India has to open up more to attract higher investment like China, Korea: Gill

The first part, getting from low income to the levels India is at, is relatively a matter of increasing investment. So, India actually increases private investment ratios massively, puts in a lot of public investment in infrastructure and so on and gets to per capita income of $2000-2500.

Now, if you keep just doing that, you get diminishing returns. It’s like driving a car in first gear and keeping it in first gear. You can press on the accelerator, but it is not going to go very fast. If you press it for long enough and hard enough, it will heat up and die.

If you look at the experience of countries that have done this well, like Korea and China and many others, they then did reforms and opened up to foreign direct investment, trade, imports etc. They opened up massively. You can do it at whatever pace you want, but you have to open up.

By the way, reform and opening up was the strategy that China followed for two decades under Deng Xiaoping. Then the question is, is India doing that well? I would not give it the same marks as China. But where India does it, it gets massive success.

India has done some reform in opening up, which basically means that you bring in new technology from abroad and you diffuse it widely in your economy. And India succeeded in doing that in digital technologies. So all that we talk about, the stack, about Aadhaar etc, that is really what it is. These are not necessarily indigenous technologies. These are technologies from around the world. Because we had the Indian diaspora and the vibrant private sector in Bengaluru, we ended up doing this incredibly well. And the government has helped a lot. 

This is the kind of thing that has to be done in every other thing, including services, manufacturing and agriculture.

The returns to this in the agricultural sector is much higher than in manufacturing or services. We have some studies where we find that if you increase the absorptive capacity of farmers to use new technology, the productivity benefits are higher than those in manufacturing and in service.

If you say that in the past India had another success in the form of green revolution, one must ask where were those technologies from? They were not home-grown. They were from the US and some of these other institutions. India brought in the best technology and applied it. Of course it required some changes.

Once you have done the first two components well, you can add another component, which is innovation or developing technique. This is because whenever you become very close to the world technology frontier, there is less of a gain from bringing in the technology from elsewhere, because they are pretty much the same that you have. Then it is much more important that you advance the technology yourself. In some sectors, India is at that point. But it should not be skipping the second stage of innovation. For the worry is that if you skip that stage, it is like moving a car directly from first gear to fifth gear and you stall it.

But, we are talking in very general terms, not specifically for one country. Especially for a country like India which is a huge and diverse economy with different sectors at different stages of development, one shouldn’t take these things, very literally and say India shouldn’t do the third thing and should do just the first two. It all depends. 

First,these are not easy targets. But there is nothing wrong with it. I think it can be a motivation. 

Second, you can define developed country in many ways. You can define it as how the World Bank defines high income countries, with a per capita income level of $14,500. Will India reach that by 2047? Almost certainly not.

If India doubles its per capita income every seven years, that would mean that India would have to grow at 10 per cent. So, 2047 is about 24 years from now. If its per capita income grows to 10 per cent and it sustains for two decades, we will get there.

Two decades means, right now it is $2,500, in 7 years, it will become $5,000. In another seven years, it will become $10,000 and another seven years, it will become $20,000.

Now let’s say that it doesn’t grow at 10 per cent, but grows at 7 per cent, then it doubles every ten years. So if you do the math, you know.

That’s one way to define it. The other way to define it, and that’s where a lot of the controversy in India is about the development report, is using a measure where we see it as a share of US gross national income per capita. 

Right now, India is at $2,500. US national income is close to $80,000. And we are saying India will not get to a quarter of the US national income by 2047. On current trends, it is actually going to be much much later.

So, it is good to set a goal. Second, it is important to define what exactly you are setting as a goal.