India is the fifth largest economy in the world, with a GDP of $3.2 trillion in 2023, and we have been growing at an average rate of 7.6 per cent in the past decade. However, on closer examination, certain key indicators reveal a startling picture. India’s GDP per capita, a true indicator of a nation’s prosperity, is at $2,730 (Rs 2.3 lakh). It is much lower compared to our developing bloc peers, including Brazil ($11,350), China ($13,150), Vietnam ($4,620) and South Africa ($5,970). To look at a broader indicator of India’s holistic well-being, our social progress ranks at 110 out of 169 countries in 2022; approximately five points below the global average score. Moreover, India’s GDP per capita places the country at the 111th rank out of 164 countries assessed on social progress.
For India to attain its vision of becoming a $30 trillion economy, we will need to grow incrementally at a rate of 9.7 per cent. Achieving this would elevate India’s GDP per capita to $18,000 (Rs 15 lakh) by 2047, at par with developed economies. India would need to harness the potential of its heterogeneous landscape at the state and district levels. This is important as many Indian states are larger than some of the countries in the world, not just in terms of population but also GDP. Bihar and Uttar Pradesh currently constitute 25 per cent of India’s population, yet have the lowest per capita income in the country at $420 (Rs 40,000) and $698 (Rs 58,500) respectively. Therefore addressing regional disparities at the subnational level becomes important. We have extensive ground to cover, and there’s too little time!
A captive market: India’s sizeable population presents significant opportunities as an expansive market for demand. According to the World Economic Forum, India is expected to witness a 4x spike in consumer expenditure, with the middle class driving 75 per cent of it in 2030. Hopes for a catalytic transformation are pinned on this class, given their purchasing power and capacity for discretionary spending. However, the rising income inequality dampens the opportunity to tap this market potential adequately. Analysing the sample estimates from PLFS (Periodic Labour Force Survey) 2022-23, we find that a monthly salary of Rs 30,000 is amongst the top 10 per cent of total incomes earned, bringing to stark relief existing income disparities. The share of the top 1 per cent makes up 6-7 per cent of total incomes earned, while the top 10 per cent accounts for a little over one-third of all incomes earned. Addressing income disparities is a prerequisite for realising India’s market potential.
It’s essential for an economy to transition from being factor-driven to being innovation-driven for sustained growth in prosperity. This takes action on two fronts: enhancing innovation and human resource capacity. In 2023, India was ranked 40 out of 132 countries in the Global Innovation Index, making remarkable strides in its start-up ecosystem and in scaling digital infrastructure. It scored the highest in Market Sophistication (20th) and Knowledge and Technology Outputs (22nd). Yet in 2020-21, 43.7 per cent of the gross R&D expenditure came from the central government, whereas the private sector industry contributed only about 36.4 per cent. Additionally, to enhance human resource capacity, we need a pool of highly skilled workers who can easily adapt to the rapidly changing job market. In India, only 11 per cent of the workers are highly skilled, 67 per cent are semi-skilled, whereas 22 per cent are low-skilled. Beyond enhancing the skills of the existing workforce, a focus on labour mobilisation is also crucial. Though India’s productivity growth has been robust, it is not matched by positive trends in labour mobilisation. According to the World Bank, India’s employment to population ratio is only 53 compared to China’s 63. Though India’s female LFPR (labour force participation rate) has increased from 23.3 per cent to 37 per cent, the male LFPR still accounts for more than 75 per cent of the labour force. This limits the scope for utilising the full potential of our youthful demographic profile.
The missing middle: The sectoral transformation from agriculture to industry has been relatively slow. According to KLEMS (capital, labour, energy, materials, services) data, the share of manufacturing in the Gross Value Added (GVA) has fallen from 17.4 per cent in 2011-12 to 15.8 per cent in 2021–22, the highest fall among the three sectors of the economy. While productivity growth has been driven by large firms, job creation has not. A majority of employees are trapped in small, low-productivity and low-growth firms, while there is a substantial “missing middle”. Even among the MSMEs, the backbone of the Indian economy, there is a 90 per cent fall in the micro category, further accentuating the ‘missing middle’ conundrum. When firms scale up, they are better able to participate in GVCs (global value chains). GVC integration in manufacturing is another opportunity we haven’t fully capitalised on. Through the 1990s and 2000s, India’s GVC participation rose steadily and peaked at 47.6 per cent just before the financial crisis in 2008, but given the size of our economy, India trails significantly behind other key Asian economies like China, Malaysia and South Korea.
India’s prosperous growth calls for concerted efforts on multiple fronts. However, the common thread guiding these interventions should focus on social progress, shared prosperity and sustainable and resilient growth in the face of external shocks. Economic growth should go hand-in-hand with social progress. The journey so far has been a mix of losses and gains. India’s vision for ‘Viksit Bharat’ in 2047 calls for a genuine acknowledgement of our competitive advantages and disadvantages.
The author is Chair, Institute for Competitiveness
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