[Answered] “India need to follow East Asian model of growth if it has to achieve the $5-trillion economy status by 2024-25”. Discuss.

The East Asian model generally refers to the model of development followed in East Asian economies such as Hong Kong, China, Japan, South Korea and Taiwan. Key aspects of the East Asian model include high rate of savings, increased private investment and exports supporting sustainable growth.

How the East Asian model can help in achieving objective of a $5 trillion economy?

To achieve the objective of becoming a USD 5 trillion economy by 2024-25, India needs to sustain a real GDP growth rate of 8%. Such growth can only be sustained by a “virtuous cycle” of savings, investment and exports catalysed and supported by a favourable demographic phase.

1. Investment: Capital investment lead to job creation as capital goods production, research and development, and supply chains generate jobs.
   • Unemployment rates decreases with greater gross capital formation as was seen in East Asia and Pacific.
   • Investment, especially private investment will lead to increased demand, creation of capacity, increased labour productivity, introduction of new technology and will generate jobs.
   • The investment, productivity growth, job creation, demand and exports will feed into each other and enable animal spirits in the economy.
   • Investment generates infrastructure thus leading to growth of an economy.
2. Savings: A high investment effort must be backed by domestic savings as was done in East Asian economies.
   • Research has shown that savings and growth are positively correlated.
   • High savings reduces external debt of the government, and reduce fiscal burden due lesser cost of loans and also create the jobs due to investment.
   • The evidence from China and East Asia in recent times is that high growth rates have only been sustained by a growth model driven by savings.
3. Exports: High level of savings will reduce share of consumption in GDP. Thus consumption need to come from exports.
   • An aggressive export strategy must be a part of investment-driven growth model.
   • A strong correlation between growth in exports and GDP growth for the high growth East Asian economies is evident.
   • The global market is extremely competitive with the firms able to produce at the lowest costs. Thus productivity of firms in the economy is crucial to export competitiveness.
   • Capital investment enhances total factor productivity, which in turn enhances export performance. Therefore, investment becomes crucial to enhance export performance.
4. Demographic dividend: India is undergoing face of demographic dividend which is must for achieving high economic growth.
   • The rise in household savings should come from positive demographic dividend. Thus employment and spilling of demography is important.
   • A high investment rate would lead to capital formation and employment generation.

Thus India need to adopt an East Asian model of sustained growth backed by high rates of savings, investment, exports supported by demographic dividend. This will ensure India achieving its goal of becoming a $5 trillion economy by 2024-25.