Posted by: Vikram | November 29, 2014

Structural Problems in the Indian Economy (Why India wont be a major economy anytime soon)

1_AD_to_2003_AD_Historical_Trends_in_global_distribution_of_GDP_China_India_Western_Europe_USA_Middle_East

Historic shares of various entities in global GDP (Data – Angus Maddison, Figure – M Tracy Hunter)

Angus Maddison told us that the various lands comprising today’s India collectively formed the largest economy in the world from AD 1 to AD 1500. They were then eclipsed temporarily by the Qing empire that contained today’s China and some neighboring areas. But the more significant eroder of India’s share in the world economy was Europe, which through industrialization was able to make its people much more productive in economic terms. Also, through colonization Europe was able to obtain the natural resources needed for its industrialization, and a captive market for its own surplus goods. In other words, Europeans were able to internally generate large surpluses and extract the surplus produced in the other regions of the world for higher levels of consumption and investment.

The European model was followed in North America, and the two together constitute today’s West, which accounts for nearly half the world’s economic output. Many centuries of living in an industrialized economy has allowed the West to develop the sophisticated legal and political instruments needed to manage such an economy. The West has also created educational institutions that ensure its labor has the right skills to service such an economy. In fact, so large is the gap in institutional development between the West and the rest, that it is able to attract large numbers of skilled workers from places like India and Africa to further accelerate its own economic growth.

In recent years, India’s economy has shown some growth and India has increased its share in global economic output. Some are predicting that India could keep growing economically and regain a share of the world economy at least commensurate with its population. For most of history, India had 20-30% of the world’s population, and a slightly larger share (25-30%) in its economy. Today it has about 18 % of the world’s population, and 6.4% of its economic output. Here are the reasons why this share wont change significantly in the coming years:

Shrinking productive resources:

The high share India had historically in the world’s economy and population was mainly due to the plentiful availability of fertile land and a large network of rivers. These allowed India to be more than self-sufficient in food, develop a large internal market, and then leverage its natural advantages and economies of scale to become a net exporter of textiles, iron-works and spices to the rest of the world. However, these resources are now shrinking. Most importantly, climate change has added a huge dimension of uncertainty to India’s future water supply and agricultural productivity. In addition, industrialization is eating into India’s most important and valuable natural resource: arable land.

drought_index

Percentage of districts experiencing drought in India. Since 1991, at least 15% of districts have faced a drought every year. (From Annual Report 2012-2013: NCAP, Delhi)

Lack of skilled labor: 

Despite some success in producing very highly skilled professionals in the engineering and sciences domain, the general quality of labor in India is low. Educational standards are poor, with Indian children regularly finishing near the bottom of the charts in international tests. The reasons for these poor standards are deep rooted: poor childhood nutrition and sanitation impacting the physical and mental growth of children, and a lack of teachers being the most important ones. The number one complaint of Indian business is not India’s bureaucracy or excessive rules, it is simply the lack of people who can get the job done.

Lack of energy resources:

On an absolute level, India’s energy resources are mediocre. But on the more pertinent scale of resources per capita, they are very low. India’s oil reserves on a per capita level are among the smallest in the world, and its coal reserves, although larger are of a low quality and quite polluting. Space for solar farms is limited, plus solar insolation is concentrated in the summer months, with the monsoon clouds and winter fog playing spoilsport in other months. Hydel resources will also be constrained due to the increasingly uncertain monsoons.

Under governance:

Many middle class Indian bemoan this fact, and will perhaps point to it as the major problem in India’s economic expansion (it isnt), but India’s poor state capacity and governance is a major structural problem and not simply one of the wrong people being in charge. India has ten times less judges than it needs and its police force in woefully undermanned and underfunded.

the US federal government has a ratio of 889 employees per 1,00,000; India’s Union government has just 295. State and local government employees in the US account for another 6,314 per 100,000; in sharp contrast, Uttar Pradesh has 352; Bihar, 472; Orissa, 1,007; Chhattisgarh, 1,067; Maharashtra, 1,223; Punjab, 1,383; Gujarat, 1,694. Given the magnitude of delays that mar the judicial process, it is not surprising to find this institution is probably the worst off in terms of human assets. India has about 1.2 judges per 1,00,000 population. The US has nearly 11 judges per 1,00,000 population; Sweden: 13; China: 17; and, at the top of the scale, Belgium: 23; Germany: 25; and Slovenia: 39!

Rule of law in India exists only on paper for the most part, and lack of low enforcement and poor quality of regulation is a major contributor to the lack of investor enthusiasm for the country.

None of these structural problems will be resolved in the coming future, in fact most Indian politicians rarely talk about them. But a country does not need to be super-rich to be happy, if its widespread ethno-religious tensions are mitigated and state capacity is improved, Indians can be a happy people, with our varied and vibrant cultures, and strong family traditions.

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Responses

  1. Hi,
    Your blog is very interesting. Regarding energy the viable solution is offshore wind farms. we have vast coastlines. Installing offshore windfarms in the southern and western states will produce lot of energy, which we can even use for powering electric vehicles and reduce oil imports. of course, the cost of installation is right now high, but similar to what we see in solar panels, the cost will eventually come down. With proper planning, installation of 5 MW wind turbines in the entire coast line of 2 or 3 states can satisfy the energy needs of the whole country.

    In another article you wondered how southern states achieved china level Total fertility rates. The reason is very simple Electrification + Television.
    If you see electrification statistics in southern states, all southern states fare very well.UP,Bihar and West Bengal are electrified 36%,16% and 54% respectively. Undivided Andhra Pradesh has 67% Electrification in 2001 and 92% in 2011. So it requires war footing exercise to bring the electrification levels of above states to 90%+.

    http://en.wikipedia.org/wiki/Indian_states_ranking_by_households_having_electricity

    Electrification brought Televisions to homes. Television brought daily serials. If you see south Indian serials most of them revolves around woman characters like educated unmarried independent woman or married woman with rich background with one or no kids. Rural and urban woman watch these serials every day and they imagine themselves in those characters and want to live like that. This really transformed their mindset and helped in birth control. They also sending their children to schools to give them the kind of life they see in Television. This phenomenon is common across all caste groups. Another aspect is, south Indian serials never portray things like huge joint families.They always show small nuclear families. This whole thing started 20 years ago.

    http://www.geocurrents.info/population-geography/indias-plummeting-birthrate-a-television-induced-transformation

    Regarding casteism and social factors, education and IT boom helped a lot. In the past 20 years, millions of people came out of small income levels to middle income and get their children educated. Nowadays in Andhra money matters more than the caste. If both boy and girl are earning their own money, parents have very less say in marriage. There is so much migration to urban areas from villages. Most of the farmers coming to urban areas along with their working children and getting into small businesses.So they are getting exposed to liberal attitudes. Many parents are accepting intercaste marriages. In Andhra, the land holding is very limited. In many villages it is very difficult to see some one having more than 5 acres of land. So wealth is more or less distributed. There is also fees reimbursement scheme in higher education in Andhra and Telangana irrespective of caste. (It is based on income for family having <1 lakh annual income). It helped everyone OCs, BCs, SCs and all other groups. That is why you can see many Engineers here. Though all of them could not get into upscale jobs, most of them moving into BPO, Insurance and finance etc. When people from different castes working in the same place and earning same money it is shrinking caste barriers. This is good for the whole society. Another important factor is there are no caste based parties here.

    Education leads to public awareness and demanding more services from government.Its trickledown effect can be seen in e-governance projects of Andhra an Telangana like meeseva (means at your service) where people can get many government office work online without visiting offices which leads to corruption free system. Nowadays almost all services are available only through meeseva.

    http://www.meeseva.gov.in/Meeseva/intro.html

    These meeseva kiosks are in all villages run by self employed youth who charge government fixed rates for various services.

    http://ap.meeseva.gov.in/DeptPortal/UserInterface/Services.html

    The application goes to government office and officers can approve services with their digital signatures.They have mandatory time periods to approve or reject any application. Once the application approved, people get sms and they can download certificates from kiosks.

    In my view with all the above factors, We are some years ahead in social development compared to some other states. But determined governments can positively transform societies with targeted funding.

    Source: I lived all my 28 years life in Andhra Pradesh, out of which first 21 years in rural Andhra. Sorry for lengthy post.

    Thanks,
    Santosh.

    • Santosh Kumar, fertility rates are indeed affected by television access rates. The other variables are female literacy and levels of patriarchy. I will argue that Eastern and Southern Indian societies were always less patriarchal than Northern and Western ones. One indication of this is the level of say of women in these areas have in matters of marriage (girl’s opinion is considered upto 90% of the times in Assam and Tamil Nadu, and this drops to 10% in places like UP and Punjab). Also the southern and eastern India interacted earlier with the industrialized European societies.

  2. Vikram: Suppose someone were writing a similar article about China in the mid-1970s. Wouldn’t the predictions and reasoning have been quite similar? Such things can change pretty quickly.


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