Assuming reasonably low decadal population growth and factoring in natural depreciation of the rupee over the next 25-odd years, for India to catch up with Greece, it requires at least 8% annual GDP growth at current prices.
Other than macro answers, there’s the issue of the current economies of major Indian states with 10 or more parliamentary constituencies. Dividing them into two sets – ‘advanced’ and ‘catch-up’ being those with per-capita NSDP above the national average of Rs 1,69,496 in 2022-23 and those below that, respectively – an unsurprising picture emerges:
Advanced states Gujarat, Haryana, Maharashtra, Karnataka, Kerala, Punjab, Tamil Nadu, Telangana and Andhra Pradesh being the poorest among them.
Catch-up states Assam, Chhattisgarh, Jharkhand, Madhya Pradesh, Odisha, Rajasthan, UP, West Bengal and Bihar being the country’s poorest.
Like India with Greece, Bihar’s per- capita NSDP is about a quarter of Andhra Pradesh’s. One may argue that for India to ‘become Greece’, while Andhra Pradesh and other advanced states must grow at least as per their existing trend, for Bihar to catch up with Andhra Pradesh, it must grow much above its trend. Can this happen? Two recent research studies answer this. In her paper, ‘Rethinking Social Safety Nets in a Changing Society’, Sonalde Desai of NCAER argues that over the last two decades, while the number of poor in India has decreased (from 38.6% of its population in 2004-05 to 21.2% in 2011-12, and 8.5% in 2022-24) and that of the non-poor has increased (from 19.6% to 32.9% to 54.1% in corresponding years), there is relatively less decline in the number of our vulnerable population (from 41.9% in 2004-05 to 37.4% in 2002-24, with 45.9% in 2011-12). Presumably, most of this demographic lives in India’s catch-up states. A CUTS International-Ford Foundation study, ‘Strengthening Discourse on Economic Policy to Generate Good and Better Jobs in India’, found that India’s problem is a wage problem, not unemployment. Along with government support for improving working conditions, better wages are key to transforming state of life of vulnerable populations.
The study also found that factory owners are willing to pay more, but unable to do so due to very-low profit margins. That’s because factor costs – land, fixed capital, working capital, electricity, logistics – are too high. Adequate prices of finished goods are also difficult due to high competition. Thus, the crux of the matter is to lower factor costs through policy and regulatory reforms, including targeted subsidies to our labour-intensive industries, particularly in catch-up states. The onus is on the central and state governments.
Increasing our aggregate demand is necessary and critical to attract private investment. While our public investment (mainly in infrastructure) is increasing and boosting aggregate demand, more is needed to crowd in private investment. This is reminiscent of Henry Ford’s argument to offer more wages to his workers so that they could afford to buy cars produced by his company.
So, for India to become ‘Greece’, with reasonable assumptions regarding its population growth and currency depreciation, and that its incremental capital-output ratio will be maintained at 5 (if not increase a bit with technological advancements), its investment (gross fixed capital formation; GFCF) must be at least 40% of GDP to achieve a long-term average annual GDP growth of 8% at current prices. At present, our GFCF is 35% of our GDP.
This difference of 5 percentage points in India’s GFCF is the distance between feasible and plausible. To bridge this gap, more focus must be given on catch-up states.