India’s superpower dream faces steep economic hurdles

Successive governments have neglected the basic drivers of growth denting claims that India will become an “advanced nation” very soon.

India is still host to a large population afflicted by poverty and social deprivation. This photo shows metal sheets hiding slums from delegates attending the G20 development meeting in December 2022. | Photo Credit: EMMANUAL YOGINI

In the search for the next country that will transit from backward to advanced status, India’s name sometimes features. This is partly because the idea has been mooted by Prime Minister Narendra Modi, who promises to make India a “developed nation” by 2047. A country is identified by official agencies and the World Bank as a developed or high-income economy based mainly on the size of its per capita gross national income (GNI), with the threshold currently placed at just over $14,000 at 2023 prices. So, the claim that India, with its current GNI of around $2,500, can exceed that threshold in 2047 has been treated as mere official propaganda. But now we have Martin Wolf, the influential economic commentator of Financial Times, weighing in and supporting India’s development prospects in an article dated July 9, 2024.

Wolf is cautious. He is clear that India is unlikely to be in the big nation league when assessed in terms of per capita GDP measured in internationally comparable purchasing power parity (PPP) dollars. Even comparing prospects relative to the poorest of the “advanced” nations, Greece, and assuming that the latter’s GDP grows at 0.6 per cent a year and India’s at 4.8 per cent a year, India’s per capita GDP in 2047 would equal only 60 per cent of Greece’s in 2047. That discounts India’s potential to make the transition.

But that, says Wolf, does not take away from what India’s potential influence may be. Because, given its population size, even with that lower per capita GDP India would be among the largest countries in the world in terms of overall GDP in PPP dollars. That would give it global influence of a kind that the per capita figure does not signal. Illustratively, Wolf notes: “[I]f India’s GDP were to grow at only 5 per cent a year to 2047…, and US GDP were to grow at 2.3 per cent…, India’s economy (at PPP) would equal that of the US.” India is unlikely to match China’s manufacturing prowess or catch up with the US in terms of productivity, but since size matters, India would be “unquestionably a great power”.

This, however, is an assessment based on a play with numbers in the form of GDP growth rates. The real issue is what drivers of growth will take it to “advanced nation” status. At Independence in 1947, India was one among the backward, ex-colonial nations of the “Third World” that showed much promise of recording rapid development under a national government. Yet, despite rapid growth in the early post-Independence years, that potential remained unrealised. India did not diversify into manufacturing, as many other less-developed nations did, even though the government invested large sums in basic industries and infrastructure. It lost growth momentum in the 1960s and 1970s. And despite the subsequent revival in growth, it is not a player of any significance in the global market for goods.

Among the many factors that contributed to this failure, four stand out. The first was the inability of post-Independence governments to address income and wealth inequality to create a mass market that could underpin growth and industrial advance. Second, the institutional changes and policies needed to galvanise agriculture and raise rural incomes were not adopted and implemented. Whatever development occurred delivered limited benefits to the majority. The third factor was that the government did not mobilise a part of the surpluses accruing to the wealthy to finance its expenditures and relied instead on inflationary financing, which worsened inequality. And fourth, the state failed to discipline the powerful industrial class to ensure investment and innovation in manufacturing and exports that would earn the foreign exchange needed to finance essential imports.

These issues, however, were not addressed by successive governments since the 1970s, when promising to correct India’s developmental failure. Rather, all blame was placed on the decision of earlier governments to restrict the role of the market mechanism, pursue growth based on the domestic market, and not give foreign capital an adequate role in India’s development trajectory. That was seen as both limiting India’s industrialisation and development as well as undermining its capacity to export and earn foreign exchange. The net result is that, starting in the mid-1980s and especially following the balance of payments crisis of 1991, successive governments opted for domestic deregulation and the opening up of foreign trade and capital movements.

It has been four decades now over which such policies have been consistently implemented. While it has been accompanied by some acceleration in GDP, as measured by official statistics, India has not recorded any increase in the share of manufacturing in its economic structure, it has not emerged as a major exporting nation, and it is still host to a large population afflicted by poverty and social deprivation. The need for a turn away from the neoliberal policies of the last 30-40 years and the return to bringing about major structural changes in the economy is clear.

Highlights

• Among the many factors that contributed to this failure, four stand out. The first was the inability of post-Independence governments to address income and wealth inequality to create a mass market that could underpin growth and industrial advance.
• Second, the institutional changes and policies needed to galvanise agriculture and raise rural incomes were not adopted and implemented.
• The third factor was that the government did not mobilise a part of the surpluses accruing to the wealthy to finance its expenditures and relied instead on inflationary financing, which worsened inequality.

But that is not what Wolf recommends as the route to realising India’s promise of becoming an advanced nation and even a superpower. Rather he seems to keep his faith in exports coming to India’s rescue. In fact, he seems to suggest that there is no option because contrary to the view that “India is a large country with a large market”, “the true market size for tradeable goods and services is somewhere between 15 and 45 per cent of GDP, given the widespread poverty”. The presumption is that that cannot be changed to expand the domestic market, but exports can be boosted, despite the evidence to the contrary over the last four decades.

In support, Wolf points to “redeeming features” that favour India’s export growth. India’s share in world merchandise exports was a mere 2.2 per cent in 2022, against China’s 17.6 per cent, providing headroom for expansion. But that has always been true. He also notes that given India’s strategic importance to the world’s leading players and its close relations with the West, India “is an obvious ‘plus one’ in a world of ‘China plus one’” and holds out the promise of an export boom based on relocative foreign investment shifting from China to India.

That is wishful thinking that wrongly attributes China’s success to its being “chosen” by the West to be the world’s manufacturing hub, ignoring the role played by the Chinese state and the high investment ratio it engineered. On the basis of that assessment, it is held that since China has lost its attractiveness in Western eyes, India is an obvious alternative. There is no evidence that India is a beneficiary of the turn away from China, with countries like Vietnam stealing the benefit. India still lags as an exporter. And the developed world, worried by its own slow growth, clearly has no appetite for one more country of India’s dimensions serving as a source for cheap manufactures.

There is little reason to believe Wolf’s proposition that India today shows promise of emerging as a potential “superpower” in the near future. 

C.P. Chandrasekhar taught for more than three decades at the Centre for Economic Studies and Planning, Jawaharlal Nehru University, New Delhi. He is currently Senior Research Fellow at the Political Economy Research Institute, University of Massachusetts Amherst, US.