Chief Economist of the World Bank Undermat Gul He believes there are many things going for India – from demographics to geopolitics and from a large domestic market to low levels of debt in the private sector. He told TOI in an interview that India should strive to increase its potential growth to 6% to 8% by focusing on greater efficiency and economic freedom and quality education and by being open to FDI and trade.What are the major concerns in the global economy? Are the problems faced by middle-income countries like India unique and how should they deal with them?
In summarizing the issues facing the global economy, it is useful to think of the world as consisting of low-income countries, emerging markets, and advanced economies. The difficulties faced by each group are different. Policymakers in advanced economies such as the euro area have brought inflation down and are now worried about slow growth again due to negative demographics and declining productivity growth. You can call it the problem of secular status quo. The problem in middle-income countries is that, with a few exceptions like China, growth rates are not high or stable enough to quickly catch up with the living standards of advanced economies. We call this the middle income trap. Low-income countries – mostly in Africa but also countries like Afghanistan, Yemen and Syria – have not been doing well since the mid-2010s. Their GDP growth rates have barely kept up with population growth, so their citizens have experienced zero or negative income growth. They have suffered a lost decade, and the prospects for the next decade are not much better. The global economy is growing at a much lower rate than it did before the Covid crisis, which was much lower than before the global financial crisis. So, with every crisis, the global economy seems to be heading towards lower growth rates. In the case of middle-income countries, which account for 75 percent of the world’s population, the decline in GDP growth is particularly sharp: from an annual average of 6 percent in the 2000s to 5 percent in the 2010s to 4 percent in 2020. The decade of
So, what is the way forward? What can middle-income economies do to reverse this disappointing trend?
We have just completed a serious inquiry into this in the latest World Development Report. We have learned from successful developers such as South Korea and Taiwan in Asia, Poland and Hungary in Europe, and Chile and Uruguay in Latin America. have tried to These countries encouraged private investment by reducing inflation and making things easier for businesses. bring new technologies from and make them widely available locally (what we call infusion), and they have timed the shift to innovation. I showed both patience and discipline. led development. China is doing much of the same, and there are indications that countries like India and Vietnam are also investing, infusing and innovating. are working towards a good mix of policies to encourage What is working against today’s middle-income economies is that they face a more challenging external environment—developed Growing protectionism in economies and growing concerns about climate change – and domestic problems such as record levels of debt and rapidly growing The population is facing.
What bright spots do you see in India?
India is much more fortunate than the typical middle-income economy. For the next two decades, it will have unusually favorable demographics. Investors in advanced economies seeking diversification away from China find it attractive. It is a large and fast-growing market, so foreign firms will be more interested in setting up operations in India. Its private sector is not heavily indebted – by one measure its private debt ratio is less than a quarter of China’s. Its economy is more balanced than China’s: it has a normal consumption-to-GDP ratio, so it is less dependent on foreign consumption and its economic growth will not be as risky as in the past two decades. During this period, China was developing. Even the geopolitics is quite favorable for India. I would say that over the next two decades, India will be at its peak. Put another way, the Indian economy may not grow that much in the next two decades. He cannot waste this golden opportunity.
In a recent piece you estimated that it could take 75 years for India to reach a quarter of US per capita income. How can it shrink that timeframe?
A 75-year estimate is not written in stone. That time period can shrink to decades. As I said, India will be at peak capacity between now and 2047. The question is how to achieve this capability. We estimate India’s potential growth rate at around 6%, which should be increased to 8%. India needs to become more efficient in its use of capital, skilled labor and energy. Increasing efficiency requires some serious structural reforms: greater openness to foreign investment, trade and technologies; To better utilize the potential of women and marginalized sections of the society. and using energy more efficiently through better pricing and regulation, and reforming government agencies that generate, transmit and distribute electricity. It has to do as much in education as it has successfully done in digital infrastructure and roads. India also needs to invest more, and this investment should come from the private sector. Fortunately, India’s private sector is well positioned for this.
It’s not like you have to do it in the next two years. India has a window of two decades. But when this period is over, things will never be so good, so it should be done immediately. I think the Prime Minister has done exactly the right thing by setting a target of Wicket India by 2047.
Women’s participation in the workforce is something that has been talked about a lot in recent years. What is the solution?
The solution probably consists of three parts. The first is to establish the facts. There is considerable disagreement about the labor force participation rate of women in India. There is no such conflict in China or the US. This needs to be resolved. After meeting the experts at MOSPI, I hope it will be done soon. Second, after agreeing on the facts, I expect that solutions to improve women’s work participation will differ in different parts of the country, say in the Hindi-speaking belt compared to the South. In some places or segments of society this solution may be cultural, in others it may be related to education, and in still others it may be related to public safety. The third part will deal with ensuring equal opportunities through well-designed and enforced legislation.
I think the world underestimates the economic benefits of better utilizing the talents of women and marginalized groups. The case of America is eye-opening. In the 1960s and 1970s, when anti-discrimination laws were first enacted, 94% of America’s lawyers and doctors were white. Today, that ratio is less than half. Without these changes, estimates are that US GDP would be about a third lower than it is today. A prosperous India will be achieved decades earlier with such initiatives than without them.
How about investing?
India has to invest more in all types of capital: human, physical, financial and infrastructure capital. On infrastructure capital, India is doing well. On physical and financial capital, things could be better: India’s private investment to GDP ratio has been largely stagnant for the past decade and has room to grow. But India’s investment in human capital – particularly in secondary schooling, polytechnics and higher education – needs to grow massively over the next decade. The real problem is not lack of money. The problem is more likely a serious lack of political will to radically reorient public education to prepare young people for a world of work that will be radically different from when these institutions were conceived. But when I talk to state governments, I don’t feel any urgency. When I talk to government officials in Delhi, I sense a sense of urgency, though I also detect frustration that they can’t do anything without the support of the state government.
In September, a World Bank report talked about high tariffs and restrictive services policies in India. In recent weeks,
What we recommend for smaller economies–more than 150 of them are outside the G20–is to facilitate trade and foreign direct investment, regardless of what the rich or large economies are doing. India can do a lot to improve the general conditions for foreign trade and investment. But when I listen to the debates among Indian economists, it is very much about whether to bet big on services or on manufacturing. For a large economy with large potential and large inefficiencies, the right approach is to bet on everything: more on services, more on manufacturing, and more on agribusiness. A good place to start is to expand economic freedom, as Vietnam has done over the past five years. I know the government is not an avid user of the International Classification, but it contains useful information. For example, the Heritage Foundation’s Index of Economic Freedom ranks India after Nigeria and Brazil. Vietnam’s index is close to Mexico and South Korea.
We did an interview recently.
I totally agree with CEA. Taxing wealth is about taxing those who have where to put their wealth. Also, when you consider wealth and inheritance taxes, you need to account for the structure of the economy and the experience of countries that have experienced higher wealth and inheritance taxes. In India, the predominance of family-owned enterprises means that a large portion of an individual’s wealth is the value of the family firm. When the head of the family dies, the survivors will have to liquidate the firm or take out a loan to pay the inheritance tax. Neither helps the firm grow. But India’s problem is to grow enterprises that remain too small, not shrink them further. And there can be other complications where large publicly traded firms are involved. Inheritance tax is very high in South Korea. If the head of a conglomerate dies and his or her shares of stock have to be sold to pay taxes, the sale can sharply reduce the share price (and the company’s market value).
Perhaps Professor Piketty’s views are appropriate for Western Europe where equity concerns may outweigh the desire for greater economic growth. India’s problem today is not high levels of inequality, but massive inefficiency. Professor Piketty’s proposal could improve the situation in France. In India, it will make matters worse.