To put it bluntly, India is a fascinating country. Over the past two decades, it has experienced a remarkable economic surge, boasting an average GDP growth rate of 6.25%. This impressive growth has propelled India past economic powerhouses like South Korea, Canada, Italy, France, and the UK, securing its position as the world's fifth-largest economy.
Morgan Stanley even predicts that within the next five years, India will surpass both Germany and Japan to claim the coveted title of the world's third-largest economy. Adding to this optimistic outlook, India's two wealthiest individuals have consistently held the top spot as Asia's richest, and the nation continues to churn out tech unicorns at an astonishing rate. Apple recently announced its plans to shift 25% of its iPhone production to India.
With all these positive indicators, it seems like India is on an unstoppable trajectory towards becoming a global superpower. However, there's another side to this story.
The Paradox of Poverty
Despite its economic achievements, India still grapples with a staggering poverty rate, with 10% of its population living in extreme poverty. Open defecation remains a persistent issue, and even the largest laundry facility in Mumbai relies on thousands of workers washing clothes by hand.
Adding to these challenges, corruption is rampant throughout the country. This begs the question: what is the true state of India's economy? Is it thriving or merely surviving?
Since the early 2000s, predictions about India's imminent economic rise have been circulating. Yet, two decades later, the country seems stuck in a perpetual state of "on the verge of a breakthrough" while simultaneously grappling with internal chaos.
A Historical Perspective
To understand India's current economic landscape, we need to delve into its past. Before the 18th century, India boasted a formidable economy. Historical data from the IMF, while not entirely precise, estimates that India and China each accounted for roughly one-third of the global economy.
The Impact of Colonialism
So, what led to India's economic decline? The Industrial Revolution in Europe undoubtedly shifted the balance of power, enabling Western nations to experience exponential growth in productivity. However, the more direct blow to India's economy came in the form of British colonialism.
The British East India Company, initially focused on trade, gradually tightened its grip on India, culminating in full-fledged colonial rule. While Britain underwent a period of rapid industrialization, India was relegated to being a supplier of raw materials, spices, and textiles. This exploitation stifled India's industrial and technological advancement.
The stark contrast in economic trajectories is evident when comparing the GDP per capita of both nations during this period. While Britain's GDP per capita soared, India's remained stagnant. When India finally gained independence after World War II, its share of global GDP had plummeted from 25% to a meager 2%. The legacy of over two centuries of British rule continues to cast a long shadow on India's economy.
The Road to Reform
After gaining independence, India, understandably wary of the pitfalls of free trade, adopted a protectionist approach. The government exerted tight control over key industries and banks, embracing a Soviet-style planned economy and shunning foreign investment.
A defining feature of this era was the infamous "License Raj," requiring businesses to obtain government permits for virtually every economic activity. This bureaucratic nightmare forced entrepreneurs to navigate a labyrinth of red tape, seeking approvals from numerous government departments and often resorting to bribery and connections to secure the necessary licenses. While obtaining a license provided a sense of security, it stifled innovation and hindered economic growth.
Although India's economy experienced some growth during this period, progress was sluggish. The year 1991 marked a pivotal turning point. Faced with the collapse of the Soviet Union, its largest trading partner, and the skyrocketing oil prices triggered by the Gulf War, India found itself in a dire economic crisis. The government was on the brink of defaulting on its debt.
This desperate situation forced India to seek assistance from the International Monetary Fund (IMF), securing a $1.8 billion loan. However, the IMF's assistance came with strings attached. In exchange for the loan, India was pressured to implement sweeping economic reforms based on the "Washington Consensus," emphasizing liberalization, privatization, and globalization.
Reluctantly, India embarked on a path of economic liberalization, reducing tariffs, deregulating interest rates, promoting free trade, and cautiously opening its doors to foreign investment. While these reforms were not as radical as some advocated for, they marked a significant shift towards a market-driven economy.
This pivotal moment in India's economic history unleashed a period of rapid growth. Between 1995 and 2018, India's exports surged at an average annual rate of over 13%, placing it third globally, behind only China and Vietnam. Its overall GDP expanded steadily at an average annual rate of 5.5%, propelling it to the fifth position among the world's largest economies.
Questioning the Numbers
It is important to note that the accuracy of India's economic data has been questioned by some international observers. While we can only rely on the available data, it's essential to approach these figures with a degree of caution.
The Rise of Outsourcing
One sector has played a pivotal role in India's economic resurgence: outsourcing. India has become the undisputed king of outsourcing, capturing over half of the global market share. Virtually every major American tech giant, from Google and Amazon to Adobe, Intel, Apple, and IBM, outsources a significant portion of its operations to India.
Even Wall Street investment banks have jumped on the outsourcing bandwagon, shifting IT tasks like basic tech support and software development to India. The driving force behind this trend? Cost-effectiveness.
The Allure of Affordability
The primary reason for India's dominance in the outsourcing realm is its low labor costs. Skilled engineers in India often earn a fraction of what their counterparts in developed countries make. This cost advantage makes India an irresistible destination for companies seeking to optimize their operations.
Beyond Cheap Labor: India's Other Assets
While low labor costs are a significant draw, India offers more than just affordability. The country boasts a vast pool of skilled IT professionals, thanks to its emphasis on STEM education.
A Legacy of Technical Prowess
Indian families place a high value on education, particularly in science, technology, engineering, and mathematics (STEM). This emphasis on technical skills is evident in the sheer number of Indian CEOs leading global tech giants. From Google and Microsoft to Adobe and IBM, Indian talent has risen to the helm of some of the world's most influential companies.
Furthermore, approximately 25% of Silicon Valley startups are founded by individuals of Indian descent, highlighting the significant contributions of Indian talent to the global tech landscape.
The English Advantage
Ironically, India can thank its colonial past for another asset: its English proficiency. While estimates suggest that only 10-20% of India's population speaks English fluently, this still translates to a massive pool of nearly 300 million English speakers, ranking it among the largest English-speaking populations globally.
This linguistic advantage has helped solidify India's position as a global hub for call centers and technical support. It's not uncommon to encounter Indian accents when contacting customer service for various online platforms and airlines.
The Challenges Ahead: Deeper Issues
India's large population, currently the world's largest and projected to swell to a staggering 2 billion, undoubtedly contributes to its overall economic output. However, a closer look at India's GDP per capita reveals a less rosy picture.
In 2021, India's GDP per capita stood at $2,250, a mere fraction of the United States' $70,000. Even when compared to its neighbor Bangladesh, India's GDP per capita has fallen behind in recent years. This discrepancy raises concerns about the equitable distribution of wealth and opportunities within India.
India's demographic dividend, characterized by a young and rapidly growing population, is envied by many nations. With a median age of 27.6, India has a workforce brimming with youth compared to aging populations in countries like China, the United States, and Japan.
However, this demographic advantage also presents a significant challenge: job creation. India struggles to generate enough high-quality, high-productivity jobs to absorb its burgeoning workforce. This has led to underemployment and a reliance on low-paying, informal sector jobs.
Structural Imbalances
One of the root causes of India's economic woes lies in its economic structure. While there are plenty of low-paying jobs like those in the laundry sector, India lacks a sufficient number of high-paying, high-productivity positions.
Economies are typically divided into three sectors: agriculture, industry, and services. During British rule, India's economy was heavily reliant on agriculture. Post-independence, the government attempted to promote industrialization but adopted a protectionist approach, maintaining state control over key industries and implementing the stifling License Raj system.
The lack of competition and bureaucratic hurdles hindered the growth of India's industrial sector. After the 1991 reforms, India witnessed a boom in its services sector, particularly in IT and outsourcing. While the services sector now accounts for 56% of India's GDP, this growth has come at the expense of industrial development.
India's experience highlights the importance of a balanced economic structure. A thriving industrial sector is essential for creating high-paying jobs, boosting productivity, and driving overall economic growth. The overreliance on services, while beneficial in the short term, can lead to structural imbalances and limit long-term economic prospects.
The Curse of Corruption
The License Raj, aside from hindering industrial growth, also fostered a culture of corruption that continues to plague India's economy. This corruption is not limited to the government; it permeates every level of society.
Obtaining basic services like education, healthcare, or even a driver's license often requires navigating a web of bribes and connections. According to Transparency International, 39% of Indians reported paying a bribe when interacting with government officials in 2020, the highest rate in Asia.
This pervasive corruption creates an environment of uncertainty for businesses and discourages foreign investment. It also undermines the rule of law and erodes public trust in institutions.
The Informal Economy
The complex bureaucracy and rampant corruption have led to the growth of a massive informal economy in India. A staggering 90% of India's workforce is employed in the informal sector, lacking formal contracts, legal protections, and social security benefits.
This vast informal economy, while providing some livelihood opportunities, poses significant challenges for tax collection, labor rights enforcement, and overall economic development.
A Controversial Legacy: The Caste System
Another factor often cited as an impediment to India's economic progress is its centuries-old caste system. This rigid social hierarchy divides Hindus into four main categories (Varnas), with those outside the system considered "untouchables" or Dalits. Traditionally, each caste was associated with specific occupations, limiting social mobility and perpetuating inequality.
While India officially abolished the caste system after independence, its legacy continues to influence social interactions, access to opportunities, and economic outcomes. Inter-caste marriage remains rare, and educational and income disparities persist across different caste groups.
While some argue that the caste system's impact on the modern Indian economy is overstated, others maintain that it continues to hinder social mobility, limit opportunities for marginalized groups, and perpetuate inequality.
A Tale of Two Indias
These challenges converge to create a stark picture of inequality in India. Despite being home to some of the world's wealthiest individuals, India also grapples with extreme poverty. The gap between the rich and the poor is glaringly apparent, with opulent high-rises often casting long shadows over sprawling slums.
While data on wealth distribution suggests that India's inequality levels are comparable to other countries, the reality on the ground tells a different story. The sheer number of people living in poverty in India makes its inequality problem particularly acute.
However, it's important to acknowledge that India has made significant strides in poverty reduction. The percentage of people living in extreme poverty has declined substantially in recent decades. This progress demonstrates that with sustained efforts, India can address its inequality challenge and create a more equitable society.
A Long Road Ahead
India's economic journey is a testament to its resilience, adaptability, and entrepreneurial spirit. Its remarkable growth in recent decades is a testament to its potential. However, India's path to becoming a global economic powerhouse is fraught with challenges.
Addressing structural imbalances, tackling corruption, improving education and healthcare, and creating a more equitable society are crucial steps toward unlocking India's full economic potential. The world will be watching as this complex nation navigates the challenges and opportunities that lie ahead.