54 (1) (2006) 4–25. [19] T. Poddar, E. Yi, India’s rising growth potential, in: Goldman Sachs Global Economics Paper No: 152, 2007. [20] UNCTAD, Handbook of Statistics 2012, United Nations Publications, New York, Geneva, 2012.