State Holds Back Nation

Source: The post is based on an article “State Holds Back Nation” published in the Times of India on 12^th August 2022.

Syllabus: GS 3 Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment.

Relevance: Inclusive Growth and Prosperity of India

News: India’s economic fundamentals and demographic composition can help it in making widespread prosperity a reality in the next two decades or so.

Strong Fundamentals of India

Economic Fundamentals

(1) The policy initiatives on infrastructure development, digitization of the economy, and a push towards rural development have created a conducive environment for inclusive growth.

(a) India’s transportation infrastructure has been improving steadily. Cities and towns in remote parts of the country are now much better connected. Therefore, there is increased mobility of labor, capital, and raw materials which could spur economic growth even in most interior parts of the country.

(2) Digitization of Indian Economy: In terms of digitization of the economy, India is by far the world leader in digital payments and transactions. For Example, in 2021, the number of real-time digital payment transactions in India was almost threefold that of China. The digital revolution has the potential to unlock the country’s entrepreneurial spirit.

(3) India has made commendable progress in improving the quality of life of its rural population. For example, rural India’s access to clean fuel for cooking increased from 18% of the population in 2012 to 54% in 2020.

Demographic Fundamental

India’s workforce can contribute to economic development through increased labor supply and higher productivity.

What is the metric to measure the increase in prosperity of India?

A key metric of the mass prosperity of any country is its per capita income. For India to come close to upper-middle-income countries on this metric, it needs a fourfold increase in its per capita income.

The Possible Measures to Achieve a Four-Fold Increase in Per-Capita Income

(1) Growth and distribution: (a) India’s GDP growth needs an average annual growth rate of 7% in the next 25 years, and (b) States like Bihar and Uttar Pradesh must grow at a much higher rate to catch up with more prosperous states like Gujarat and Haryana.

(2) Drivers of growth: India’s long-run economic growth will depend on an economic system that provides strong incentives for productivity gains through technological innovation and capital formation. For this India needs a market-based system, where the private sector is much involved

Can India achieve productivity gains and capital formation that can set it on a 7 % GDP growth rate path?

Although it is not easy, undoubtedly it is achievable due to the following reasons:

(1) India has irreversibly moved towards a market-based system since the 1991 liberalization.

(2) Furthermore, the speed of reform, like the pace of privatization has picked up in recent years.

What more measures do we need to move towards a 7% growth rate?

(1) India needs to speed up the privatization of the loss-making public sector banks: A market-based banking sector will be in a solid position to allocate capital efficiently and productively across different sectors of the economy. It will lead to the creative destruction of underperforming companies, and will eventually pave the way for sustained economic growth.

(2) In addition, India will also need a lot of new private enterprises like start-ups spread across the country to meet its growth target of 7%.