India’s Unusual Economic Past and Uncertain Future
Arvind Subramanian Senior Fellow, Peterson Institute for International
Economics and Center for Global Development
Atlantic Council Washington DC August 10, 2012
Overview • Unusual Model: “Precocious India”
• Economic future
– Near-term macro-challenge
– Medium-term growth challenge
– Long-term “everything” challenge
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6
6.5
7
7.5
8
8.5 R
eal L
og
GD
P p
er c
apit
a -
PP
P
Per capita (2011): $3654 (PPP) $875
Balance of payments crisis
“Hindu growth” 1,8%
Low investment, low TFP
“Turnaround” 3,1%
Low investment, high TFP “Take-off”
7,0% High investment,
high TFP
Per capita (1960): $711 per capita (PPP) $145
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Precocious India • Political: The democracy exception
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Precocious India
• Political: The democracy exception
• Growth based on using skilled rather than unskilled labor
– Services-led (IT and software) not manufacturing-led growth
– Within manufacturing too, skill-intensive and highly diversified
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India and China: Services Vs. Mfg
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Precocious India
• Unusual pattern of political and economic development
• Political: The democracy exception
• Growth based on using skilled rather than unskilled labor
– Services-led (IT and software) not manufacturing-led growth
– Within manufacturing too, skill-intensive and highly diversified
– Uphill flows of foreign direct investment (FDI)
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9
India and China: FDI Exports
India
$15.5 bns
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Different and Not-so-Different India
• Domestic demand rather than export-led growth – Consumption-to-GDP ~35% in China and 58% in India
– Number of years of surplus
– Trade/GDP • India: from 16%(1980) to 45% (now)
• China: from ~20-25% (1980) to 80% (now)
• Social outcomes:
• Not-so-bad on inequality
• Par on life expectancy
• Terrible on child malnutrition
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8/20/2012 Arvind Subramanian
Afghanistan, 2008
Albania, 2008
Argentina, 2010
Armenia, 2008
Austria, 2000
Azerbaijan, 2008
Belarus, 2008
Belgium, 2000
Belize, 1999
Bhutan, 2007
Bolivia, 2008
Bosnia and Herzegovina, 2007
Bulgaria, 2007
Cambodia, 2008
Canada, 2000
Chile, 2009
Colombia, 2010
Costa Rica, 2009
Croatia, 2008
Czech Republic, 1996Denmark, 1997
Djibouti, 2002
Dominican Republic, 2010
Ecuador, 2010
Egypt, Arab Rep., 2008
El Salvador, 2009
Estonia, 2004
Fiji, 2009
Finland, 2000
Georgia, 2008
Germany, 2000
Greece, 2000
Guatemala, 2006
Guyana, 1998
Haiti, 2001
Honduras, 2009
Hong Kong SAR, China, 1996
Hungary, 2007
Indonesia, 2005
Iran, Islamic Rep., 2005
Iraq, 2007
Ireland, 2000
Israel, 2001
Italy, 2000
Jamaica, 2004
Jordan, 2010
Kazakhstan, 2009
Korea, Rep., 1998
Kyrgyz Republic, 2009Lao PDR, 2008 Latvia, 2008
Lithuania, 2008
Luxembourg, 2000
Macedonia, FYR, 2009
Malaysia, 2009
Maldives, 2004
Mexico, 2008
Micronesia, Fed. Sts., 2000
Moldova, 2010
Mongolia, 2008
Montenegro, 2008
Morocco, 2007
Nepal, 2010
Netherlands, 1999
New Zealand, 1997
Nicaragua, 2005
Norway, 2000
Panama, 2010Papua New Guinea, 1996
Paraguay, 2010
Peru, 2010
Philippines, 2009
Poland, 2009
Portugal, 1997
Qatar, 2007
Romania, 2009
Russian Federation, 2009
Serbia, 2009
Singapore, 1998
Slovak Republic, 2009
Slovenia, 2004
Spain, 2000
Sri Lanka, 2007
Suriname, 1999
Sweden, 2000
Switzerland, 2000
Syrian Arab Republic, 2004
Tajikistan, 2009
Thailand, 2009
Timor-Leste, 2007
Tunisia, 2005
Turkey, 2008
Turkmenistan, 1998
Ukraine, 2009
United Kingdom, 1999
United States, 2000
Uruguay, 2010
Uzbekistan, 2003
Venezuela, RB, 2006
Vietnam, 2008
Yemen, Rep., 2005Benin, 2003
Burkina Faso, 2009
Burundi, 2006
Cameroon, 2007
Cape Verde, 2002
Central African Republic, 2008
Chad, 2003
Comoros, 2004
Congo, Dem. Rep., 2006
Congo, Rep., 2005
Cote d'Ivoire, 2008
Ethiopia, 2005
Gabon, 2005
Gambia, The, 2003
Ghana, 2006
Guinea, 2007
Guinea-Bissau, 2002
Kenya, 2005
Liberia, 2007
Madagascar, 2010
Malawi, 2004
Mali, 2010
Mauritania, 2008
Mozambique, 2008
Namibia, 2004
Niger, 2008
Nigeria, 2010
Sao Tome and Principe, 2001
Senegal, 2005
Seychelles, 2007
Sierra Leone, 2003
Sudan, 2009
Tanzania, 2007
Togo, 2006
Uganda, 2009
Zambia, 2006
Bangladesh, 2010
Brazil, 2009
China, 2005
India, 2005
Pakistan, 2008
20
30
40
50
60
70
Gin
i In
de
x
6 7 8 9 10 11Log of per capita GDP (PPP)
Note: The surveys used are the latest available for each country
Source: World Bank, WDI
Gini Index and GDP - most recent
Afghanistan, 2004
Albania, 2005
Algeria, 2005
Argentina, 2005
Armenia, 2005
Australia, 1996
Azerbaijan, 2006
Belarus, 2005
Belize, 2006
Bhutan, 2008
Bolivia, 2008
Bosnia and Herzegovina, 2006
Bulgaria, 2004
Cambodia, 2008
Chile, 2008
Colombia, 2005
Costa Rica, 1996
Croatia, 2009
Czech Republic, 2002
Djibouti, 2006
Dominican Republic, 2007
Ecuador, 2004
Egypt, Arab Rep., 2008
El Salvador, 2003
Georgia, 2005
Germany, 2006
Guatemala, 2002
Guyana, 2007
Haiti, 2006 Honduras, 2006
Indonesia, 2010
Iran, Islamic Rep., 1998
Iraq, 2006
Jamaica, 2007
Jordan, 2009
Kazakhstan, 2006Kyrgyz Republic, 2006
Lao PDR, 2006
Lebanon, 2004
Libya, 2007
Macedonia, FYR, 2005
Malaysia, 1999
Maldives, 2001
Mexico, 2006
Moldova, 2005
Mongolia, 2005
Montenegro, 2006
Morocco, 2004
Myanmar, 2003
Nepal, 2006
Nicaragua, 2005
Oman, 1999
Panama, 1997
Papua New Guinea, 2005
Peru, 2005
Philippines, 2003
Romania, 2002
Samoa, 1999
Saudi Arabia, 2005Serbia, 2006
Singapore, 2000
Solomon Islands, 2007
Sri Lanka, 2009
Suriname, 2006
Syrian Arab Republic, 2006
Tajikistan, 2005
Thailand, 2006
Timor-Leste, 2003
Trinidad and Tobago, 2000
Tunisia, 2006
Turkey, 2004
Turkmenistan, 2000
Ukraine, 2002 United States, 2004
Uruguay, 2004
Uzbekistan, 2006
Vanuatu, 2007
Venezuela, RB, 2007
Vietnam, 2008
Yemen, Rep., 2003
Benin, 2006
Burkina Faso, 2009
Burundi, 2000
Cameroon, 2006
Central African Republic, 2000Chad, 2004
Comoros, 2000Congo, Dem. Rep., 2007
Congo, Rep., 2005
Cote d'Ivoire, 2006
Eritrea, 2002
Ethiopia, 2005
Gabon, 2001Gambia, The, 2006
Ghana, 2008
Guinea, 2008
Guinea-Bissau, 2006
Kenya, 2009
Liberia, 2007
Madagascar, 2009
Malawi, 2006
Mali, 2006
Mauritania, 2008
Mozambique, 2003
Namibia, 2007
Niger, 2006
Nigeria, 2008
Rwanda, 2005
Sao Tome and Principe, 2009
Senegal, 2005
Sierra Leone, 2008 Sudan, 2006
Tanzania, 2005
Togo, 2006
Uganda, 2006
Zambia, 2007
Bangladesh, 2007
Brazil, 2007
China, 2005
India, 2006
Pakistan, 2001
02
04
06
0
Ma
lnutr
itio
n r
ate
6 7 8 9 10 11Log of per capita GDP (PPP)
Malnutrition rate is pctage of children under 5 whose height is more than two SDs below the median of international reference
Sources: WHO, Global Database on Child Growth and Malnutrition. WDI
Children malnutrition and GDP (most recent survey)
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Near Term Challenges
• Macro-economic vulnerabilities
– Inflation
– External deficits
– Fiscal deficits
• Slow-down in growth
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High and Persistent Inflation
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Persistently High Fiscal Deficits
-12
-10
-8
-6
-4
-2
0
0
5
10
15
20
25
30
35
88 90 92 94 96 98 00 02 04 06 08 10
Revenues Expenditures Fiscal balance (RHS)
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What Potential: Medium Term Challenges? • India does not deserve to be growing at 8-9 percent (cross-
section and time series) – Is high inflation signalling that?
• “Precocious India” model unsustainable
• Scarce Skilled labor: Dysfunctional education limits supply
• Abundant unskilled labor: Under-utilized by labor laws
• Scarce social capital: Undermined through
corruption/criminality
• Not-so-abundant land: Now locus of corruption; price bubble
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What Potential: Medium Term Challenges? • Fiscal populism
• From permit-licence-quota raj to Rents Raj:
– Ethereal rents
– Terrestrial rents
– Subterranean rents
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How can you keep India down? • Long way to go before running out of steam (“Advantage of
backwardness”) – India’s per capita GDP is about 8 percent of US in 2010 and will be
20 percent in 2030 even if India grows at 9 percent a year)
• Demographic dividend
• Growth begetting growth dynamic has taken over – Education – Nano
• Dynamic of competition between states
• More responsive politics
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How can you keep India down? • Entrepreneurship: Nation of hustlers (“Jugaad”)
• Skilled labor: Growth eliciting supply especially in
allowing private sector to substitute for public sector
• Unskilled labor: Demographic dividend and labor mobility aiding convergence
• Scarce social capital: • The Gilded Age Analogy: The market for wealth
accumulation, crookery and criminality contestable • Civil society
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Long-term challenges
• Democracy and governance: Race between rot and regeneration
• The five axes of discord: – Economics (Class)
– Language
– Caste
– Religion
– Geography/Tribals: Internal security threatened: Writ of the Indian state runs only in 80% of the country
• Resources: Climate change and Water
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Persistent Current Account Deficits
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Index of Economic Dominance
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China India
Size of economy (PPP $; trillion) 14.8 4.6
Rank 1 3
Size of economy ($; trillion) 5.9 1.6
Rank 2 9
Per capita GDP (PPP $;) 11.3 3.8
Economic growth since 1980 (%) ~10 % ~6.5 %
Trade (goods and services; $, trillion) 3.3 0.8
Inflation (%) ~3.5 ~9
Fiscal deficit (% of GDP) ~3 ~10
Current account balance (% of GDP) 3 -3
China and India: Key Economic Facts
