India's Progress Over 75 Years - A Tale of Two Halves

This month India celebrated 75 years of Independence.?We have taken a look at India's economic development over these 75 years.

India's Progress over 75 years - A Tale of Two Halves

There was a decolonization movement in Asia and Africa between 1945 and 1960. We were amongst the first to get Political freedom but did not get Economic freedom at the same time, which most countries did. We followed a Socialistic form of Government, which slowed our progress. Further, the License Raj, corruption, nationalization, and lack of free enterprise caused India to initially lag behind its neighbours’ growth.??

Between 1950 and 2008, it was the golden period of growth for the rest of the world. After World War 2, there was a population explosion, productivity boom, and increase in global debt to finance and leverage growth, which grew at the same rate as debt. Globalization was on steroids. India after getting left behind has now started catching up to the position we were in the 1950s.

• GDP

We were ranked 6th in GDP level in the world in 1950. We moved down to the 13th ? rank and then started growing faster to currently be back to 6th in the world again. It is estimated that in about 10 years, we should reach the 3rd rank in the world.

• Per Capita Income

??????This is the single most important indicator of a country's success. Currently, the per capita income is at US$ 2200 and the gap between India and the rest of the world is at the same level as it was in the 1950s, (per capita?was at US$ 60 then) - after the gap widened in the first few decades. However, we are still ranked 158th out of 205 countries so we are near the bottom.

According to industry experts, US$ 2200 is seen as an inflection point for growth in consumption, when basic needs are taken care of.?We are moving from a pyramid structure (largest population at the lowest strata)?to a more diamond-shaped economy, where the middle-income numbers are rapidly increasing.?

• Life Expectancy has gone up substantially from 40 years in 1950 to 70 years currently. The infant death rate in 1950 was at 140/1000 births and is now at 25/1000 births. In the 1950s about 7 years were spent on schooling which has gone up to 12 years.?
• Economic Freedom - we are in the bottom 25% of the world. The more economically free you are, the richer you are. In Autocratic regimes, you tend to get much more violent shifts in policy, and hence in outcomes?In Democratic countries, you get much more stable policy.
• Market capitalization has risen with our economy. A lot of wealth creation does happen in India. But at the same time, there has been serious destruction of wealth in the Government enterprises, which the taxpayer has had to pay for e.g. Airline, Telecom, Steel, Banking, etc. FII and FDI investments used to move equity, but now retail investors are embracing the markets. One of India's great weaknesses was in Manufacturing - after being stifled for years in the License Raj.?However, it has been steadily rising from 10% of GDP a decade ago to 16% currently.
• In the last 10 years, India was ranked 3rd in the new Billionaire boom.?From 55 billionaires in 2011 (more than half are no longer on the list) to 140 in 2021 (110 are new names). Wealth as a percentage of GDP has gone up from 13.5% to 19.6%. India is a county of extremes and concern has been expressed over inequality of income. Previously a lot of wealth was inherited, but now many new self-made billionaires are created in manufacturing, healthcare, and technology.
• Rupee was at Rs. 4 per dollar at the time of Independence and is now Rs. 79. We have depreciated on an average of Re. 1 per year of Independence. However, for years we were pegged to the dollar and were therefore expensive. We are currently fairly valued and quite cheap in the terms of the Big Mac Index.
• Rapid Digitization in India

India is digitizing at a more rapid pace than anywhere else in the world, which will assist in our growth. This is reflected in 3 areas:

1. Widespread usage of Smartphones.

2.?Ease of transactions which are done without a charge.

3.?Because of?digitization, the transfer of subsidies is done with reduced leakages.?

In conclusion, with India taking the Socialist path, growth was stunted for many years and our economic place in the world fell. However, we are now on a "V" shaped recovery and have re-reached the position we were at Independence and now would hopefully continue the growth trajectory.

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How Did China Move Ahead?

India and China were almost at the same level of economic growth in 1990. Under the leadership of Deng Xiaoping, China's growth was parabolic. He created Special Economic Zones which were relatively free of interference and bureaucratic interventions. These regions became engines of economic growth. In the 1990s, China fired 90 million people from?their?badly run state companies. The State created the infrastructure, and new cities, and encouraged rural people to move to them. Although the population is similar to India, China has double the amount of big cities. The focus was on manufacturing and exports. Only about 10% of India’s population will move outside their districts. India has strong regional identities. Whatever China did in the last 30-40 years, it is now reversing and therein lies the opportunity for India to shine.

Cracks have started appearing in "invincible" Xi Jinping's authority over China.?The zero Covid tolerance policy has caused a huge economic slowdown in Cinna. The protractive Trade War with the US has not helped. The Premier, Li?Keqiang, has urged local officials to stabilize the economy. The President's crackdown on over-leveraged property companies has caused a crash in real estate prices. About 1/5th of China's economic activity is tied up in the property market. 24 leading property companies are on the brink of collapse and 70% of ordinary Chinese people's wealth is tied up in the real estate. They are now publicly revolting, with rapidly escalating boycotts on mortgage payments spread across at least 301 projects in about 91 cities. Fears that it will cause a Banking Crisis in China. It is yet to see whether the Civil unrest spreads in China and how India can benefit from this.

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Economic Growth Going Forward

A country sustaining high growth for decades is difficult.?There are 5 countries that maintained 5%+ growth for 5 decades - China, Singapore, South Korea, Taiwan and Thailand.?India's recovery started 4 decades ago when it started its V-shaped recovery and grew 5%+ per decade along with Malaysia and Hongkong.?If India continues its average 5% growth rate it will become the 3rd largest economy by 2032.?However, it will take 18 years to double the per capita income.

The four engines of growth are faltering globally.

1. Population?

Most countries’ working population is shrinking and also the longevity is increasing. Even in India, the working population growth rate is falling, and is now around 2%,?and is expected to become negative by 2050.?Without favourable population growth, it is difficult to maintain economic growth of 5%. However we do have an advantage in that women have just entered the workforce?and account for only 21% of the?same, and it is about double that for similar countries and about 70% for developed economies. So if more women enter the working population, our growth rate can sustain.

2.?Productivity

Global productivity is declining. During the last 2 decades, as any hint of a slowdown or recession, the Central banks have been pumping in money and hence inefficient companies have been kept afloat. The culture of constant stimulus has undermined the key merits of capitalization.?The tenets of efficient use of capital have been ignored, and hence productivity has fallen.

?3. Globalization

There has been increasing Societal pressure against globalization. Trump, Brexit, etc are all symptoms of this. In India too we are raising trade barriers Further the Government has been encouraging "Made in India", through various policies.?

?4.?Debt

Earlier the rate of increase in debt and the rate of increase of growth was similar.?However, governments have taken on unprecedented debt from the Great Financial Crisis of 2007/8 and again during the?Covid crisis.?With debt, you are buying future growth now, and we may currently be paying the price. Inflation has hit the world and the developed economy's?inflation is higher than India.?

?????Hence, in conclusion, although there is high inflation around the world and definite signs of a slowdown, India is better placed when the recovery starts.??

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EQUITY MARKET

The market continues to be range bound with a few violent moves on either side. The previous top of 18000?- 18300 will show some resistance. There are still global problems.?US inflation will take time to be tamed. Europe has sorted out the Russian gas problem by importing coal from the US, Australia, etc, and climate change is put on a back burner.?China's problems may be beneficial for India.?The market is looking at a good festive season. Credit offtake has risen to a pre-Covid high.?

DEBT MARKET

In India, we are used to inflation being at the 6-7% level.?If the rest of the world continues to raise interest rates, India would have to decide whether to defend the currency and raise interest rates too or push for growth and pause the increases. We do not see 10-year GSec crossing 8%.?

GOLD

Gold continues to be range bound, and trying investor's patience. However there is upheaval?in the global economic system, and even if the digital currency does become popular, it is likely to have some gold backing.?Further, it is good to have some hedge against global uncertainty.?

Disclaimer: - Inputs and data collected from various sources