Gateway to developed India: Country needs to sustain 7% GDP target

Despite June’s under-7% GDP growth rate – the first sub-7% marker in five quarters – policymakers see India growing at 7% over the next two decades to become a developed economy. This is a departure from the playbook of other Asian economies that have, or are on course, to reach the ‘viksit’ milestone. The Asian development model relies heavily on a burst of export-led growth before settling down to more sedate rates. There’s a progressive decline in the share of consumption relative to investment as household savings are channelled into manufacturing exports. This model has delivered, but makes economies more vulnerable to external shocks and business cycles. It also requires an eventual rebalancing of consumption vis-a-vis investment through a process of transferring surplus back from producers to households. This adjustment is not painless.

India, on the other hand, is attempting a more balanced approach to development. Here, a growth spurt is not brought about by squeezing domestic consumption, but investment and consumption are allowed to grow in tandem. This reduces the economy’s dependence on exports. It also avoids redistributing income among producers and consumers at a future date. This course offers policymakers greater control over key macro variables, and allows a smoother transition from a controlled to a free economy. India’s gradualism may be the road less travelled, but it involves fewer economic upheavals.

The 7% target may appear unambitious. But effort is needed to sustain it. India will have to grow at twice the pace of the global economy for the next 20 years. It has managed to do this when the world economy is struggling and should find the going easier with a global recovery. Structural changes in energy demand should reduce dependency on fossil fuel imports. The country also has an early-mover advantage in globalisation of services. These long-term factors bring the 7% target closer to the policy dartboard. India could be writing a new development playbook that may work for others back in the queue.