Weekend reading links

1. Some facts about India's trade trajectory since the millennium. Exports and imports have surged 12 and 15 times respectively.

But closer scrutiny of the data shows that over the last 13 years, from 2010 to 2023, India's export share saw only modest growth, rising from 1.5 per cent to 1.8 per cent... despite efforts to diversify, India's share in world trade has more or less stagnated over the past decade... Exports make up a significant portion of GDP in smaller economies — Vietnam (93 per cent) and Singapore (174 per cent) — but also leave them vulnerable to global economic instability, he explained. In contrast, larger economies have a much smaller share of exports in their GDP: the US (11.6 per cent), China (19.7 per cent), Japan (20.5 per cent), and India (21.9 per cent).

2. Fascinating article about a Russian satellite Cosmos 2553 located at an orbit of 1240 miles (a high radiation area where there are no other satellites), circling earth once every two hours, and with the potential to threaten military and commercial satellites with a nuclear blast in space. The US scientists believe that it's part of a Russian attempt to develop a nuclear weapon to obliterate hundreds, if not thousands, of critical satellites. But this Russian effort is a sharp advance in anti-satellite technologies.

Once considered a largely peaceful domain, space is now viewed by many American lawmakers and military commanders as a place where the next major global conflict might unfold. If Moscow is working on a space nuke, it would be merely one of dozens of space weapons under development or already in use by Russia, China and the United States. All three nations have tested high-flying missiles capable of targeting space systems from the surface and have lasers, signal jammers and other devices that can disrupt space operations. Russia has deployed nesting doll satellites (in which one satellite births a smaller satellite that is maneuverable and armed with a projectile) and China and the United States have demonstrated grappling satellites, which can sidle up to another satellite and tug it out of its orbit with robotic arms. It may sound as if these technologies were torn from the pages of a science fiction novel, but none of them come close to doing what a nuclear weapon could in space: wipe out clusters of satellites at once... 

The detonation would disable and destroy everything in its immediate vicinity, turning satellites into unguided projectiles that could crash into one another. Objects in low orbits travel at around 17,000 miles per hour. Any debris — even as small and light as a paint chip — would pose real danger to other objects or people in space... Swirling away from the blast point, the charged particles would form a shell of radiation that would linger for weeks, if not years — long enough to gradually fry the onboard electronics of surviving satellites orbiting close to Earth. U.S. intelligence analysts have determined low-Earth orbit would be unusable for an unknown period, depending on the size of the blast.

3. Coffee prices soar on the back of bad weather.

According to the U.S. Department of Agriculture, around 57 percent of the world’s coffee production last year came from arabica beans, and Brazil is the largest exporter. But a severe drought there this summer devastated the harvest, which typically runs from May to September, and it could threaten next year’s crop as well. In Vietnam, a severe drought followed by heavy rains harmed the world’s largest reserves of robusta, which is the second-most-popular variety globally and is commonly used in instant coffee blends... The wholesale price of beans has jumped more than 30 percent just since the start of November. Futures prices for arabica beans — or what buyers pay for beans to be delivered from producer countries to ports in the United States and Europe — rose to more than $3.30 per pound in mid-December, breaking a 47-year-old record.

4. Good FT explainer on China's urban migration control system, hukou. 

Because a hukou governs access to local government services, having one from China’s wealthiest municipalities, particularly Beijing and Shanghai, entitles the holder to the best education and healthcare, easier access to stable government jobs and other privileges. Abandoning hukou would encourage more rural workers to move to more productive jobs in cities... at least a quarter of city dwellers lack an urban hukou. Many migrant workers crowd into neighbourhoods on the margins of the big cities, such as Yuxinzhuang in northern Beijing. Scrapping the system would give migrant workers better access to public health and education, leaving them with more money free for consumption... Residents of first-tier municipalities would resist losing their privileges, while city governments would balk at the cost of investing in additional infrastructure and services. Many of the 298mn migrant workers who already live in urban areas lack access to the best healthcare, education and public services...

While some smaller cities have abandoned hukou altogether as part of gradual reforms, obtaining one in China’s largest municipalities, particularly Beijing and Shanghai, has become even more difficult, according to Yao Yang, a prominent Chinese professor and author. Outsiders seeking a Beijing hukou need to satisfy a points system that takes into consideration their university degree, professional abilities and ability to pay tax — tougher criteria than what many countries impose on foreign immigrants. A Beijing hukou can also be obtained through marriage rules or by birth. Shanghai’s system is almost equally strict. In China’s first-tier cities, a hukou gives access to 20 different rights, said Yao in a public speech earlier this year. This starts with direct access to the nation’s best schools, which are often in central Beijing and Shanghai and offer students superior preparation for university...

 

One of the most important privileges a Beijing hukou grants the holder is the right to complete high school and sit the gaokao, the university entrance exam, in the capital. The country’s most elite universities, which are concentrated in Beijing and Shanghai, generally offer higher entrance quotas for students sitting the exam in those cities. The populous central province of Henan, for instance, has about 20 times more students sitting the gaokao than Shanghai and Beijing, but admission rates for Henan’s students are only about a fifth of the rates achieved by applicants from the biggest cities. Privileges such as these make a Beijing hukou so valuable that some employers offer it as part of their pay packages... Without a Beijing hukou, she could only buy a less desirable flat with higher management fees. Beijing’s traffic congestion rules, which favour hukou holders, forced her to pay more to own a car.

5. From Adam Tooze, a graphic which points to how low electricity prices are in China, which is an important factor in its economic competitiveness. 

The low prices also reflect the high level of hidden subsidies.

Another graphic points to the very tight correlation between electricity consumption and national income - there are no low-energy rich country.

In other words, unless there's some miracle, forcing down electricity consumption is only going to keep the country poor. This is a big challenge to climate mitigation. 

6. Income distributions of India and China

7. Important points about constraints to the rapid expansion of industrial housing.

Private-sector initiatives in this area are often hampered by regulatory hurdles. Inflexible zoning regulations, illiberal building laws and approval processes, and high operating costs restrict land usage near industrial clusters, resulting in suboptimal usage of land. For instance, both the floor area ratio (FAR) and ground coverage ratio (GCR) are quite low in the country compared to those in developed countries, limiting both vertical and horizontal expansion, respectively. High setbacks, which mandate minimum distances from property lines, roads, and adjacent buildings, lead to wastage of space. Industrial housing faces additional challenges, including mandatory parking requirements, which are unnecessary because most industrial workers do not own vehicles.

Recommendations of the NITI Report on this.

The report suggests that government support in the sector should come in the form of VGF to bring down the cost of construction, and give tax relief and interest subvention to subsidise market interest rates to reduce the cost of borrowing for builders. There is also a need to relax FAR and GCR norms such that building height and size can be decided on the basis of cost-efficiency considerations.

8. Debashis Basu has some figures on the Indian economy.

India’s GDP (gross domestic product) growth, after reaching 8.2 per cent in FY24, fell to 6.6 per cent in Q1 (the first quarter) of FY25 and then further to 5.4 per cent in Q2... Government capex as a percentage of expenditure reached 28 per cent in FY24, up from just 14 per cent in FY14. However, while government capex increased by 33.7 per cent last year, it has contracted by 6.6 per cent in April-October of FY25... Growth in central-government gross tax revenues has fallen to 10.8 per cent in April-October FY25, compared to 18 per cent in FY23 and 14 per cent in FY24. Similarly, GST (goods and services tax) collection has slowed significantly. After 26.2 per cent growth in FY23, as the economy rebounded from the pandemic, GST collection grew just 11.9 per cent in FY25 and 9.3 per cent in April-November FY25. Other worrying signs are emerging as well. In April-November FY25, growth in power consumption slowed to 3.9 per cent, down from 9.7 per cent in FY24. Cement production increased only 1.8 per cent during the same period, while fuel consumption grew just 3.3 per cent.

9. Some snippets on Reliance's Jamnagar refinery, which celebrates its 25th anniversary.

The refinery overnight turned India from a fuel deficit nation to a self-sufficient one and later into a surplus, exporting gasoline and gasoil to Europe and the US. Today, Jamnagar has become the world's refining hub... experts had said that it would be impossible for an Indian company to set up the world's largest grassroots refinery in three years... Reliance achieved that in a world-record time of just 33 months, notwithstanding lack of infrastructure and a severe cyclone that had hit Jamnagar then... More importantly, the 27 million tonnes a year (560,000 barrels per day) capacity unit was built at nearly 40 per cent lesser cost (per tonne) in comparison to contemporary refineries in Asia. The unit was later expanded to 33 million tonnes... The first private sector refinery of India single-handedly added 25 per cent to India's total refining capacity and made India self-sufficient in transport fuels...

A decade later, Reliance, through a subsidiary, build another refinery adjacent to the old one. The new unit capable of processing a whopping 580,000 barrels per day (29 million tonnes) turned Jamnagar into world's largest single site refining complex. The refinery's most interesting feature is that it is one of the world's most complex. This enables it to turn cheaper heavy crudes into top quality products that meet increasingly tough specifications in western fuel markets. And in doing so it is able to compete with almost every refinery in the world. The new refinery caters to only the export market while the older one meets domestic market demand...

Reliance's focused efforts created a green zone in the arid land, resulting in the lowering of temperature and improved rainfall in the region. The Jamnagar refining complex now boasts of Asia's largest mango orchard, with over 1.5 lakh mango trees. The huge mangrove belt there has become a haven for migratory birds, and the surrounding dense forest houses theVantara --the one-of-its-kind rehabilitation home for rescued wild species.

10. A reminder of the extraordinary achievement that India's economic liberalisation is. It's extraordinary also as to how such radical measures involving multi-departmental co-ordination were done in such quick time. 

11. Corporate profits in four five year periods from 2004-24.

Excluding banks and oil companies, corporate sales and profits during the 2004-09 stands out even more.

12. Primer on India's cement industry. 

13. The paradox of India’s mango cultivation - the largest cultivator in the world that also struggles to export.

The ‘king of fruits’ has been cultivated in India for 4,000 years, and the country is known to grow about 1,000 varieties. Indeed, India is the largest producer of mangoes in the world, accounting for half of the global output. And yet, less than 0.5% of its annual production of 20-22 million tonnes is exported. That’s because the country’s best mango cultivars are ill-suited for commercial export and only a handful of popular ones drive the market. The birthplace of the fruit is yet to hit upon a variety that can dominate global markets. Consequently, in 2023, India’s share in global mango shipments stood at a mere 6.3%, lower than Mexico (21%), Thailand (15%), Brazil (12%) and Peru (11.6%)… In 2023-24, India exported 93,000 tonnes of fresh mango and pulp (valued at ₹1,120 crore)—a decline of nearly 40% from 2021-22.

So, why isn’t the world’s largest grower exporting more mangoes? Experts cite two reasons; first, as mentioned earlier, the best varieties grown in India do not travel well over long distances. On the other hand, mangoes grown in Mexico and Brazil, such as the Tommy Atkins and Kent varieties, are better travellers, thanks to having thick skins. But what they enjoy by way of a longer shelf life is offset by the lack of sweetness and complexity of flavour. In addition, Latin American exporters Mexico, Brazil and Peru, among others in the region, have been able to capture the premium US and Canada markets not so much because of the quality of their mangoes as their geographical proximity, which makes for lower freight costs.

Since most Indian mangoes have short shelf lives—between two days to two weeks after harvest—the air route is the preferred mode of transport. This pushes freight costs up. For instance, the average air freight for Siddiqui is around ₹70 per kg this summer. This, too, is from smaller international airports such as Lucknow and Jaipur to destinations in the Middle East. The payout on freight is higher than the price at the farm gate—it costs more to transport a mango than it costs to grow one. For destinations in the US, the transport costs are in multiples of wholesale mango prices. This summer, the air freight charge from Bengaluru to a US destination is about ₹450 per kg—over four times what it costs an exporter to procure mangoes ( ₹110 per kg for Banaganapalle)…

The second reason India’s mango exports have remained low is the strict entry standards set by importing countries, imposing a high compliance burden on anyone who wants to ship agricultural produce. The United States, for instance, requires imported mangoes to be irradiated (exposing the fruit to gamma rays) to ensure they are pest and disease-free. The European Union asks for hot water treatment (immersing fruits in water heated to 48 degrees Celsius, for an hour). Japan and New Zealand require vapour heat treatment (heating the fruit with air saturated with water vapour).

14. More on the thin personnel capabilities of Indian state

At the end of January 2024, 331 of the total sanctioned 1,114 vacancies for judges in various high courts were vacant. Similarly, there were over 5,000 vacancies across various subordinate courts in the country... As of November 2024, the National Company Law Tribunal had 43 members in service against the authorised strength of 63. The average time taken for the resolution process of an insolvency petition today has gone up to 716 days, far exceeding the stipulated maximum of 330 days, even for cases involving litigation. Another tribunal — the Debt Recovery Tribunal — is paralysed because many do not have a presiding officer.

15. Noushad Forbes summarises corporate India's R&D problem

Indian industry invests 0.3 per cent of gross domestic product (GDP) in in-house research and development (R&D), compared to a world average of 1.5 per cent. We spend $7 billion annually on industrial R&D, compared to $625 billion in the US, $335 billion in China, $130 billion in Japan, and $90 billion in Germany. We are the world’s fifth-largest economy and manufacturer, but rank 21st in industrial R&D. Our 10 most successful non-financial firms have a very healthy profit by world standards but invest little in R&D: A mere 2 per cent of profit. By contrast, firms in the US, China, Japan, and Germany invest between 29 and 55 per cent of their profits in R&D. To put this in perspective, 25 individual firms — from Alphabet ($40 billion) to BMW ($7.6 billion) —invest more in R&D than all Indian firms combined.

16. Important tourism fact

Dubai, a single city, now attracts twice as many tourists as all of India.

And this

Foreign tourist arrivals peaked in 2019 at 10.9m. That year Dubai (World Heritage Sites: zero) attracted 16.7m visitors. In the first half of 2024 Dubai’s numbers grew by 11% compared with 2019. India’s fell by 10%.

17. Finally, Indian economy graphics. On corporate investment decline.

And the anemic demand for consumer goods. 

Indian economy over the last 25 years - its evolution and challenges in perspective

As we near the completion of the first quarter century of this millennium, it's worth taking stock of the Indian economy and examining its challenges. This post draws together several strands that have been a recurrent theme in this blog.

The Indian economy underwent an episode of healthy growth (2003-08) till the global financial crisis (GFC) hit. This period was marked by high corporate sales and profits, rising domestic savings, peak gross fixed capital formation, especially by the private sector, rapid export growth, peak tax-GDP ratio, and favourable global conditions. The post-GFC economic slowdown and fiscal profligacy of the government left corporates over-leveraged, the banking sector with a large pile of non-performing assets (the twin-balance sheet problem), and governments with large deficits. All this coincided with a period of Eurozone crisis and weakening global economic conditions, and corruption scandals and decision paralysis at home, which further dampened growth. 

After the government changed in mid-2014, on the back of a recovery in public investments and disciplined project execution, the economy picked up some steam and grew rapidly for a short period. This and macroeconomic stability allowed for corporate deleveraging, and prudent policies and recapitalisations restored bank balance sheets. But the demonetisation and GST were either negative shocks or dampeners on the economy. From the first quarter of 2018, there were seven consecutive quarters of declining growth, touching a low of 3.3% in the last quarter of 2019. It was this declining economy that entered the pandemic shutdowns and eighteen months of pandemic-related uncertainties.

India weathered the pandemic disruptions with perhaps the smallest economic stimulus among all major economies, preferring a combination of targeted welfare support revolving around Public Distribution System (PDS), National Rural Employment Guarantee Scheme (NREGS), and Direct Benefits Transfer (DBT), credit guarantees to Micro-small and medium enterprises (MSMEs), and a broad swathe of liquidity support measures by the central bank. It chose to instead use the additional public borrowing space from the relaxation of the budgeting rules to expand capital expenditures, while tightly monitoring its quality. 

On the external front, the repeated Covid disruptions were compounded by the Russian invasion of Ukraine, the uncertainties from the emerging Cold War between China and the West, and a trend of rising trade protectionism and backlash against immigration and globalization. Into this mix comes the second Donald Trump Presidency, with all its uncertainties and potential for instability. 

As stylised facts for this period, since about 2010, but for some blips there has been a steady decline in some of the foundational parameters of sustained growth – gross domestic savings as a percentage of GDP, gross fixed capital formation as a percentage of GDP, export growth rate, corporate sales and profits, etc. While there has been a small uptick since the pandemic, it remains to be seen whether it can be sustained, much less recover the considerable gap to reach the levels that supported the growth episode of the noughties. 

Further, the tax to GDP ratio, the measure of the central government’s fiscal space, has remained anchored in the 10-11.5% range. Manufacturing’s share of the GDP has remained persistent in the 12-13% range for decades. Alongside this, the country’s structural transformation has stalled and, indeed, has even shown signs of reversing course in recent years with increases in the share of the population supported by agriculture. Also, India has not been immune to the global trends in business concentration and widening inequality. 

Finally, on the political economy, there has been a proliferation of competitive populism revolving around cash transfers that has distorted priorities and is now threatening to create fiscal crises in many states. 

With the backdrop of this description, what are the salient features of the Indian economy today?

The mainstream narratives on India’s growth prospects have been spun around its emulation of the Northeast Asian, specifically Chinese, economic growth trajectory. This has raised expectations about decades of 7-9% economic growth rates. 

However, commentators and experts’ discussions and comparisons of India’s prospects with the growth trajectories of the East Asian countries miss important differences. While India of the 1960s was richer and more developed compared to, say, South Korea, it was far behind in the quality of human capital, gender and social equity, and state capability. These are essential ingredients required to support broad-based economic growth. Further, as Joe Studwell and others have shown, the spectacular growth of Northeast Asian economies happened on the back of long-drawn and broad-based capital accumulation through intensified agriculture, infrastructure investments, and importantly government-guided export-led industrialization. 

In this context, a historically disturbing feature of the Indian economy has been its narrow overall capital base. It has struggled to strengthen and expand the base of its human, physical, industrial, financial, institutional, and social capital. This manifests in poor quality of student learning outcomes, weak primary and public health indicators, deficient infrastructure, narrow meaningful consumption class, missing middle among companies, excess of subsistence entrepreneurship and scarcity of scale manufacturing, fragmented farms and low agricultural productivity, and poor capabilities of its service delivery and regulatory institutions. 

This narrow capital base naturally imposes inherent limits on the pace at which the country can grow. If it grows at too rapid a pace, it risks overheating and opening fault lines in a short time. Given its economic structure, it may not be incorrect to argue that the Indian economy with its present base and structure cannot support sustained episodes of high growth rates of the kind experienced by the Northeast Asian countries. 

Fortunately, much has been done over the last ten years to provide macroeconomic stability and expand infrastructure, and in some sectors, there have been transformational changes. A robust push on industrial policy through the Make in India and Production-linked Incentive (PLI) scheme has undoubtedly stoked interest in manufacturing. There have been serious efforts to improve the ease of doing business, lower compliance costs, and expand the tax base. A big boost to corporate competitiveness came in the form of the steep reduction in corporate tax rates from 2020-21. Other reforms like the GST and the Insolvency and Bankruptcy Code (IBC) will most likely start to show results in time. 

However, there has not been a similar focus on improving the quality of human capital and state capabilities. The state of education, from primary school to colleges, remains a matter of deep concern, perhaps the country’s biggest developmental and governance failure. No matter even major macroeconomic and other reforms, the poor general quality of human capital that enters its workforce is a binding constraint on economic growth. 

An equally disturbing trend has been the failure to deepen and broaden the economic base consisting of productive firms and consumers with disposable incomes. Apart from public policy failures, perhaps a more important factor in this failure to broaden the base has been the reluctance and inability of India’s private sector to play its expected role. Governments can only do so much. 

Despite years of deleveraging and record profits, investments in productivity improvements during the pandemic, and an economy which has been the fastest-growing major economy globally, corporate India has been found missing in action in complementing the government’s efforts to push economic growth. Specifically, I can think of six practices of corporate India that have been damaging – wage stagnation, jobless growth, a preference for low-cost contract labour, reluctance to undertake investments, low level of R&D expenses, and a preference for serving the domestic market instead of competing globally (with all attendant distortions). 

The abysmally low level of R&D expenditures, even among its vaunted IT and pharmaceutical firms, should be a matter for collective introspection by corporate India. This trend is also reflected in its vibrant start-up sector. Despite the proliferation of several unicorns and decacorns, they are engaged with copying innovations and technologies deployed in advanced economies. There are very few engaged in frontier technologies, or in areas that target the country’s major development problems and can be transformational in addressing them. 

So, what has kept the economy growing at a good pace in recent years, enough to claim the mantle of the fastest-growing major economy?

For one, the central government has done a remarkably good job of maintaining fiscal prudence and macroeconomic stability. The central bank has complemented with policies to control inflation and maintain financial stability. Second, fortuitously, the global environment of fiscal accommodation in the post-pandemic era offered central and state governments an additional 2-4 percentage points of fiscal space each year, which it has utilised effectively to nearly double the capital expenditure as a share of GDP. 

Third, the large size of the economy with its growing population and the addition of inputs means that there will always be a sustained pace of catch-up growth. The macroeconomic stability and tailwinds from a few reforms support this growth. Fourth, the central government’s use of industrial policy through its PLI scheme to catalyse domestic manufacturing has succeeded at least somewhat in breaking down the barriers to scale manufacturing in India. If it can be built upon, and this is by no means easy or assured, this can be an important contributor to broadening the economic base. 

Fifth, there’s a small segment of the Indian economy, the one inhabited by its highly profitable corporates and its knowledge-based services sectors, that is undoubtedly dynamic. It contains a consumption class with high disposable incomes that’s collectively comparable to a middle-sized European economy. It has been among the most vibrant economic segments in the world economy for nearly two decades now. It encompasses sectors like the rapidly emerging Global Capabilities Centres (GCCs) of global corporations, which hold much promise. Given the size of the country, this small segment is large enough in absolute terms when compared to others. But this remains a sliver, and by their very nature localized in a handful of urban centres in the South and west of the country. Finally, in the absence of good data, there will always be questions about the actual growth rates.

Unfortunately, all these factors appear to have reached their limits in propping short periods of higher growth rates, and the present slowdown may only be an indication of an economy reverting to a growth rate that its capital base can support. With global economic conditions turning adverse, the domestic engines of growth must all be firing at full throttle to generate high growth rates. In their absence, the ongoing economic slowdown should not be a surprise. 

If the explanation above is accepted, then it raises several concerns. What are the areas of concern that require attention?

It’s hard to argue against the view that India missed the great opportunity to capitalize on three decades of economic stability and growth and build its capital foundations. The economic liberalization and post-millennium economic and political stability provided the country the time to build the foundations for broad-based economic growth. It was also an opportune period of benign global economic conditions to develop its manufacturing capabilities and integrate itself with the global supply chains. 

It can be argued that the country’s biggest failure has been in human and institutional capital formation, the basis for sustainable growth. Unfortunately, it has been unable to make meaningful investments in the quality and quantity of human capital formation. Even when there has been intent, central and state governments have struggled to execute. A combination of private sector practices, adoption of band-aid digital technology solutions, and extensive outsourcing of core activities of government to consulting firms and others, coupled with the general trend of demonization and disparaging of governments (and its personnel and activities) have eroded state capabilities and enfeebled the state. 

State governments are the principals in both these endeavors, and any meaningful effort must involve their active ownership and engagement. Unfortunately, the increased confrontations and acrimony between the central and state governments on issues is a serious obstacle to these endeavors. Both the centre and state must walk together to stand any chance of making a meaningful dent in these problems. 

India’s economic growth over the last few years has been mostly driven by inputs. There’s nothing undesirable or bad about this since that’s generally the case with catch-up growth that characterizes developing countries and has been a major factor in China’s spectacular economic growth. Further, since the pandemic, even as rural and urban consumption has flagged and private investments have stalled, public capital investments have emerged as the primary driver of economic growth. To the government’s credit, it has ensured macroeconomic stability and focused on the quality of capital expenditures. 

But disappointingly, as discussed earlier, India’s much-hyped private sector has failed to step up in any meaningful way to create the foundations for sustained growth. The trends of business concentration and dominance of a few industrial groups across sectors work against broadening the industrial base. A revival of corporate investments, creation of good jobs, and sharing of the record profits with labour would have deepened and broadened the base of the consumption class, and set the stage for sustained high growth. 

The stalling of structural transformation should not be seen as a temporary phenomenon. Instead, it should be viewed against the backdrop of global trends of premature de-industrialisation, expanding automation, the rise of Artificial Intelligence technologies, and the inherent limitations of the services sector in replacing manufacturing in the creation of productive jobs. 

In this context, agriculture and related industries assume significance in livelihood formation and job creation. For long, despite half the population being dependent on it, public policy and public attitudes missed the plot by viewing agriculture through a subsistence and welfare lens, as a temporary holding sector awaiting the inevitable structural transformation, instead of positioning the sector as a source of dynamic and productive livelihoods and attractive incomes, and as important as manufacturing and services in accommodating those entering the workforce. 

For all these reasons and more, the conditions for broad-based growth remain elusive. 

As mentioned earlier, a small sliver in a continental-sized economy coupled with the standard inputs-based growth is large enough to sustain middling growth for a reasonable period. It’s most likely true that this segment of the economy has been one of the main growth drivers. But there are hard limits to how much it can contribute to growth, and it cannot be the foundation for sustained high growth rates. Worse still, if consumption in this sliver plateaus (as it will, since there are only so many cars and other purchases the well-off family can do), the catch-up growth factors flounder, and global conditions become adverse, there’s the risk of slipping into prolonged bad economic equilibriums. The base must expand considerably to be able to avoid this and realize sustained growth.

This slow expansion in the economic base has been coupled with evidently rising stress at the lower segments of the economy (which in this country forms the major share of the population). In less than four years, India has been subject to three large negative economic shocks in succession – demonetization, GST, and Covid 19 pandemic. A feature of all three shocks was its adverse impact on the informal and rural economies. These shocks also coincided with concerted efforts to shrink and formalize the informal economy. For a country where the poor people and rural areas largely inhabit the informal economy, it’s hard not to believe that the impacts of these shocks have been very significant. 

Efforts to formalize the economy, while laudable, may also have gone overboard in pushing it too hard and too quickly. As experience from other countries and research shows, the formal sector’s share of the economy expands less by shifting the existing informal sector but by creating the conditions for the new growth to become formal. Besides, the belief that digital payments and capturing economic transactions can formalize an economy overlooks the several other important factors that contribute to informality.

The combination of the struggles on human capital and state capability fronts, economic growth confined to small slivers concentrated in the metropoles, and the unwitting (or misguided) neglect of the sector that employs half the population point to the narrow base of economic dynamism. Broadening the base is an essential requirement for sustained growth.

Amidst all this, state and central governments are faced with an inexorably rising trend of competitive populism that threatens to wreck the fiscal balance. Recalibrating the political economy incentives away from the likes of cash transfers towards productive expenditures is an essential imperative. 

In conclusion, to aspire to emulate the Northeast Asian success and ensure sustained high growth rates, in addition to maintaining macroeconomic stability, investing in infrastructure, and improving ease of doing business, the state and central governments must prioritize efforts towards significantly improving the quality of human capital and building the capabilities of public systems to design policies and implement them effectively. 

Economic policy must equally target productivity and dynamism in the manufacturing, services, and agriculture sectors. No country can attain sustained high growth by glossing over half its population and over two-fifths of its workforce. The importance of female workforce participation and agriculture productivity cannot be overstated. Finally, the private sector must step up to make capital investments, create good jobs, embrace innovation and significantly raise R&D expenditures, and prioritize exports. 

The objective of these efforts must be to broaden and deepen the human, physical, financial, industrial, and institutional capital that would create the platform for sustained high growth. Dauntingly, the country must do all this amidst rising geo-political uncertainties, adverse global economic conditions, and the urgent need for climate change adaptation and mitigation.