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India: The Next Asian Economic
Giant
Arvind Panagariya
NITI Aayog
Government of India

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POST INDEPENDENCE ECONOMICHISTORY OF INDIAIEEJ：May 2016 © IEEJ2016

Slow Growth has been Behind Slow
Transform of India

PeriodGDP

Per-capita
GDP

1951-88

3.8

1.6

1988-2003

5.9

3.8

2003-012

8.3

6.7

2012-14

4.6

3.1
3

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Index of real per-capita GDP (1950-51 = 100)
700
2013-14 = 598

600
500
2000-01 = 295

400
1990-91 = 206

1980-81 = 151

300
200100Index of per-capita GDP

2013-142010-11

2007-08

2004-05

2001-02

1998-99

1995-96

1992-93

1989-90

1986-87

1983-84

1980-81

1977-78

1974-75

1971-72

1968-69

1965-66

1962-63

1959-60

1956-57

1953-54

1950-51

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Where We Stand Currently
Annual growth in real GDP
2003-04 to 2011-12: 8.3%
Year
2012-132013-142014-152015-16*

Real
5.1
6.9
7.2
7.6

*Advance Estimate

2015-16 (Adv. Est.)
Q1 (April-June)
Q2 (July-Sept)
Q3 (Oct-Dec)
Q4 (Jan-March)

Real
7.6
7.7
7.3
7.8

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India’s Modernization Challenge• After 65 plus years of development effort– Low per-capita income ($1500 per annum in2015)– High extreme poverty (22% in 2011-12)– Manufacturing stuck at 15% of the GDP– Low urbanization (31% in 2011)– Workers predominantly in informal employment• 50% in agriculture• Another 40% or more in the unorganized sector
6

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INDIA’S VAST GROWTH POTENTIALIEEJ：May 2016 © IEEJ2016

1873

1710
1239 1226

1366

2011-122010-11

2009-10

2008-09

2007-08948

2006-07834

2005-06722

2004-05618

2003-04523

2002-03

2000
1800
1600
1400
1200
1000
800
600
400
200
0

GDP at market prices in current dollars($Billion): Annual Growth: 15.6%

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India can be the Third Largest
Economy in Fifteen Years• Annual Growth in Nominal Dollars from 2003-04
to 2011-12: 15.6%• With the GDP deflator 2% in USA, annual growth
in India in real dollars during 2003-4 to 2011-12:
13.6%• The GDP in 2015-16 in current dollars: $2 trillion• Conservatively assuming annual real growth of10%, in 15 years, the GDP will be: $8.4 trillion.
• Therefore, becoming the World’s third largest
economy in 15 years is within India’s grasp.
9IEEJ：May 2016 © IEEJ2016

What If Growth Stagnates at 5%• At 5%, we will rise from $2 trillion in 2015 to just
$4.15 trillion in fifteen years.
• This will leave India fourth or fifth globally,behind USA, China, Japan and possibly Germany• The difference between a $4.15 trillion versus$8.4 trillion economy will be– Domestically, significantly poorer progress in cutting
poverty and improving education and healthoutcomes– Internationally, much diminished relative to China

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Why India has High Potential• High Savings Rate
• A vibrant Entrepreneurial Class• An Open Economy• A Low Per-capita Income with Vast Scope for
Catching up

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Slow Transition from Agiculture to Industryand Services• According to data for 2011-12, the share of agriculturein employment is 49% while that in the GDP is 15%.
• The best agriculture has done over a ten-year period is
4.7% during the 1980s.
• But industry and services grow 8-10% or faster.
• So the share of agriculture in the GDP will continue todecline• IMPLICATION: We MUST create good jobs in industry
and services in much larger numbers so that farmers
wishing to migrate out of agriculture may findemployment at decent wages.

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Why the Focus on Labor-intensive
Manufacturing is Important• India has 500 million workers with another 1012 million joining the workforce each year
• Except construction and retail, services will
not create good jobs for low-skilled workers• There is no known path to rapidtransformation that does not go throughlabor-intensive manufacturing.
• Faster growth of manufactures helps create
jobs in services as well.

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Acceleration in Manufacturing Also
Accelerates Services Growth
Country and period
South Korea
1954-62
1963-72
Taiwan1951-53 to 1961-63
1961-63 to 1971-73
India
1991-92 to 2002-03
2003-04 to 2010-11

IndustryServices

11.6
17.3

4.4
10.0

11.5
15.3

7.6
10.3

5.6
8.0

7.1
9.7

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WHY HAS MANUFACTURING NOTDONE WELL IN INDIA?

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Substantial Presence of Large-Scale Firms is the Key
to the Success in Manufacturing• Per-unit costs decline with scale• Large firms must sell in the world market• Fierce competition in world markets forcesthese firms to rapidly adopt cost-saving
technologies and management practices• Small and medium firms also become more
efficient as they become ancillaries to large
firms or compete against them.

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Apparel: Workers are in Small Firms inIndia, in Large Firms in China
China

India

Proportion of workforce

100.0%
80.0%

60.0%
40.0%
20.0%
0.0%

0-50

51-200201-2000>2000
Firm size in number of workers

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Export Performance in Apparel: India and China
Perform Very Differently (1992-2014)
Clothing Exports ($Billion)
200.0
180.0
160.0

120.0
100.0
80.0
60.0
40.0
20.00.0
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014

$Billion

140.0

Clothing and accessories-SITC 84 (China)

Clothing and accessories-SITC 84 (India)

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Make no Mistake, On Average, Indian Firms are SmallIEEJ：May 2016 © IEEJ2016

Fewer Large Firms Translate in Low
Productivity in Small and Medium Firms

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The Overall Impact of Relatively Few
Large Firms• Low overall productivity because too manyworkers are stuck in low-productivity, lowwage micro and small firms• In 2010-11, firms smaller than 20 worker– employed 73% of manufacturing workforce inIndia– But they produced only 12% of manufacturing
outputIEEJ：May 2016 © IEEJ2016

THE PATH TO TRANSFORMATION STILL GOES
THROUGH EXPORT-LED MANUFACTURINGIEEJ：May 2016 © IEEJ2016

Focus on Labor-intensive
Manufacturing• India has 470 million workers with another 1012 million joining the workforce each year
• Except construction and retail, services will
not create good jobs for low-skilled workers• There is no known path to transformation in
to to three decades that does not go throughlabor-intensive manufacturing

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Export Orientation or Import
Substitution?
• Cost competitiveness requires the presence of large firms.
• Large firms require large markets to sell their product. Largemarkets are outside, not at home
– Total world merchandise exports: $18 trillion.
– India’s domestic goods market: less than $1 trillion.
– India’s domestic market in electronic goods: $65 billion– Global market: $2000 billion• Inevitable conclusions:– Import substitution will not go far– We must go for the LARGE world markets.

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Even India’s 8.3% Growth from 2003-04 to 201112 Came with Rapidly Expanding Exports
Exports by India: 1990 to 2014 ($Billion)
400$301 billion

350
300
250
200

150

$50 billion

100
50
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014

0Exports by India ($Billion)IEEJ：May 2016 © IEEJ2016

But Can We Rely on Robust Export
Growth in a Stagnant World Economy?
• Yes. Thus, consider that– Between 1995 and 2013, the OECD countries grew
only 1.4% annually and yet China expanded its exports
from $150 billion to 2.2 trillion (share in world exportsrose from 2.9% to 11.7%).
– World merchandise exports today (2014) are $18trillion. We can grow by expanding our share from
1.7% today to 6% in 10 years.
– Real wages in China are rising 10% per year since 2007
(Rs. 5 lakh annually currently). So China will vacate
space in the world market in low-skill products.

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Rising Wages in Manufacturing in China (Renminbi)

Source: Albert Park, Hong Kong University of Science and Technology[Annual Wages in 2014: Rs. 5 lakh. In surveys, Chinese firms point tolabor costs as the most important barrier to their growth.

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But What About Robots and 3D
Technologies Taking Over Manufacturing?
• Commercial viability of these technologies remains far off.
• In industries with job potential such as apparel, footwear,
assembly activities and food processing, even scientificfeasibility is some distance away.
• If the threat from robots were imminent, China today would
be preparing for complete collapse. That it is not should tell
us something.
• Rather than freeze out of these fears, we need to get going.
• This approach will also better prepare us for the age of robots
should it become a reality.

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A POSSIBLE STRATEGYIEEJ：May 2016 © IEEJ2016

What India Must Do• Taking the context of the Sagarmala initiative, ageographically focused, port-led development
strategy must be pursued• We must create Coastal Economic Zones thatoffer an ecosystem that is friendly to large,
employment-intensive firms and sectors• In CEZs, we must create infrastructure that allows
goods to move in and out of the country rapidly• We must build external trade alliances thatensure open markets abroad for our goods

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At the Heart of the Strategy• A handful of Coastal Economic Zones that
- Encompass production clusters and urban centers- Are connected to selected deep draft ports on
India’s east and west coasts via a network of highly
efficient logistics and distribution systems- Have a world class regulatory framework governingbusiness, urban and industrial development- Are gradually connected to the hinterland throughan ever expanding multi-modal transportation
network
Contact :report@tky.ieej.or.jp