Indian economy in 2061

History is like Pac-Man, the eponymous hero of the video game. Just like he relentlessly gobbles up the dot-like pellets, History too is a voracious consumer of pellets, we call “events”. An event has but a momentary existence before it vanishes into the vast innards, and becomes part of History. The job of a futurologist is to gaze at, and describe all the pellets before they get gobbled up. Looking at India in 2061 is such an exercise. Of course, History is not a jealous hoarder of her treasures (the “events”). She reveals lessons from the past, only if you are willing to look. Often these lessons help us predict and anticipate the future, the part that has not yet been devoured by History Pac-Man. This is a process of linear extrapolation. It is also an implicit application of the maxim, that history does repeat itself.

In this essay, we will confine ourselves to extrapolating the economic aspects of India into the future. Perforce we will be silent on many other fascinating aspects of life of the nation, such as science, education, health and culture. Of course, some (if not many) economists believe that economic issues pervade all parts of our lives. These people are the champions of extreme economic determinism, who feel supremely confident on prognosticating on every aspect, purely based on economic analysis. We shall desist from such overreach.

1. Unity of India is Robust

The rollout of a nationwide goods and services tax (GST) system, which will overcome inter-state barriers of trade and commerce will act as binding glue for economic unity.

India in 2013 is already among the top ten economies, in sheer size. If size is measured in dollars, adjusted for changes in purchasing power across different countries, then India is the third largest economy in the world. When India was born as an independent nation in 1947, the world had around 120 other countries. Today, the United Nations membership has more than 240. So, India’s ascent in global ranking has more potency, simply because the class size is bigger! Of course, it is not as if the world discovered new landmass. It is just that in the past seven decades, old and new nations broke up into smaller parts. Even our twin, born in 1947 broke into two. Our erstwhile close friend, the Soviet Union broke into ten pieces. As late as 2013, a new nation was born out of Sudan. But India has remained intact, in one piece. Given its immense diversity on every conceivable dimension (race, religion, language, cuisine, culture), this indivisibility itself is a remarkable thing. Moreover it has remained united despite a political framework of multiparty democracy, which has inbuilt fissiparous forces. There is little prospect of civil war, or secession in the coming half century. In fact, there are many centralizing forces, which create national ties, making it less likely that India will break up. One such development is the creation of a common economic market across the length and breadth of the country. The rollout of a nationwide goods and services tax (GST) system, which will overcome inter-state barriers of trade and commerce, will act as  binding glue for economic unity. This consensus among all 35 states of India has taken a decade, but is to be celebrated as a landmark in India’s federal setup. The GST consensus involved surrender of semi-sovereignty by the states, in exchange for larger welfare of the nation as a whole. That this consensus was obtained without coercion, in a democratic setup is remarkable. Such political achievements lend support to our assurance that breakup of India is an extremely remote possibility.

This is not to say that there may be proliferation of sub-national entities. As more power gets devolved to lower strata of governments, the administrative manageability becomes a constraint. Many states of India, if they were independent countries, would be among ten most populous countries. Uttar Pradesh would probably be fifth and Maharashtra seventh largest nation. Hence, it is quite likely that in the next five decades, larger states will break up into smaller ones. The birth of states like Chhattisgarh, Uttarakhand and Jharkhand is testimony to this tendency, and feasibility. It is possible that India will be made up of fifty states, and maybe eight hundred districts. The spirit of empowering lower tiers, like village and town councils will manifest in many tangible ways. Already much of government’s welfare spending is getting routed through the lowest tier, i.e. the village panchayat. This phenomenon will only get stronger. It is quite likely that local governments will have a greater say in running schools, law and administration and building, upkeep and provision of local infrastructure. The national level constitutional mechanism of the Finance Commission will ensure that a greater share of tax revenue automatically devolves to lower tiers.

As for tighter national integration, there are several interlinked factors, which minimize the chance of the nation crumbling into smaller pieces. The India nationhood experiment is unique, because it has allowed citizens to maintain multiple identities. India has often been called a salad bowl, rather than the melting pot. The latter leads to eventual homogenous identity, but the former allows distinctions to be sustained.

One factor weaving the nation together is the movement of labour, which is also a decisive factor. India has one of the largest intra-country labour migration in the world. Large scale movement of labour, and their connection via the remittance economy, to their homelands, also weave uniting threads in the quilt of the nation. The free movement of labour is a remarkable feature guaranteed by the constitution. It has had a dynamic effect in the evolution of India. Despite being tested by occasional political turbulence caused by regional parties agitating against “outsiders”, this right to free movement has had a robust existence in this vast nation.

2. Evolution of Economic Size

It is possible that India will be made up of fifty states, and maybe eight hundred districts.

The prediction of the economic size of India in 2061 is a relatively straightforward exercise. We know from the authoritative work of Angus Maddison, the renowned British economist, that India and China made up more than 50% of global GDP until the advent of the Industrial Revolution. India was the second largest economy even as late as 1870. The historic large share of India and China, commensurate to their population share is expected to be restored in this century. More recently, the publication of the BRIC report by Goldman Sachs (and its technical revision by the IMF), as well as several other similar reports point to resurgence of India’s economy. If we think of the economy as a machine in a black box which produces output called “GDP” and takes inputs called “labour” and “capital”, it is easy to understand the logic of the BRIC report. India’s labour force is expanding at around 2.5% per annum, and capital is expanding at a rate of about 3%. The latter is aided by India’s high savings rate. Both these are structural features of the economy, unaffected by macroeconomic shocks, or political or business cycles. In addition to labour and capital stock, is the phenomenon of productivity. If one unit of labour combined with one unit of capital produces one unit of GDP, then in course of time, a productivity improvement means higher output per unit of inputs. Productivity improvement is a consequence of better education and innovation, which are essentially enhancement to human and physical capital. Together these three factors, labour, capital and productivity are sufficient to forecast the economy’s trajectory. To express the economic size in dollars, we need additional assumptions about how the exchange rates will evolve. (We also need to adjust for inflation.) Assuming a slightly appreciating bias of the rupee, the Indian economy will be roughly 60 to 70 trillion dollars, in today’s prices. That’s roughly four times the size of the present USA. It will be second or more likely the third largest economy, and the largest in terms of population.

Demographic projections are more reliable, since they are based on mortality tables, which have long-term stability. Human capital projections are harder, since they have to assume educational achievements, on top of demography. Even with these caveats, it can be asserted that India will be a very large economy by 2061. It may however be stuck in the “middle income” category. That is, the per capita income of Indians will remain in the middle quartile of the world. Very few economies in modern history have been able to make the transition from low income to very high (per capita) income in two or three generations. Japan and South Korea are outstanding examples. But there are many other economies like Brazil and South Africa, who for long periods saw their per capita incomes stagnating. This may be true for India and China as well, although Chinese per capita income may be considerably higher than India.

3. Some Demography Changes and Implications

India has often been called a salad bowl, rather than the melting pot. The latter leads to eventual homogenous identity, but the former allows distinctions to be sustained…

The changes in India’s demography, even though predictable, will lead to some radical changes. These are termed “radical” only because it produces a picture quite different from the current circumstances. The median age of India is currently 26. A large proportion of those below the age of 26, are less than 15 years of age. But by 2061, the median age will move rapidly to 38 or 39. This acceleration is due to several factors. Life expectancy is constantly increasing, and will probably reach 80. The total fertility rate (TFR), i.e. the average number of children born to a woman of childbearing age will go down. The replacement TFR is 2.1. This TFR has already been achieved by states like Kerala, Tamil Nadu, Maharashtra, West Bengal and ten other states of India. India as a whole will reach 2.1 only by 2060. TFR reduction is aided by factors like rise in female literacy and female participation in the labour force (i.e. getting into paid work, as against unpaid work at home). TFR reduction has been unexpectedly fast in many states of India. This population stabilization is beneficial, because it then leads to rapid increase in per capita income and standards of living. Worryingly, the TFR for the country is stuck at 2.6 in 2011, and half the population live in states which have much higher TFR. This means that per capita income increase will be more rapid in the low TFR states. This will lead to increasing interstate, or inter regional inequality.

The phenomenon of ageing will also become more pronounced. India’s population will go up only by 50% in the next 50 years, but the share of elderly will be up by 200%, reaching around 350 million by 2061. The elderly tend to be net consumers, since they are “living off” their savings. In India, unlike in the West, a larger proportion of the elderly are poor, so their dependence on the state is greater. In the West, the elderly are relatively more wealthy, than the general population, and hence are often target of political canvassing. The rise of elderly population provides an opportunity for businesses that cater to their needs and lifestyle, but the size of the market will be tempered because of large presence of low income people. Resultantly, the responsibility of their care, on the state will be much greater.

4. Public Finance

Most of the projections to 2061 rely on demography. For the government’s treasury too, the demographic phenomenon portends good fortune. With the rollout of consumption-based taxation in the form of GST, there will be tax buoyancy.  With greater integration of information technology and tax administration, more people will be in the tax net. India’s tax to GDP ratio at 11% is quite low among its peers. This is sure to rise in the coming decades. If agriculture income becomes taxable, through a constitutional amendment, that too will add to the ratio. This will also mean that the government debt to GDP ratio will not rise alarmingly. It is likely to stay well below 90%. We will also see more devolution of taxing powers to lower tiers of government, especially city councils. Local infrastructure provision will become primary responsibility of local governments, who will depend on their tax base or their own debt financing capacity.

However, these beneficial trends are also offset by contrary factors. India is a fractious democracy with more than 1200 political parties. Democracies have an inherent bias to produce fiscal deficits. This is because there is tremendous pressure from interest groups on spending, but there is no vested interest for higher tax collection. This feature is compounded in Indian context, since electoral victories are based on wafer-thin margins. Hence, there are often multiple (three or four) hopeful aspirants, with competing spending agenda. Since no national party can realistically hope for an absolute majority, it has to depend on allies to form governments. In the age of coalitions, the impact on fiscal health is adverse. Even with greater transparency and accountability in our electoral systems and the functioning of the government, the tendency toward fiscal discipline will be weak.

The best antidote to weak fiscal discipline is to increase the share of spending on public goods. This includes conventional things like physical infrastructure: roads, bridges, public transportation. It also includes spending on primary health and education, since these have spill over benefits for society at large.

5. Worry Points: Energy, Resource Sustainability, Urbanization

India will have 21% of the world’s population but only 2.4% of its landmass, and less than 2% of fresh water resources. In the coming decades, the per capita consumption of energy will rise at least as fast as GDP growth. This is much faster than most of the developed world. This will require energy sources like coal, oil and gas, and renewable sources like wind, solar, nuclear and biomass. India’s current per capita consumption of electricity is below world average. This will need to rise faster than world rates. The world crossed an important landmark in 2010, when more than fifty percent of the world’s population was located in cities. In India, the degree of urbanization is only 30% and will rise more rapidly than rest of the world. Urban dwellings have a much larger requirement of energy and resources. Hence, in the next 50 years, India will have to grapple these exponentially growing challenges. Aggressive pursuit of the Sustainability Agenda is called for. Water resources can be considerably enhanced with recycling. Cropping decisions have to be based not on maximizing production, but maximizing yield per unit of water. Similarly, industrialization too needs to focus on maximizing production per unit of electricity. Of course, maximizing employment (and hence focus on labour intensive industries) should remain a focus too. The management of energy and water probably are the greatest challenges in India’s journey to 2061.

6. Concluding Thoughts

History’s Pac-Man will quickly gobble up events, and indeed all the years from 2013 to 2061 in a trice. India is a much older civilization than it is a nation. In the life of a civilization, fifty years is but a tiny dot, the “pellet” that the Pac-Man will devour. Change will happen, but will be overshadowed by continuity. Discontinuous change is unlikely. But seen from the perch of 2061, it will still be a dramatic progress. It is like the ascent of a mountain along its slowly rising contours. The climb is gradual, often imperceptible. But a glance back from the summit displays some astonishing panorama. The world’s second largest economy, a strong union after 114 years of Independence a large and vibrant middle class, a fractious and rambunctious democracy, a thriving industrial hub of low cost innovation, are but some of the descriptors of that panorama. For more details, we have to wait till 2061.