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.
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.
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.