Acclaimed author and investor Ruchir Sharma, while delivering the 40th Palkhivala Memorial Lecture earlier this week, called upon Indian economists to shed their “anchoring bias” and stop talking about 8-9 per cent GDP growth which is difficult to achieve.
He blamed four trends for his view. India, he said, has lost its demographic sweet spot. The country’s working age population growth rate which was more than 2 per cent till 2010 has dropped to 1.5 per cent. He quoted his research to say that 75 per cent of the countries with economic growth of 6 per cent or more had a working age population growth in excess of 2 per cent. Most developed nations slowed down as their working age population dropped. The current population growth rate in India is not conducive for high economic growth, he warned.
Pandemic and indebtedness
The challenges created by declining demography is further accentuated by declining productivity (these two factors are the major drivers of economic growth). He argues that all the recent technological innovations have been more on the consumer experience side and they have not resulted in increasing productivity. The pandemic, he added, has pushed nations deeper into debt.
The amount of debt in the world today is 4X the size of the global economy with 25 countries having a debt/GDP ratio in excess of 300 per cent. India’s level of debt (170 per cent of GDP), while lower compared to other nations, is high when one considers its per capita income. High debt cuts productivity and smothers growth, he said.
The final trend that forced him to come out with this stark prognosis for the Indian economy is de-globalisation. Post world War-II, there was intense globalisation where flow of trade, people and capital exploded. Countries that were growing their economy in excess of 6 per cent registered exports growth of 20 per cent or more. After the global financial crisis, protectionism has increased. This has caused trade in goods and services to plateau. Capital flows have also dropped. Without strong exports, high growth rates are not possible for any country, including India.
Growth reset
He concluded by saying that for India any economic growth in excess of 5 per cent should be a great achievement. If what he says comes true, India’s ambition of becoming a higher middle income country like China (for that it needs to grow its per capita income at 8.8 per cent for the next 10 years) or a developed nation like US (it needs to grow at a rapid pace for many decades) will not happen.
The country will not be able to pull its poor out of poverty and significantly increase its per capita income which is currently a little less than $2,000 (China’s, in comparison, is in excess of $12,000).
But has Ruchir Sharma extrapolated what a slowing population growth did to developed nations to India without considering its uniqueness? That appears to be the case. While it is true that India’s total fertility rate fell to 2.0 per cent -- below the replacement rate of 2.1 per cent -- in the recent National Family Health Survey (NFHS-5), the population (according to a paper prepared by C Rangarajan, former RBI Governor, and JK Satia, Prof Emeritus, Indian Institute of Public Health) will continue to grow and will peak at 165 crore only around 2050.
The paper attributes this to population momentum arising out of a larger number of people entering reproductive age group of 15-49 compared to those leaving it. So reduction in working age population is not going to be sharp and immediate.
No labour shortage
Also, India is not a labour scarce country. The US saw its labour rates rise rather sharply when population growth slowed. It was forced to outsource production to China to remain competitive. While there is a mis-match between availability of labour and nature of the available jobs, India is not short of hands. This problem can be resolved, in the short run, through re-skilling programmes and in the long run through adequate investment in the education sector.
Unlike developed economies, India also has a large headroom for improvement -– be it labour participation (a large proportion of women are still outside the labour force), labour productivity (existing people can be pushed to produce a lot more), infrastructure efficiency and adoption of technology.
At the same time, the government should not ignore what Sharma is saying. It should act now and doing so will help the country to be better prepared to tackle the challenges demographic changes will bring about tomorrow.
Need for skills upgrade
There is an urgent need to map skill requirements of the future and ensure that the education system is tuned to deliver them. Mere large scale investment in education, though needed, will not be enough. Similarly, a conscious strategy needs to be devised on use of technology in a manner that it adds value and improves productivity without causing significant job losses.
The government should also eschew protectionist tendencies that has gripped the world. It should be flexible and strike preferential trade deals that are overall beneficial to India. Exports may not be as critical for India as it is for countries like China or Japan and it is unlikely to become so in the future as its economy will continue to be powered by domestic consumption. Still, exports have their benefits. It contributes to economic growth, funds imports, improves efficiency and helps to keep the current account deficit in check. Strong exports growth is a pre-requisite for a fast paced economic growth.
There is also a need for a single-minded focus on economic growth. The government should avoid all distractions, domestic or foreign, in order to achieve this. China did just that till its economy reached a significant size. It is different story that it is throwing its weight around in geo-politics today.
A growth focussed prudent economic policy will ensure that India’s investment rate which has fallen significantly since 2007-08 will bounce back. Once that happens, high growth rate will return and India will be in a position to take advantage of the demographic dividend before it is too late.