- 2018-10-19
India's reforms are imminent
On the eve of India’s independence in 1947, India’s first prime minister, Jawaharlal Nehru, chanted the slogan "tryst with destiny." This poor country with a vast territory and huge internal differences has since embarked on a path of democracy and development. Today, 70 years later, India is still a democratic country and has made progress in development. Although this journey is not without its blemishes, Indians have reason to be proud of their achievements.
So, what kind of future will India face? According to United Nations projections, by 2050, India’s population may reach 1.7 billion, while China’s population may reach 1.35 billion. This sounds unaffordable. But India’s population has grown from 376 million in 1950 to 1.3 billion in 2015, and this country is much richer than it was when it first became independent.
As pointed out by the excellent Economic Survey by the Ministry of Finance of India, in the past 37 years, real GDP per capita in India has grown by about 4.5% per year. In the same period, India’s per capita real income has risen from 5% of the US level to 11%. This is the second most important aspect of the economic field in the era of globalization, second only to the more remarkable rise of China.
Assuming that from now to 2050, China's per capita GDP growth rate will remain at a moderate 3%, while the poorer India will remain at 4%. Suppose again that the per capita GDP of the United States increased by 1.5% per year during the same period. By 2050, China’s per capita GDP will reach 40% of the US level, while India will reach 26% of the US level, which is China’s current level. By then, China will become the world's largest economy (in terms of purchasing power parity), India will be second and the United States third.
Through an enlightening analysis of the development of India, the "Economic Survey Report" proves that India has shifted from socialism to "open trade, more open capital markets, and dependence on the private sector."
The so-called (often derogatory) "Washington Consensus" has now become the consensus of India. The Indian government led by Narendra Modi has been carrying out reforms, especially the passing of the new Bankruptcy Law and the introduction of a unified goods and services tax.
For example, India’s trade-to-GDP ratio is now roughly the same as China’s. The level of net foreign inflows is in line with other emerging economies. In addition, India’s state sector is no longer surprisingly large relative to its national income. The scale of government expenditure also conforms to the international normal standards of countries with this level of development.
The current government has made great efforts to reduce the cost of doing business and create a more friendly investment environment. The era of bureaucratic "licence raj" (licence raj) has become a distant past. Looking to the future, India still has the obvious advantage of a relatively slow population aging.
However, the "Economic Survey Report" also acknowledges that India has three disadvantages compared with other market-oriented emerging economies: hesitation in accepting the private sector and protecting property rights; insufficient national capacity, especially in the provision of education and medical care. Services; decentralized and extremely inefficient income redistribution.
The report convincingly argues that these characteristics reflect the fact that India is a precocious democracy — it achieved democracy before it became a developed country. Optimists would say that as India becomes increasingly wealthy, these obstacles will diminish.
But the pessimist will say that these obstacles will eventually stifle continued progress. But democracy is not a luxury; democracy is a necessary condition for India to exist as a unified nation. With luck, India’s growing middle class will force the required improvements in government governance.
If you consider the challenges facing the future, in the long run, there are three major challenges that seem to be particularly important, and there is one that is more prominent in the near future.
The first long-term challenge is education. The large and growing workforce is only a gift, not a hindrance, if it possesses the skills required by a fast-growing economy. The development of education is the responsibility of the country. But "competitive federalism" (where states compete with each other) has not yet resulted in the required improvements in education services.
The second long-term challenge is the environment. From now to 2050, India's real GDP may increase by 400%. Urbanization will also advance rapidly: one-third of India’s population now lives in cities; by 2050, this proportion is likely to double. The successful realization of such a scale of urbanization requires a lot of organizational work and investment. But the environmental challenge will not be just India's own problem. India needs to develop without significantly increasing the use of fossil fuels.
The third long-term challenge is the external economic environment. According to some credible assumptions, India’s exports of goods and services as a share of global GDP may double in the next 10 years.
It is true that this share of India is still very low, only 0.6% (China is 3.3%). However, given the resistance to globalization within high-income economies, India may not successfully double this share. India needs to consider how to promote an open global economy.
The big short-term challenge is a weak investment that is disturbingly weak. The "Economic Survey Report" attributed this in part to the "twin balance sheet problem"-a combination of overly indebted companies and dragged down banks.
The report stated that India will not be able to get rid of these debts with economic development, partly because these debts hinder investment and growth. The solution is a combination of punches: acknowledging losses, restructuring debt, and overhauling the banking industry. It is not easy to do this, but it is absolutely impossible not to do so.
India is very hopeful that it will become the world's fastest-growing large-scale economy, and will eventually emerge as a new democratic superpower in the middle of this century. But the challenges facing India are huge. Past success shows that these challenges can be overcome. But India must reform, and many reforms will not happen automatically. Right now, India has another appointment with fate.