Growth matters

Topics Indian Economy | GDP | Narendra Modi

Some of my favourite stories growing up were about Akbar and Birbal. With each hour bringing news via whatsApp (everyone’s untrustworthy source) of the exponential growth of coronavirus cases worldwide, I am reminded of the famous Akbar-Birbal story of exponential growth. As we all recall, Akbar presses Birbal to claim a reward; Birbal takes a chessboard, and asks for one grain of rice on the first square, two on the second, four on the third, and so on, doubling with each square. The punch line, of course, is that by the time one gets around the board, the grain needed far exceeds the total harvest of rice produced in the kingdom. Such is the power of exponential growth.

So, too, with the coronavirus: Typical unchecked growth in cases per day is estimated at 35 per cent.  That’s a doubling time of two days.  If we add 10 cases on day one, unless we intervene we would see 100 new cases a day by the end of Week one and 1,000 cases a day by the end of Week two.  This is exactly why every day matters, and the promptness of action to slow the spread is as critical as its correctness.  

At such a time, it might seem odd — even perverse — to write about our growth aspirations and the $5 trillion goal by 2024 that the prime minister has set. But long-term national development is a story of exponential growth as much as the coronavirus and Birbal’s chessboard.  

A brief historical overview

The economic historian, Joel Mokyr, put it well: “To say that a country is rich is to say that it has experienced economic growth in the past.”  Two hundred years ago, the world was a pretty equal place, as every country was poor.  The richest country in the world was three-times richer than the poorest. By 2018, the richest country (Switzerland or Norway) was two-hundred times richer than the poorest (Niger or Malawi). Britain became the world’s richest country in the 18th and 19th century. By 1913, the US had overtaken Britain, by growing its per capita gross domestic product (GDP) at 1.5 per cent annually for a hundred years. India can be justifiably pleased at over-taking France and the UK in 2019 to become the world’s fifth largest economy at $2.9 trillion. But we should, equally, remind ourselves that this is largely because we have 1.4 billion people; per person we are among the poorest one-third countries in the world.  

Source: World Development Indicators, World Bank
Sustained growth

In 1960, South Korea and India had much the same per capita GDP, and in 1980, China and India had much the same per capita GDP. South Korea ($31,000) is now fifteen-times richer than we are, and China ($9500) five-times richer. It’s all a ma­tter of growth rates: Between 1960 and 1990, South Korea grew at 10 per cent each year, to India’s 4 per cent. Between 1980 and 2019, China has grown at 9 per cent each year, to our 6 per cent. In the last three years, we have both been growing at around 6 per cent.

Only a few countries, all largely in East Asia, have grown rapidly enough to bridge much of the gap with the rich world in one generation: Japan (the 1950s to 1970s), South Korea, Taiwan, Singapore and Hong Kong (the 1960s to 1980s), and China (the 1980s to the present). Each saw growth of 8–10 per cent annually for 20 or more years, followed by at least 6 per cent growth for another 10 years once they achieved middle-income levels. Our best growth episode was the eight years between 2003 and 2011 when we grew at 8 per cent.  

To sustain growth, sequence policy 

There has been an on-going debate about the sources of East Asian growth, in particular on the relative role of markets and government. But there is consensus on a few factors. First, all grew as exporters of manufactured goods, beginning with the export of simple items such as garments, footwear and toys. As wages rose, they moved to more sophisticated items such as electronics, appliances and cars. Second, all began with relatively high levels of human capital, with literacy levels ahead of their peers.  They then invested sequentially in expanding their education systems, from primary to secondary and higher. Third, as wages rose and firms moved up the value-chain to more sophisticated products, they substantially increased investments in technology.  Consider, for example, investments in R&D by South Korea and China relative to India. Between 1970 and 1990, investment in in-house R&D by South Korean industry grew 1000 times in real terms — the most rapid expansion worldwide of R&D investment ever. Between 1996 and 2016, investments in in-house R&D by Chinese industry grew 80 times.  India has also expanded in-house R&D investment — but by a lower multiple of 13 times in the same 20-year period.

All this was accompanied by a massive change in occupation: Millions moved from rural to urban areas, and were employed in factories. The most dramatic growth driver is the movement of people from low-productivity agriculture to much higher productivity manufacturing. The 2017 Economic Survey estimates that if the entire Indian workforce had the productivity of our factory sector, we would be fifteen-times wealthier, and already as rich as South Korea. Our inability to participate in large-scale labour-intensive export manufacturing is our biggest missed development opportunity.   

Our national priority, then, must be to catch up.  If we grow 9 per cent each year for the next four years, we will achieve our $5 trillion goal by 2024.  That is the first step; we will then in 2024 be as rich as Indonesia is today ($4,000). But to be as rich as China is today, we must sustain a growth rate of 9 per cent each year for 20 years. That, surely, must be our minimum aspiration — to be as rich in 20 years as China is today. What we must do to sustain growth of 9 per cent for a generation is the subject of a future article.

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