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#4 Pillars That Drive India's Growth Story

A rising population causes real GDP to grow but it does not allow the real GDP per capita to grow
#4 Pillars That Drive India's Growth Story
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An economy can grow for many different reasons. But which reasons may be considered the most important?

Consider, for example, the discovery of new natural resources such as lumber, oil, silver, copper. This would on first instance seem like to be the primary basis for economic growth, and it was the scenario for a long time in history.

Newly Available Natural Resources Do Not Always Promise Long-term Growth

It is true that newly discovered resources sometimes create a temporary spurt in economic activity. For e.g. oil discovery in the North Sea in the 1970’s helped increase real GDP in Norway, England and several other countries.

But newly available natural resources are not a key determinant of long -term growth. Many countries grow for decades or longer without significant discoveries in natural resources. Being rich in natural resources can explain a high GDP but cannot explain a continually growing real GDP.

Rising Population Causes GDP to Grow

In fact, some countries like Japan with a relatively low amount of natural resources have shown significant amount of economic growth. Another important source of growth is the rising population, it is true that with more people a country can produce more goods and services but a rising population does not provide the kind of growth economist usually talk about.

A rising population causes real GDP to grow but it does not allow the real GDP per capita to grow. It is the real GDP per capita that determines a country standard of living since that is a measure of how much output is available per person in an economy. To put things into perspective, for per capita GDP to grow each person in the economy is required to produce more output, simple increasing the number of people producing the output does not help.

Labour Productivity

Economists studying output and standards of living for any economy talk about one simple term, Labour Productivity. This refers to the output an average worker can produce in an hour.

The two terms which are critical to the advancement of living standards are Growth and Productivity.

To consider these items in the context of a highly populated economy like India, we need to get our focus on increase in productivity. Increasing productivity is a function of four elements.

  1. Physical Capital
  2. Human Capital
  3. Technological Ecosystem
  4. Sound Governance

We can look at each of these elements independently as below:

Physical Capital

Physical capital refers to the resources made available to the labor in an economy to increase productivity. The sum total of which can be termed as capital stock. An increase in the amount of capital available per worker is called “capital deepening”. The Government of India with their Startup India and other initiatives working towards increasing the amount of capital available to business’ can be seen as making an effort towards capital deepening. A standard to keep in mind while deriving at an economies capital deepening is to ensure that the capital stock increases more rapidly as compared to the increase in workforce. An influx of capital in the Indian ecosystem is emphasized upon keeping in mind this principle since India is home to the largest population in the working age group followed by a high number in student population just about to enter in to the workforce. A few avenues to invest “physical capital” into India with an objective of economic growth would include investment into economic infrastructure like communication, transportation systems, banking and financial services, etc.

Human Capital

Human capital refers to the knowledge and skills of the workforce not just the number of people in the workforce alone. India being home to the largest workforce in the world, skill development as an initiative can be seen as the efforts of the Government (and private companies) to increase the overall Human Capital available to the economy. Since human capital is more skill oriented than number oriented, one way to increase a countries human capital is to increase the average number of years people spend in schools, colleges and institutes of further education. Since various surveys in the past have indicated that over 90% of Indian MBA’s and Engineers are considered unemployable by major corporates, special attention needs to be given to relevant “human capital” development in institutions across grades and hierarchies to ensure India gets maximum leverage from the demographic advantage available to the country.

Technological Ecosystem

Technology has seen the most attention in terms of investible value for any of the 4 pillars driving India’s growth in the recent past. The simple reason for this is the sheer pace at which technology can augment an ecosystem making it more scalable and accessible to all. With concepts like inclusions being considered of utmost importance in the current day and age, technology proposes to be one of the largest drivers for India’s growth story. Fin-Tech, Edu-Tech, similar inclusion driven technology can significantly increase productivity of the economy by positively influencing not only the “economic factors of production” but also other pillars that have the potential to be growth drivers.

Sound Governance

 A stable and sound government system is one of the most (if not the most) important driver of any countries growth. A result of sound governance is that entrepreneurs, investors and others in the economy feel confident investing into the economy. India, in the recent past has not only displayed sound governance, but also an overall growth objective which aligns with the vision of entrepreneurs and investors in any ecosystem to make it an attractive proposition. Continuity on this front has great potential to positively influence the growth trajectory of the economy.

When economic growth is driven by increase in productivity rather than increase in population it helps increase the living standards in developing countries. This makes a razor sharp focus on the drivers listed above important. In a country as rapidly developing as India, the fact that over 20 percent of its population continues to remain below the poverty line is a testament to the fact that increasing productivity is imperative for inclusive growth and overall increase in living standards. To sum things up, a few steps seem to have been taken in the right direction with the overall impetus on technology orientation, skill development and financial inclusion. We need to wait to ascertain how these efforts help us make the most of the demographic advantage presented to us in the long run.

Edition: June 2017

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