“Any emerging economy that performs well is good news,” Kaushik Basu, a former World Bank chief economist, tweeted after the International Monetary Fund updated its World Economic Outlook. “But it is surprising that India, which had a 25% lead five years ago, is now behind.”
Ever since it began opening up the economy in the 1990s, India’s dream has been to emulate China’s rapid expansion. After three decades of persevering in that campaign, falling behind Bangladesh damages its global image. The West wants a significant counterweight to China, but that partnership will be based on India not getting caught in a lower-middle-income trap.
Relative poor performance can also affect self-confidence. If a country with great power ambitions is defeated in its own backyard, by a smaller nation that it helped liberate in 1971 by going to war with Pakistan, its influence in South Asia and the Indian Ocean could diminish.
Where have things gone wrong? The coronavirus pandemic is definitely to blame. New infections from Bangladesh peaked in mid-June, while India’s number of daily cases is starting to decline only now, after hitting a record for any country. With 165 million people, Bangladesh has recorded fewer than 5,600 deaths from Covid-19. While India has eight times the population, it has 20 times more deaths. What’s worse, the severe economic blockade imposed by India to stop the spread of the disease will wipe out 10.3% of real production, according to the IMF. That’s almost 2.5 times the loss the world economy is expected to suffer.
Fiscal scrupulousness, an undercapitalized financial system, and a multi-year investment funk would delay India’s recovery in demand after Covid. Worse still, even without the pandemic, India could have finally lost the race to Bangladesh. The reason is nested in a new article by Pennsylvania State University economist Shoumitro Chatterjee and Arvind Subramanian, India’s former senior economic adviser, titled “India’s Export-Driven Growth: Example and Exception.”
Consider first the exceptionalism of India’s growth. Bangladesh is doing well because it is following the path of previous Asian tigers. Its share of exports of low-skilled goods is in line with its share of the working-age population of poor countries. Vietnam is hitting slightly above its weight. But basically, both of them are taking a sheet out of China’s playbook. The People’s Republic maintained high GDP growth for decades by gaining a much greater command of the manufacture of low-skilled goods than its workforce size warrants.
India, however, has gone the opposite way, choosing not to produce the things that could have sucked its working-age population of one billion into factory jobs. “India’s missing output in the key low-rated textiles and apparel sector amounts to $ 140 billion, which is roughly 5% of India’s GDP,” the authors say.
If half of India’s computer software exports in 2019 ceased to exist, there would be a furor. But that $ 60 billion loss would have been the same as the annually lost exports from low-skilled production. It is real and yet no one wants to talk about it. Lawmakers don’t want to acknowledge that shoe and apparel factories that were never born, or were forced to close, could also have made dollars and created massive jobs. They would have provided a path for permanent migration from the countryside to the city in a way that jobs that require higher levels of education and training can never do. Bangladesh has two out of five working-age women in the workforce, double the 21% participation rate of India.
A greater danger is that instead of taking corrective action, politicians may redouble past mistakes and seek salvation in autarky: “Poorer than Bangladesh? Never mind. We can erect barriers to imports and do things for the national economy. We create jobs that way ”. Suddenly, the self-reliance slogan of the 1960s and 1970s is returning to economic policy.
To dispel this pessimism, Chatterjee-Subramanian’s study comes in handy again: Contrary to popular belief, India has been an example of export-led growth, doing better than all countries except China and Vietnam. The glass is half full.
Trade has worked for the country. It is the composition that is wrong, due to unusual “specialization that defies comparative advantage,” the researchers show. India exports a large number of highly skilled manufacturing goods and services, such as computer software. But as a global factory, China is now giving way to others at the lower end of the spectrum. That is where India’s opportunity really lies and the competitive advantage of its cheap and not particularly healthy or well-educated workforce.
Given the urgent challenge of creating at least 8 million jobs year after year, it is also the biggest post-pandemic headache in the country.
(1) At their current prices, and without adjusting for the difference in purchasing power of their local currencies.
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Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services. He was previously a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW, and Bloomberg News.
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