Road to India@100: The largest economy in the making

Uttar Pradesh and Bihar—one of the most fertile regions in the world—together will soon have the population of the US and Canada combined. But the income per person is an astonishing 100 times less for UP/Bihar compared to the US/Canada despite India’s relatively fast growth over the last few decades! For all of India compared to the US, that per capita difference is around 30x (or 8x if you adjust for cost of living; similarly, 100x for UP/Bihar becomes, say, “only” 20x after adjustment).

These would be mind-boggling numbers even for as late as the 18th century. For development theoreticians, economic historians as well as practitioners across policy and business—such massive wealth disparities across regions have been a source of great curiosity and debate. Because to understand if there is a convergence ahead for China/India/Africa with the West/Japan, we need to first understand what caused this massive divergence which has been historically otherwise absent.

A related macro-historical debate has been the huge rise in living standards across the world, especially over the last one or two centuries. After all, the “great divergence” was more because of the ‘West’ taking off by an order of magnitude even though large parts of the ‘Rest’ were impoverished because of colonialism, slavery and famines—India and Africa most notably. So, the second big question now is even if the world convergences to not so dissimilar standards of living, what happens to overall growth even if a few countries remain the “frontier” for innovation?

These two questions—“convergence” and “cornucopia”, let us say a bit extravagantly—will in large part define the rest of this century.

Some factors that favour convergence—good institutions (political and financial), culture (in a malleable, not essentialist, sense), geography (resource availability and infrastructure), labour demographics (across age and sex), and innovation (energy and communication)—are all net tailwinds for India more than any large region of the world for the next generation. Indeed, many of these factors—like debt and demographics—are headwinds for many of the richer parts of the world.

Over and above these relatively well-known long-term factors, there are three short-to-medium-term ones that support what I call the “Long India” thesis.

First, with China going back from a collective authoritarian model to a dictator-for-life one, all bets are off in terms of policy predictability and geopolitical stability. Combine that with Russia falling off the maps for global investors, democratic India will be much more attractive for international capital, though China is not going away anywhere in terms of its economic heft.

Second, the US dollar’s roughly two-decade cycle has likely just seen its peak: the pandemic, war and earlier shale delayed cyclical dollar weakness. And 2023, despite any volatility, will likely be when the rupee starts a gradual transition towards becoming a hard currency. India has the scale, talent and culture to host two of the world’s top 10 financial capitals over time. We will export and import capital more freely, interest rates will fall, and the rupee will be the only long-term alternative to the dollar (unless Europe fully unites, or China democratises).

Third, the Indian push for reforms and infrastructure will intensify. This will be both due to the sagacity of the leaders, but also this development is endogenous to our democracy. Economic growth and mobility have led to various caste and linguistic barriers being diluted, and in turn has led to more civilisational pride along with an interest in development. This virtuous cycle should continue in 2024 and beyond, as our polity gradually transitions from a patrimonial- and patronage-based one to a more performance-based one across political parties.

As India rises, its scale and prosperity will not just attract some of the diaspora back but even educated migrants over time. Hence, a snowball effect will take over. In fact, if India grows just 5-6 per cent faster than America per year on average, by 2047 the Indian GDP would have comfortably surpassed America’s and by the 2060s, even GDP per capita (remember, with a population that is more than four times larger). Part of the math works out because of the rupee’s real appreciation—it has already been happening for a generation, but as growth differentials rise and inflation differentials fall, this will turn into nominal appreciation.

Communist China’s demographics and politics will cause it to slow dramatically, but it is still likely to grow faster than America—and there is no cause for complacency or premature celebration. However, what is equally important is that an empirically grounded optimistic picture, if true, is necessary to disseminate to further rekindle our economy’s animal spirits.

Finally, overall global growth is likely to be faster than what many think based on linearly extrapolating demographic and other trends, even though growth will not be as fast as some “singularity” techno-optimists say. The difference will be that the tech frontier will not be one country anymore—which is the cause of some statistical confusion—but global and concentrated in three or more countries. We may not have “cornucopia”, but we will have abundance and the end of poverty, and as Keynes said a century ago, it will lead humanity to ask some fundamental questions about itself.

From the Gangetic Plains to the Bay of Bengal and Arabian Sea coasts, Bharat was the veritable golden bird a millennium ago. This time our waterways will be supplemented by railroads, clean energy, augmented reality, and a billion-plus dreams—as this time we would be fine-tuning the ultimate tech: an accountable and representative civilisational state. 

The writer is an investor, author, economist and a Public Interest Director on the Board of the NSE International Exchange