How India can escape the middle-income trap

In 1999, when ICICI was designing its retail strategy, we picked two youngsters fresh out of campus to work on this task. One of them was a lad from IIM-C, Krishnamurthy Subramanian. It is gratifying to see the youngster become a professor, assume the mantle of India’s chief economic adviser during a difficult period for the global economy, and pen the optimism that I have passionately felt about the Indian economy in his new book India@100.The retail strategy that we conceptualised then at ICICI helped spur the growth of India’s consumer class, which now contributes about 60% of our GDP. The Indian economy has now charted new territory, especially during the pandemic, by outperforming all the advanced economies with consistent growth over 7% and strong macro-fundamentals. The optimism that such outperformance has generated leads me to dream about the strength of our economy in our centennial year. A $55tn economy in 2047 is eminently possible.Subramanian postulates a new growth construct for the nation. For the first time, we see an economist breaking free from the mould and mindset of 19th-century economic theory, boldly envisaging a Viksit Bharat or developed India by India’s centennial year with GDP per capita equalling $40,000.Persuasively laying out his underlying theme, Subramanian argues that India needs to break free from the pessimistic shackles of the past and set bold targets, underpinned by sound thinking. The inspiration for India’s optimism stems from case studies of growth from the last 50 years, showcasing rapid transformations in economies like Japan, China, and South Korea.For instance, Japan’s economy grew from $215bn to $5.15tn between 1970 and 1995. During this period, inflation declined from about 8% to around 1%, and interest rates saw a similar decline. The exchange rate strengthened from approximately 350 Yen to 85 Yen per dollar. Japan also became the innovation hub of the world. China’s growth trajectory demonstrates a similar trend. Rapid growth to India becoming a developed economy by 2047 is indeed possible if we discard pessimism.So, how do we achieve a $55tn economy by 2047? Subramanian argues that an 8% long-term growth rate is feasible. Coupled with 5% inflation and 0.5% currency depreciation, which itself stems from lower inflation leading to lower depreciation of the currency, this results in an overall GDP growth rate of 12.5% (=8+5-0.5) in US dollars. According to the rule of 72, this implies that GDP would double approximately every six years over the 24-year period from 2023 to 2047. The doubling every six years would enable GDP to grow about 16 times from $3.28tn in 2023 to $55tn in 2047. This is eminently doable.India’s growth can be not only high but also inclusive if we base it on four pillars that will shape Atmanirbhar Bharat at 100. These pillars are macro-economic focus on growth, social and economic inclusion to build a large middle class, ethical wealth creation by the private sector, a virtuous cycle ignited by private investment. As high growth has sharply reduced poverty, our macro-economic focus must be on implementing policies to generate high growth. Social and economic inclusion through high-quality jobs enables the benefits of high growth to spread far and wide, thereby generating the necessary democratic support for salutary economic policies.The emphasis on markets and ethical wealth creation as the third pillar captures the refreshing change in economic mindset towards respecting wealth creators for the telling contribution they make. Finally, as the experience of every country that has registered high growth demonstrates, private investment is the engine that can drive a virtuous cycle.In this path to Viksit Bharat, India can certainly avoid the middle-income trap. For this purpose, Subramanian emphasises the need to gradually eliminate subsidies and protectionism, drive manufacturing and exports, and implement reforms to ease economic activity. He calls for an agrarian renaissance by highlighting that the status quo only benefits a few. Therefore, agri reform must create the coalition of small farmers as the labharthis, or key beneficiaries, of reform.The digital bridges that have been established can be built further by leveraging the digital public infra that has transformed the country. Over the next 24 years, India must become an innovation hub, driven by private investment and a virtuous investment cycle. Given the progress made in recent years, India benefits from clean and strong balance sheets in both the corporate and banking sectors, along with strong cash flows.India@100 persuasively outlines the path forward to a Viksit Bharat in refreshing detail. By pursuing this path, India can certainly rub shoulders with the top economy in the world in 2047. This once-in-centuries opportunity thus heralds India’s Amrit Kaal.The writer is chairman of the National Bank for Financing Infrastructure and Development (NaBFID) and former CEO of ICICI Bank.