Unlocking state economic activity – key to harness India’s growth potential
Contextualising India's growth journey of past 60 years and states role ahead
Unlocking state economic activity – key to harness India’s growth potential
This article is not an endeavour to burnish India’s coming growth decade or how India is an oasis in the desert, where rest of world faces multiple challenges. That possibly is best left to more imaginative minds, however, what I intend to do is to look at the journey of India’s growth, when not many were willing to vouch for the India “story”, and how one can potentially see a similar template developing over the coming decades, if we set our minds to it.
The journey so far:
(Source: World Bank, nominal GDP)
From a share in world GDP of above 3% in sixties, Indian economy share dwindled down to 1.1% in 1990. From the 8th largest economy in sixties, India dropped to 18th largest economy in 1990! Pushed to the corner, India embarked on dismantling the License Raj, embracing free-market based principles and unleashing the latent entrepreneurial spirit of India. As Dr Manmohan Singh remarked (quoting Victor Hugo) while tabling the budget – “No power on earth can stop an idea whose time has come”! It has taken 30 years since then for us to go back to our relevance to world economy, which we had in sixties!
Gains in the first decade since liberalization (seen as improvement in India share to world GDP) were muted – gain of 30bps, but there was significant foundations laid then, that we continue to gain from, even today. Think of our entire financial markets, which were started then, and how it is better than most parts of world. Similarly, our push on infrastructure build out – notably telecom, highways, media. And then, as Y2K phenomenon gripped the world, our IT industry took off, after decades of painstaking work. At the turn of century, we were the 13th largest economy, with GDP share of 1.4%.
The first decade of millennium saw India participate significantly in global boom – a boom dominated by strong global growth lead by China, significant demand for commodities and build out of significant infrastructure projects (notably in commodities, power, telecom). By 2009, our share in world economy had moved to 2.2% (doubled from lows in 1991) and we had moved a couple of places in rankings to 11th largest economy.
Over the last decade, as world slowed down post GFC, Indian share has grown significantly, and in 2021, its share was 3.3%, becoming the 6th largest economy. We have since then displaced UK as well this year, and given the growth rates seen in Germany (especially after Russian invasion of Ukraine, which has impacted their energy imports) and Japan, the mantle of 3rd largest economy going to India is near certainty (of course, timelines of same can be debated).
Which brings us to the journey of US and China over the last 60+ years.
At the turn of last century, China’s share of world GDP stood at 3.3% - same as India’s share of world GDP in 2021! They have added almost 100bps share almost every year over the last 12 years (since GFC), compared to 100-120bps we have added in last decade! Thus, while we have come a long way from the nadir seen in early 90s, we have a long way to go.
The economic journey of India over the last 2 decades have been punctuated with key reforms, focus on build out of infrastructure (and yet, it is always inadequate given our growing cities and populations), navigating multiple crises – geopolitical, economic, different political establishments – and yet Indian GDP has grown 10x from approx. 20 lakh crores (in 2000) over the last 21+ years.
While it is hard to forecast how growth will shape up in decades to come, one way to visualize would be to look at how large economic activity resides in some of our larger states. We plotted the GSDP of larger Indian states, and there are 7 large states whose GSDP is almost similar to India’s GDP in 2000! These states are Maharastra, old Uttar Pradesh (UP + Uttarakhand), old Andhra Pradesh (AP + Telengana), Tamil Nadu, Karnataka, Gujarat and West Bengal. These 7 states (referring to before they were split) account for more than 50% of our population, and about 3/4th of economic activity.
We have also plotted the state expenditure of these states along with year closest to Central government expenditure. For eg, Old UP (UP+Uttarakhand) spends 5.64 lakh crores in its budget, similar to Union Budget when it was presented in 2007 by Mr. P Chidambaram. These are large outlays, and just like Union Budget attracts significant analysis, it will be more and more important to scrutinise the outlays of these large states.
If India could grow from 20+lakh crores to 200+ lakh crores in 20 years, is it possible that these large states also have similar journey? While there were many reforms in last 20+ years, there are many subjects that are either in concurrent list or state list (like power, education, healthcare, local body reforms etc) that require attention, which can help provide tailwinds for this transformation. There are best practices in many states that can be “templatised” and followed by others.
In the late 90s, not many believed the India “story”, there were many sceptics, and today it appears pendulum has swung the other way – with many believing to be India’s decade etc. Without getting carried away by the opportunity, we have potential to create multiple trillion dollar economies in each of these states in the decades to come. For sure, future is unpredictable, and there are many moving parts. Especially in an environment where global growth looks challenged, we are better off looking inwards to provide an environment where states can harness the Indian potential.