12% Growth Agenda: A Blueprint for India’s New Government
In the coming months, India will head to one of the most pivotal elections in its brief history as an independent nation. With its growth having slowed from 10% to less than 5% this year, and a policy logjam which has seen its biggest structural issues exposed for all to see, India’s ascent into an economic power is at stake in this election. While a change in the government appears imminent, the outcome of the election is still far from certain. With the election race entering its final phases, the major contenders seem set to state more clearly their visions of India and its future with the objective of winning the support of the country’s yet undecided voters. It is these visions and the policies that emanate from that that will be closely watched by the world to see if India is ready to take its place as one of the leading global economic – and following that at some stage political – powers during the next decade or whether the country becomes an also-ran with perennially untapped potential and deep yet unsolved structural problems. India can do better than the gradual recovery from 5% to 6-7% growth which is currently being projected, and if it is to create sufficient jobs for its rapidly growing workforce, and meaningfully reduce poverty, India’s new government will need to deliver GDP growth in excess of 10%. Doing so will require decisive action on the part of the incoming government to implement sweeping changes. Even if a new government, whether it be a Congress or BJP led coalition, had clarity on the shape of the reforms required, demonstrating that they can work India’s political and legislative system to get things done will be the real test of credibility. India’s new leaders will need to demonstrate not just an inspiring vision, but the skill and finesse required to execute a far-reaching reform agenda and that agenda will be deemed to have failed unless the country moves to double digit growth in short order.
Why Growth is Fundamental to India’s Progress
Earlier issues of the Sign have discussed the need for India to unlock the potential of its people, its resources, its entrepreneurs and its government in order to realise its true economic potential. The policies implied by this approach have the potential to accelerate India’s GDP economic growth to double digits. For India, GDP growth is more than just a number, it is also a proxy for development indicators such as productive employment and poverty reduction. For example, India has made the most progress on reducing poverty during the periods of rapid growth. India today still has an estimated 300m living in poverty and economic growth is a fundamental necessity in order to create opportunities for them. India today needs c.10% growth simply to maintain current levels output per workforce participant given the number of youngsters entering the labour force in this decade, and even faster growth to solve the issue of underemployment in its current labour force. Moreover, this pace of growth needs to be sustained over the next several decades with 250m more people expected to enter the labour force by 2030. Creating and maintaining the required level of development will require more than just short-term stimulus measures – it will involve fundamental transformation of India’s productive potential.
Finally, growth is not just critical to India economically and socially, it is critical to India’s leaders politically. Achieving high rates of economic growth is also the best way for India’s politicians to counter natural anti-incumbency trends and therefore the best way for them to ensure political stability and continuity at both the state and central levels. The most obvious examples of this are the strong positions enjoyed by leaders who have emerged in states such as Bihar, Madhya Pradesh, Tamil Nadu, and, of course, Gujarat (the home state of the BJP’s prime ministerial candidate, Mr Narendra Modi) and delivered high growth for their constituents. The best way for the incoming government and India’s leaders to ensure success is to make tangible progress on creating an economic system which allows all Indians to feel that they have the opportunity to realise their potential. Creating such a system goes to the core of the many challenges of the huge and complex democracy that is modern India.
Pulling the Levers of Growth
Economists currently estimate India’s potential rate of growth at c.6.5-7.5% which at the current growth rate of c.5% implies a c.2% ‘output gap’. Also, growth is expected to only gradually recover to these levels given a revival of the investment cycle in the country and a benign global growth environment. However, as noted above, this level of growth will not be sufficient to provide employment for the rapidly expanding labour force or to reduce poverty in a meaningful way. To address these issues requires increasing its growth potential to above 10%, which implies significant structure reforms. Achieving these levels is not impossible – India’s potential growth was estimated at 8-9% as recently as 2-3 years ago. The recent decline has been largely due to a combination of factors, including (i) a sharp slowdown in investment and persistently high inflation, (iii) a decline in productivity growth due to persistent supply-side bottlenecks, and (iii) a policy logjam which has seen existing projects stall due to lack of clearances and approvals. While some measures towards short-term fiscal consolidation have recently been taken, much more concerted action will be required by the incoming government in order to accelerate India’s growth to double digits. From the first budget onwards, the new government will need to build momentum to implement an ambitious reform agenda. In order to most effectively increase India’s growth potential, the government will need to design its reforms to maximise the use of the following three levers:
- Increased Domestic and Foreign Investment. Accelerating economic growth will require jumpstarting India’s investment rate. In order to achieve 10% or higher growth, India needs to increase investment to 40-45% of GDP from 30% currently and 37% at its height in FY09, through a significant increase in the domestic savings rate, increased FDI, lower inflation (through monetary policy), and increased financial intermediation.
- Increased Productivity. India’s productivity growth, which has slowed from 5.8% to 2.4% in the last two to three years (well below the 7-7.5% levels which China was able to achieve), will need to increase by 5% through a combination of structural reforms and administrative and executive actions, with priority given to increasing agricultural productivity and transitioning the workforce into industry and services
- Growing the Labour Force. Most importantly, India needs to create high-quality jobs for the additional 250m people who will enter the labour force, including 30 million new jobs within the first two years, through investments in manufacturing, infrastructure and agriculture, with priority given to driving employment for women, who at 38% labour participation in India are among the most marginalised of any major country.
The 12% Growth Agenda: Key Policy Priorities
India needs an ambitious and comprehensive growth plan if it to meet its development objectives and deliver meaningful economic and social progress to its citizens. We have dubbed this plan The 12% Growth Agenda, representing that ambitious stretch target an incoming government should aspire to, commit to and execute. Indeed for an incoming BJP government under Mr Modi this may well prove to be a necessity if it is to avoid turning high expectations to anger. Accelerating growth to 12% will require any new government to deploy all the policy tools and political capital available at its disposal. To do this, the incoming government will need to pursue a parallel multi-pronged approach to enacting the reform agenda focused on three areas in particular: (i) Monetary and fiscal policy through executive action and empowering the relevant regulators, (ii) Capital markets initiatives and financial reforms (through the regulators and legislation) and (iii) Productivity-enhancing structural reforms. These will need to be executed through administrative actions, close coordination with state governments and legislative
Additionally, it is important to keep in mind that while India clearly needs an accelerated high rate of economic growth, simply growing headline GDP will not be sufficient for it to meet its goals; the quality of growth is equally critical and will be judged on sustainability, breadth of impact on the population and environmental impact. On the environmental impact, China’s pollution is estimated to cost the country c.3.5% in GDP growth.
Execution, Timing and Outcomes
Delivering such a far-reaching reform agenda in any country, not just India, would clearly be challenging, but not impossible if the government has the mandate and uses it boldly to take the right risks while continuously building the political momentum for reform across various aspects of the economy. There are five components to the execution plan for India’s change programme:
Easiest First, Bank Early Successes. Timelines for government deliverables in India, where early elections are often the rule rather than the exception, are short, with a need to bank early successes to enable deeper longer term reforms and insulate against the risk of early elections. Accordingly the government will need to prioritise administrative and executive as well as monetary and fiscal initiatives that have immediate impacts on the economy.
- High Growth from a Low Base. The government should also focus on the most growth-challenged states where small reforms can have the maximum possible impact. If growth can be initiated in the larger poor states in India, then their low-base alone will ensure that overall growth accelerates significantly, and more importantly, the government will succeed in bringing more and more regions of the country into the economic growth story.
- State Level Peer Group Pressure Tactics. The government will need to enlist the early assistance of high growth states by creating the environment in which certain high-performance states embrace key agenda initiatives and then publicize the resulting benefits and wealth to create pressure for change for the laggards.
- High Profile Heroes and Villains. To ensure that the country’s growth potential in double digits for a sustained period of time India’s leaders will need to challenge some well-entrenched incumbents in the government and in industry and take on endemic crony capitalism and corruption to create a genuinely level playing field for all businesses, requiring a comprehensive reform governance and government – from the bureaucracy through the judiciary to local police stations, and by ensuring transparency in all manner of government functioning.
- Record, Report and Rally. Finally, India will need to implement a recording system to measure progress along a new scorecard, one that measures the well-being of the nation and the creation of its system of enterprise. The scorecard will need to be transparently reported to create and keep the pressure on late-adopters and rally people to the need to change.
The challenge for a BJP-led government is to meet huge expectations which include creating a corruption-free India, opportunity for all, spreading the Gujarat prosperity model nationwide and re-asserting India’s place and pride among respected nations. And of course, the challenge for a Congress-led government is the same; it is just that expectations are lower. If either of the parties is able to set India on the course for 12% growth through the measures described above, the country will be radically transformed. By 2025, average per capita income will have grown from the current US$90 (5,700 INR per month) to US$420 (compared to the current consensus estimate of c.US$210) and several million people will be lifted out of poverty. India will have the world’s third largest economy in purchasing power parity terms, larger than Japan’s and trailing only the US and China. It will also have succeeded in significantly enlarging its labour force by 250m– creating a world class services sector (including industries such as financial services, information technology etc.), have caught up to global productivity levels in agriculture, and building out a large manufacturing base which can absorb the country’s labour. In this period, India could become a world leader in industries such as pharmaceuticals, financial services, automobiles, information technology, among others. A strong vibrant and growing India in 2025 would also be an economic platform for India to play a more effective role in the world at large. The country is already pursuing super-regional defence and policy goals through bilateral engagements with countries like Japan, Australia and Vietnam, the strength and importance of which will only grow with India’s development. A strong and developed India will also be a more effective trading partner for China and a potent alternative to China for many when it comes to attracting manufacturing companies, investing in Africa, acquiring blue-chip companies in the US and Europe or attracting intellectual property investments for the growth industries of tomorrow.
India’s challenge is that most economic transformations on the scale required were either engineered top down in authoritarian states (e.g. Singapore, China, Chile, and South Korea) or implemented in the face (or wake) of a crisis significant enough to shatter the country’s status quo (e.g. India during the 1991 reforms, where the country had less than three weeks of foreign currency reserves). Regarding the former, India is too large and too diverse to ever accommodate authoritarian rule at the national level. Regarding the latter, there is no looming catastrophe to act as a watershed in sight currently. India’s current crises are slow-boiling ones which, despite the occasional simmer, its previous leaders have been able to more or less successfully sit out. Getting India to double digit growth will therefore require a third way: a visionary leader or leaders who can build the case for growth and reform with the public create an irreversible momentum for the economic and political changes which India needs to realise its potential. Having initiated the change, the government would do well to maintain the momentum and fully open India for the world’s talent, capital and intellectual property. Given the size of this challenge, the conclusion of the elections will in some ways mark the start, rather than the end of the uphill battle to victory facing the winners.
 see the March 2012 Sign of the Times: India Wide Open
 From 1947 to 1990, when the country grew at an average rate of 3.5%, the people living in poverty increased by 221m. However, in the two decades since the 1991 reforms average growth accelerated to 6.5% and 113m people were lifted out of poverty.
 Defined as people aged between 15 and 30; Source: United Nations Population Database
 Source: United Nations Population Database
 While the expected tapering of quantitative easing policies in the US are expected to adversely impact global liquidity conditions, recent estimates by the World Bank and IMF suggest that the India’s growth will recover to 6-7% levels in spite of these developments
 Source: The Conference Board
 Based on FICCI estimate that 10mn new jobs need to be created per year in order to achieve 9% GDP growth
 Cost of Pollution in China, World Bank
 See the Jan 2013 Sign of the Times Leader: Protests in China and India: When is Enough Enough?