India has 20 years to get out of the middle-income trap. Here’s how to do it.

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India has a lot of potential but also numerous structural problems. As the most populous nation with a vast number of young people, India can potentially experience fast growth over the next couple of decades. However, this won’t be easy, since the same dynamics can become a burden if the country cannot create enough good jobs, modernize the economy, improve infrastructure, accelerate urbanization, fix trade deficits, solve environmental problems, navigate geopolitical landmines, and avoid a religious civil war.

On the 75th anniversary of India’s independence, PM Modi said that India must become a developed nation within 25 years. This means India’s current GDP-per-capita of $2,300 needs to grow 6x in real terms. It’s feasible but requires meticulous planning and flawless execution.

The Path to Success

Here’s the theoretical path for India to succeed:

  1. Hundreds of millions of young people move from villages to cities, and increase the urbanization rate from 35% to 65%.
  2. These young people get productive urban jobs — in manufacturing and services.
  3. The young people buy homes, cars, appliances etc. Their consumption drives India’s GDP.
  4. India becomes a manufacturing powerhouse, exports a lot, and boosts its foreign exchange reserves.

What will prevent this growth model?

Okay, that sounds good. And it’s nothing new. This is the proven model used by Japan after WW2 as well as South Korea, Singapore and China starting in the 1990s. As for China, it will officially become a developed or a high-income nation this year, with a GDP-per-capita of about $13,000. Although China and India were at the same boat 40 years ago, China has surpassed India in incredible ways. Thus, it’s good for India to study all the successful Asian countries and learn from them.

However, India faces monumental challenges in implementing similar growth. Here’s why:

Inability to attract Foreign Direct Investments (FDI)

The #1 requirement for fast growth is to attract foreign capital and foreign technology. For example, get Apple, Samsung, Tesla, Intel etc. to invest billions of dollars in establishing manufacturing plants and R&D centers in India. This is the proven model used by “Asian Tigers.” However, India is failing miserably in this crucial step.

India’s share of the global FDI is only 3%. (Link to UNCTAD report). China’s FDI is 7x India’s — $320 billion versus $45 billion. Even tiny Singapore got $100 billion of FDI in 2021.

Looking at FDI-per-capita, numerous developing countries in Asia — Thailand, Philippines, Indonesia and Vietnam — perform far better than India.

So, why is India so far behind? For starters: bad infrastructure.

Infrastructure Problems: All those countries were efficient in improving their infrastructure. India has been terrible in addressing this so far.

Let’s start with electricity, the foundational requirement for manufacturing or services, and any modern society. Compare the growth in electricity production in India versus China over the last 30 years:

In electricity generation, China is 5.3x India, pretty much the same as the GDP ratio.

Even in large Indian cities, there is power outage multiple times every day. And it’s totally random — when you’re going to lose power and when you will get it back etc. are completely unpredictable. How can manufacturing thrive in a situation like this?

Look at other two critical materials needed for infrastructure: cement and steel. For both, China’s production is more than 8x India’s.

Roads, Railways, Airports, and Seaports. Indian roads are notoriously third-world. Potholes everywhere, roads without lanes or traffic lights or rules, and congested traffic with extremely slow speed. Fixing the roads alone will increase India’s GDP by a few percentage points every year.

Similarly, India needs fast and efficient railways, airports and seaports to increase GDP, manufacturing and exports. This will take trillions of dollars of investments. Not sure if the country can/will do it, especially within a decade. China built 30,000 km of high-speed rail in the last 10 years. India will have thousand excuses why it cannot do it.

7 out of the top 10 busiest seaports in the world are in China. In terms of container traffic, China = 14x India. Can India build and expand seaports that will help its trade?

Speed and Scale

Too many things work very slow in India. People have no sense of urgency due to laziness, corruption or culture. In Bangalore, the Silicon Valley of India, it took 11 years to build 56 km of metro! During that same time, China built mind-boggling 7000 km of subway systems. Now, Beijing and Shanghai each have 800 km of world-class metro system — that’s more than entire India! With 27 lines and 480 stations, Beijing’s subway transports staggering 10 million (1 crore) people every day! And the subway trains even have 5G network with a lightning speed of 500 Mb/s.

Modernization

One more thing: India needs to modernize its manufacturing. China is the global leader not because of cheap labor. Chinese wages are 4x to 10x higher than in India. China leverages automation and the 4th Industrial revolution. Chinese firms buy more than 40% of all industrial robots in the world — 50 times more than India.

How do all these factors combined help China? Its manufacturing value added is staggering 10 times larger than India’s!

India also needs to modernize its agriculture where the productivity is abysmal. In the staple food of rice, India’s yield per hectare is half that of Japan, Vietnam and China. Overall, China produces almost four times as much food as India — agricultural output in value ($1.5 trillion versus $400 billion). This is even more astonishing given that China has less arable land than India and far fewer farmers.

India needs to use better seeds and fertilizer; deploy greenhouses and other best practices; and consolidate and create larger farms that can employ tractors, drones and modern technologies.

Housing accommodation for migrants: China’s urban population increased by stunning 700 million in 30 years. And China was able to accommodate them by building ungodly amount of apartment buildings, thousands of miles of new subway systems, and hundreds of other things needed to grow cities. India’s growth depends on urbanization, which in turn depends on the ability to digest massive internal migration.

Meanwhile, in India, streets are often filled with garbage, stray dogs and all kinds of poop. Even nice apartments don’t have proper sewage system. And the tap water is completely undrinkable.

Technology and IP: Although there are plenty of smart people in India, the country lacks the technology and IP to make most products. Go to any store like Croma or Reliance Digital, most products are foreign — Samsung, LG, Xiaomi etc.

India’s GDP cannot grow with consumption, if Indians consume only foreign goods!

Every time you buy a foreign good, you lose foreign exchange reserves, since Japan, China, South Korea etc. are not going to accept Indian Rupees. Those countries got rich by importing raw materials and then exporting finished goods (like Toyota cars, Samsung appliances, Huawei telecom gear and so on).

India desperately needs a manufacturing and exports strategy. This may involve buying IP and/or creating joint ventures.

In the Nature Index 2022 that looks at research institutes in Asia, 9 out of the top 10 were from China. And 65 out of the top 100 were also Chinese. India had just four institutions among the top 100: IISc at #63, HBNI at #75, CSIR at #91, and IIT Bombay at #98.

Thus, it goes without saying that India needs to vastly increase spending on R&D. Right now, China spends about $440 billion a year, while India’s spending on research and development is an insignificant $20 billion.

Focus on Quality Work

Shoddy quality work is an epidemic in India. In every type of work, people do crappy work and don’t care about quality or customer satisfaction. This may work in India where customers have just resigned themselves to accept mediocrity. However, if India wants to become a global leader and export its products and services, it should focus on quality and constant improvement like Japan and Germany.

Trade Deficit and Weak Currency

India constantly runs trade deficit and this is an unsustainable path. Look at what’s happening in Sri Lanka, that will be the eventual situation. Only Americans can run on perpetual trade deficit because the dollar is the world reserve currency. So far, India has managed to survive by allowing foreign companies to invest in India and buy/dominate all the important sectors — like Amazon in e-commerce and Google in FinTech. However, this is a terrible model in two ways — India loses sovereignty and will soon run out of things to sell to foreigners. This model is also why the Rupee has lost half of its value since 2008. Obviously, the solution is to switch to a trade surplus model.

Avoid Divisive Social Issues

India’s obsession with religion and caste will drag down the economy. For example, Muslims and Dalits comprise one-third of the population. They must be made to feel part of the country with inclusive and fair policies and attitudes. The country should disavow faux patriotism and hateful religious fundamentalism. Live and let live.

Improve India 360 degrees

India needs to improve in all areas. You cannot become a global power without a complete development in all areas. Make the country beautiful and inviting. Raise the standards in all areas — environment, infrastructure, health, education, jobs, economy, tourism and so on. Indians need to acknowledge the problems and set concrete goals, rather on exaggerating our accomplishments and patting ourselves on the back.

While India is far behind China, the failure to grow fast is obvious looking at other developing countries in Asia. Compare India’s GDP-per-capita to other developing Asian countries like Thailand, Indonesia, Vietnam, Philippines and even Bangladesh:

Consider that India ranks 101 out of 116 countries in the Global Hunger Index; and it ranks at the very bottom — 180 out of 180 — in the Environment Performance Index. As for water, 70% of tap water in India is contaminated; and Indian ranks 120 out of 122 in Water Quality Index. And in the World’s Most Polluted Cities list, 6 out of top 10 as well as 63 out of top 100 are Indian cities. Embarrassing!

Accountability for Politicians

We need to make local politicians accountable. Every city should have a website, a mobile app, and links to contact politicians and bureaucrats who are in charge of that area. People should be able to file complaints that are visible to everyone else. Every town and service should be rated by its people.

Smart Geopolitics

India should learn from China how to work with adversaries. While the CCP is now saber rattling a lot, it encouraged huge investments and technology transfer from Japan and Taiwan for many decades. The Chinese government lured many top Japanese and Taiwanese scientists and engineers to develop entire industries in China. Similarly, Indians should encourage/demand Chinese firms to open up joint venture projects in India. And India can use China to build high-speed rail and other projects. Postpone the geopolitical struggles and border wars for a few decades.

Conclusion

It’s once-in-a-lifetime chance for India. If we don’t get our act together in the next 20 years, the chance for rejuvenation will be gone forever. All the demographic dividend will be gone by 2040. And India will be stuck in the middle-income trap forever.

Can India step up?

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