Galwan valley

How Bright is India’s Future?

There are lots of rosy projections for India’s economy and power, especially on Indian TV, where passionate pundits claim that India is already a superpower. Many western experts also say that, by 2030, India will be the 2nd largest economy (in PPP GDP) in the world, boosted by demographics of young people. Furthermore, India will have one of the largest military in the world. Booming economy and powerful military! On the surface, it sounds great, but let’s dig in deeper.

Population and Labor Force: Yes, India will be the most populous country within four years; and about half of India’s current population is under the age of 25. Theoretically, all these people will be productive, earn decent money, and consume plenty of goods and services, pushing India’s GDP growth to the top of the chart. But … here’s the catch:

Vast majority of Indian population — including young people — are not employed. Worse, college graduates are five times more likely to be unemployed than the uneducated. Even engineering graduates face a shocking 60% unemployment.

The labor force in India is only 500 million. Take away the 10% who are unemployed, you get 450 million. That means about 900 million Indians — or 2/3rd of the population — are not working. This is not a good recipe for economic growth.

And with 63% unemployment among people of age 20-24, the country might be ripe for exploding crime and political unrest. Population quickly turns from an asset into a burden, if the society can’t create jobs.

GDP growth: Even before the coronavirus pandemic, India’s GDP growth had dropped to about 4%. In the Apr-Jun quarter, the growth plummeted by 24%, the worst among the world’s large economies. And Goldman Sachs forecasts that India’s GDP will shrink by almost 15% this year!

Quality of jobs: What is even more shocking is that 42% of Indian workforce consists of farmers. Compare that to 1.3% in the US. The last time the US had 42% of its workforce in farming was in the late 19th century. These 200+ million farmers in India are dismally unproductive, but thanks to democracy, Indian politicians cannot do much to transform agriculture or industrialize the nation. For example, India doesn’t want to join RCEP, because 100 million Indian dairy farmers are afraid of competition from 5 million cows in New Zealand. The average income of an Indian farmer is just $130 a month.

Lack of innovation: While there are brilliant Indians leading hi-tech startups and Fortune 500 companies in the US, innovation is absent in India. In the European Innovation Scoreboard, India’s score is 29 (while China is 95 and USA is 99).

When it comes to international patents (filed with WIPO), India is nowhere to be seen.

Where is India?

This lack of innovation is reflected in India’s persistent trade deficit, which slowly drains away India’s wealth.

Unsustainable and disastrous model

Growth through trade deficit is only possible for the US, which can print and borrow trillions of dollars because the US dollar is the world’s reserve currency. However, for India, the trade deficit model is sustained only by selling national assets in the name of privatization. Indian corporations have been selling their shares to western corporations in the name of opening up and inviting FDI.

Now, while the public is distracted by COVID-19 and anti-China hysteria, the Indian government is quickly selling state-owned airlines, banks, railways, insurance companies etc. This selling-the-family-jewel plan is not only unsustainable, but also leads to steady loss of sovereignty. India is becoming a victim of “shock doctrine,” that has been honed to perfection since the US took over Chile in the early 1970s or Russia in the 1990s. Privatization of countries is just like vulture capitalists buying up a corporation, raiding the pension fund, slashing wages, laying off employees, gradually selling the assets, and choking it like a python.

While Indians are passionate about lifeless, resourceless, and distant mountains on India-China border, they are losing precious national assets to global corporations. This is a deja vu of how Indians got bamboozled by the British East India Company in the 18th century.

India’s debt is also insane. The government spends 40% of its revenue on just interest payments on debt. While the US can borrow at less than 1%, India’s 10-year bonds now have a yield of 5.6%. And you know what will happen when India stumbles a bit in the future? Loan sharks on Wall Street will downgrade India, and the bond yields will skyrocket, forcing India to beg the World Bank. That’s the real debt trap.

India’s banks are stuck with non-performing loans (NPL) and are ripe for a giant catastrophe like America’s financial crisis of 2008.

Environmental Problems: India faces daunting environmental problems such as pollution and depleting groundwater. 21 cities in India will run out of groundwater this year.

And India accounts for 21 out of the 30 most polluted cities in the world. These tragic conditions exist even though India’s manufacturing is very limited.

Socialism versus Corporatism: During the Cold War, India’s growth was stunted due to a socialist model. However, now it has swung too far into a US-style corporatist/neo-liberal model. Unbridled capitalism is just another form of feudalism that increases inequality and poverty. Corporations don’t build infrastructure — highways, railways, airports, hospitals and schools; and they don’t worry about long-term objectives. Corporations don’t even worry about the well-being of a society — for example, Pepsi is incentivized to sell sugary food, while Big Pharma profits from increasing number of diabetic Indians. Then there is the military-industrial complex that makes hundreds of billions of dollars every year by selling deadly weapons. These “defense” contractors – whose business is war – pay think tanks, politicians, media, and ex-military generals to spread fear and hate propaganda disguised as patriotism.

Look at China, where the government spent $3.4 trillion last year, compared to less than $400 billion of spending by the Indian government. In other words, Chinese government annually spends more than the entire GDP of India. This is why China can have 30,000 km of high-speed rail network, semiconductor companies that will soon rival the west, 60,000 5G base stations by the end of this year, world-class universities, almost 0% poverty, Belt and Road Initiative’s infrastructure projects all over the world etc.

India’s Solution: Even if India’s nominal GDP grows at 10% every year for the next ten years, India’s GDP will be only $8 trillion by 2030. China and the US will still be 3-5x larger than India by then. But let’s be real: Even before the coronavirus pandemic, India’s GDP growth last year was 4.2%, and a lot of economists are suspecting that India has been exaggerating the GDP growth for the last few years. Thus, considering all these staggering problems, India will likely have very low growth rate and will possibly be stagnant in the coming decade.

To change the trajectory, India needs to do seven things:

  1. Lure Indian engineers and scientists abroad to come back home.
  2. Increase tax on corporations and wealthy individuals, and use that money wisely to build infrastructure. To solve the urgent water problem, India must build numerous desalination plants all around its coastline. Also, thousands of reservoirs should be built to capture and store the monsoon rain. (Of course, the government must be made more transparent and accountable, else the extra tax revenue will just line the pockets of politicians).
  3. Stop warmongering. Make peace with China and use Chinese expertise to develop India. For example, China makes 99% of electric buses in the world. So, rather than spending $5 billion on new fighter jets from Russia and France, why not spend that $5 billion on Chinese electric buses? Reduce pollution and solve the border issues in one stroke. (Delhi can be like Shenzhen, where all the 21,000 taxis and all the 16,000 public buses are electric.)
  4. Active public-private partnership to create jobs and turn trade deficit into trade surplus.
  5. Change FDI laws. If foreign corporations want to invest in India, it shouldn’t be ownership in existing Indian corporations. FDI should involve new companies (preferably joint ventures) that create net new jobs.
  6. Join more free trade agreements like RCEP. Only competition can improve productivity and fuel innovation.
  7. Fix the media. Right now, Indian mainstream media is a landfill of sensationalism and ignorance. The country needs fact-based, data-driven, and intellectual discussions to chart a bright future.

Related Blog post: India as a tool to contain China – Geopolitics 101