ANALYSIS: Can India Become a Developed Country in 25 Years?
Indian Prime Minister Narendra Modi addressing the nation at his annual independence day speech. During his 2022 speech, commemorating India’s 75th anniversary of independence, Modi proclaimed his goal was to make India a developed country in 25 years (Flickr).
Three months into 2023, it’s hard to know what to make of India’s economy.
For the past few weeks, Indian financial headlines have been dominated by the saga of Gautam Adani, formerly India’s richest man who has suffered a record drop in both his net worth and in the stock price of his conglomerate, Adani Group.
Following a report in late January by American short-seller Hindenburg Research alleging massive accounting fraud and stock manipulating by the conglomerate, the company has lost more than $100 billion in market capitalization, with Adani himself having lost a similar amount of money and ejecting him out of the ranks of the 25 richest billionaires. This stunning collapse has raised questions about the stability of India’s corporate landscape, as well as political questions about Adani’s historical closeness with Indian Prime Minister Narendra Modi, who are both from the same state of Gujarat.
Yet despite these issues, India’s underlying fundamentals remain strong. Adani’s losses have largely not disrupted India’s markets as a whole, thanks to its broad size. Meanwhile, after a difficult two years during the COVID-19 pandemic, India has rebounded with force, and is set to be the fastest-growing major economy in 2023. It has now become the fifth-largest economy in the world, overtaking the United Kingdom with a nominal gross domestic product (GDP) of approximately $3.5 trillion.
Many observers have labeled India a rising power, or even a potential superpower; it has already surpassed China in population, and most observers predict it will not be long before it becomes the world’s third-largest economy. This sense of optimism was reflected in the Independence Day speech by Prime Minister Modi last August: in the address, commemorating India’s 75th Independence Day, Modi declared it was his goal to turn India into a developed country in 25 years, or by the country’s 100th anniversary.
Such a feat would certainly be impressive. India has long been perceived in the West as a global archetype for ‘Third World’ poverty. Since the 1990s, when it liberalized its economy from semi-socialism to market capitalism, India has undergone impressive growth, yet it has often been overshadowed by the growth of its neighbor China, compared to which it lags in numerous indicators. By purchasing power parity, which adjusts for local prices, India’s GDP per capita is just $7,000, compared to $19,000 for China and $69,000 for the United States.
Poverty thus remains a critical challenge for India, as well as the excesses of unrestrained capitalism, as the Adani situation highlights. Yet thanks to the rapid changes that have been occurring in the country, Modi’s goal might just seem possible.
Whether India can grow wealthy is perhaps the most important development question in the world today. Not only does it concerns the fate of 1.4 billion people, but as growth slows down in countries such as China and geopolitical competition begins to heat up, India’s economic ascendance can serve as the perfect pivot point for the economic world to rally behind.
Hindu Growth to South Asian Tiger
The Indian growth story, from 1960-2020. Of note is the almost exponential increase in growth following the 1990s, when India liberalized its economy (Our World in Data).
In order to understand where India’s economy is heading, it’s important to understand where it came from.
In the immediate aftermath of India’s independence, in August of 1947, the new country faced multiple simultaneous crises. The messy partition of British India into India and Pakistan led to widespread religious violence and displaced nearly 20 million people. Additionally, the incidence of poverty was estimated at a staggering 80%, totalling about 250 million people, while the literacy rate was just 12%.
India had undergone little development during British rule; in fact, the opposite occurred, with one economist estimating that Britain looted the modern equivalent of as much as $45 trillion from the Indian economy. Thus, when India’s first prime minister, Jawaharlal Nehru, was surveying the economic landscape, he found he had to start mostly from scratch.
As was common with postcolonial leaders of the time, Nehru applied socialist principles in constructing India’s economy, though he did not follow the Marxism-Leninism of the Soviet Union. While studying law in London in the early 1900s, Nehru had joined the Fabian Society, a left-wing organization that advocated for democratic socialism through gradualist reform, rather than the Soviet model of dictatorship and radical revolution.
Thus, while preserving India’s infant democracy, Nehru implemented socialist ideas such as five-year plans and tight restrictions on private enterprise. Private business was not nonexistent, but under the so-called “License Raj,” starting a new firm was made extremely difficult by bureaucratic red tape and permit requirements.
For Nehru, industrialization was India’s paramount goal, but he was also highly suspicious of foreign trade. He thus organized the economy around import substitution, encouraging domestic production of everything from automobiles to steel. The resulting isolation from the outside world and a lack of competition harmed the quality of these products, however. Additionally, Nehru’s excessive focus on industrial goods led to a neglect of agriculture, which still employed the majority of India’s population. As a result, despite being one of the most fertile countries in the world, India became reliant on foreign food aid in the 1960s, particularly from the United States.
Nehru’s policies were largely continued by his daughter and successor, Indira Gandhi, though she managed to solve India’s chronic food shortages through implementing new farming and fertilizing techniques from the West. Yet by the time of Indira’s death in 1984, the socialist system was beginning to sputter. Under both prime ministers, economic growth had always been weak, averaging just 3.5% from 1950 to 1980 and earning the derisive nickname “Hindu rate of growth.” But now, stagnation seemed to be pervading all aspects of the economy, while countries from China to the Soviet Union were beginning to reconsider their socialist systems.
Small market-based reforms began in the late 1980s under Prime Minister Rajiv Gandhi, but the decisive moment arrived in 1991, during the premiership of P.V. Narasimha Rao. That year, India faced a “twin deficit” crisis in its trade and fiscal deficits: The country’s foreign exchange reserves had fallen to less than $6 billion, which could only cover about two weeks of imports, while the risk of debt default loomed after Indian bonds were downgraded on the international market.
Prime Minister Rao, along with his finance minister Manmohan Singh, was forced to take drastic steps to avoid a full-blown default. To replenish forex reserves, the government and the Central Bank heavily devalued the rupee and sold gold holdings to foreign banks such as the Bank of England. But more critical were the structural reforms in trade and industrial policy, including the dismantling of export subsidies and the relaxing of License Raj policies.
Slowly but surely, the liberalization reforms began to have an effect on the economy. Foreign direct investment exploded from approximately 0% of GDP to a high of 3.6% by 2008, and GDP growth averaged 5.8% in the 1990s and 6.3% in the 2000s. Foreign companies began to set up shop in India en masse and the amount of domestic entrepreneurship soared.
As India became integrated into the global economy, cities such as Bangalore and Hyderabad became booming tech hubs, while products such as pharmaceuticals found vast new overseas markets. Manmohan Singh himself ruled as Prime Minister from 2004 to 2014, presiding over the fastest growth in India’s history.
Yet holes remained in the Indian growth story. As noted, it never quite hit the highs of its neighbor China, and growth had already started to slow during Singh’s final years in office. Additionally, India’s performance on various quality-of-life indicators has remained weak: though extreme poverty has greatly declined since liberalization from nearly 50% in 1993 to approximately 10% in 2019, that percentage still includes more than 130 million people and the poverty rate jumps even higher when using the non-extreme poverty line. Meanwhile, the adult literacy rate is just 74% as of 2018, or 66% for females, and many Indians still lack access to basic necessities such as running water.
According to Shareen Joshi, Professor of Economics at Georgetown University and a longtime researcher on human development issues, these deficiencies have continued due to systemic neglect of public services.
“You can only grow so much without investing in people,” Professor Joshi said in a phone interview with The Caravel. “If you look at China, China had nearly 100% female literacy before economic growth became a huge priority. China worked on public health, education, and rural human development. [India] just never got that right.”
The Modi Effect
Under Prime Minister Modi, there are signs that this historical weakness of public services is changing. Modi, who has led India since 2014, has sought to decisively restructure India’s economy like Nehru and Rao before him.
During his initial campaign, Modi portrayed himself as a pro-business leader who would further liberal reforms and boost economic growth. Boosted by slogans like Sabka Saath, Sabka Vikas (Together, Development for Everyone) and by his track record as Chief Minister of Gujarat, whose economy grew by an average of nearly 10% during his tenure, Modi’s Bharatiya Janata Party (BJP) won a decisive supermajority in India’s parliament.
The BJP went on to increase its supermajority in the 2019 elections, meaning throughout his tenure Modi has held the mandate to make his reforms—his high approval rating also helps, currently almost 80% according to Morning Consult.
Over the past nine years, Modi’s reforms have ranged from everything to tax streamlining to the selling-off of publicly owned firms like Air India. But if there was one word to describe Modi’s most impactful changes, it would be infrastructure.
From roads to bridges, from ports to airports, India has undergone the largest infrastructure spending spree in the country’s history. India’s national highway network has expanded by more than 50% since 2014, while domestic air traffic has nearly doubled. In its latest budget, announced early February, the government pledged to spend $122 billion on infrastructure over the next fiscal year, an increase by a third over last year which will finance 100 new projects. That number also included $4.3 billion for green energy projects, including India’s steadily increasing investment in solar and nuclear power.
These infrastructure investments also encompass interventions at the individual or household level. For instance, India’s Aadhaar system, a national identity program based on biometric data like fingerprints and iris scans, has become the world’s largest biometric ID program, covering nearly the entire country’s population of 1.4 billion. Though it was first introduced under the Singh government, the Modi government has used Aadhaar to enable people to open up digital bank accounts as part of the Jan Dhan initiative. Now, over 80% of Indians have a bank account, up from half at the start of the program, giving millions of people stronger access and connectivity to the economy.
Critically, the digital bank accounts have also allowed stronger provision of Modi’s numerous welfare schemes, cutting through bureaucratic red tape and creating easy direct cash transfers for hundreds of programs and social security payments. Modi’s other welfare programs have also proven decisive in addressing India’s poor quality-of-life indicators.
For example, the Swachh Bharat initiative, focused on eliminating open defecation, claimed to have built over 100 million toilets in rural India from 2014 to 2019, while the Ujjwala program, focused on providing clean natural gas cooking fuel to rural women, has claimed to have provided over 80 million gas connections and increased gas coverage from 62% to nearly 100%. Most recently, the Har Ghar Jal campaign has had a significant effect on tap water coverage, having provided 80 million households with tap water since 2019 and offering a clean alternative to wells or handpumps.
In this vein, Modi is not quite the Indian Margaret Thatcher or Ronald Reagan as he has sometimes been portrayed as. Modi believes in the power of government, but that it must be focused on providing particular services rather than having control over every industry, as it did in the Nehruvian era.
Professor Joshi agrees that the progress on public services in recent years has been impressive, though she does highlight the issue with the sheer number of programs, noting a past economic survey which stated there were over 950 poverty alleviation initiatives in India.
“The problem is they’re too fragmented, there are too many of them,” Joshi said. “There’s this tendency for every leader in India to launch new programs, but the old ones remain in place. They don’t necessarily improve or disappear if they’re inefficient.”
Additionally, not all of Modi’s enterprises have been successful. A demonetization initiative in 2016, meant to battle counterfeit currency, largely just ended up hurting the savings of low-income Indians instead. But Modi’s most high-profile recent failure has been in the realm of agriculture: a critical part of India’s economy.
Over 60% of India’s workforce is employed in agriculture, but for years the industry has suffered from chronic inefficiencies and increased hardship for farmers. Farmer suicides have increased over the past few years, driven by recurring crop failures and an inability to pay back debt due to unscrupulous lending practices. In fall 2020, India’s parliament enacted three pieces of legislation meant to address some of these issues by privatizing agriculture and tackling corruption in the government-run agriculture buyers.
Yet rather than solving India’s agricultural problems, the so-called farm laws ended up provoking a firestorm, causing thousands of farmers from nearby states to descend onto Delhi and demand a repeal of the laws. The farmers were mainly concerned that the removal of the government-run buyers would remove the mandated minimum price floors and cause them to receive lower prices for their crops, a concern the government was unable to assuage. After more than a year of the standoff, the government repealed the farm laws in December of 2021, all but burying any kind of farm reform for the foreseeable future.
In truth, many economists endorsed the laws, noting how they actually had the potential to raise rather than lower farmer incomes, though of course variance would increase in a privatized system. The main issue, according to Professor Joshi, was the government’s lack of consultation with relevant stakeholders.
“The problem with the farm laws is that they were very top down, they were passed in the thick of the pandemic without sufficient grassroots connectivity. That’s why there was so much uproar,” Joshi said. “I think that there’s no upper limit to how much consultation one should do when you're reforming a sector that houses about 60% of India.”
Joshi notes that privatization would have to be done on a case-by-case basis, and not nation-wide given the vast disparities in connectivity.
“Privatization is great when you have an infrastructure for market links, but what do you do when a woman who is not literate is the farmer? How is she going to do contracts?”
Daring to Hope
After surveying 70 years of Indian economics and both its successes and failures, it is important to return to the original question: can India truly become a developed country in 25 years? To answer this question, it is first critical to identify what it means to be developed, which is not so simple to answer.
The World Bank defines a high-income country as one with a gross national income (GNI) per capita higher than approximately $13,000. According to the World Bank’s “Atlas method” of calculating GNI per capita, India is nowhere close to this number, holding a value of just $2,150. India is thus squarely within the lower middle-income category, and it would likely be very difficult to increase this value by $9,000 in just 25 years—that would necessitate double digit growth rates every year.
But the upper middle-income level, starting at about $4,000, is certainly reachable, letting India join the likes of China, Russia, and Argentina. Yet development can’t just be summarized in a single number; the United States blows past the bar for a high-income country, yet that average is deceiving, as Americans struggle with massive wealth inequality and large disparities in health and education outcomes.
Thus, India must keep focus on the public infrastructure and public services as it initiates its wider growth strategy. So far, the Modi government appears to understand such a necessity, but the current trajectory could easily change.
Additionally, India still has a long way to go in another key element of development: the manufacturing sector. Economists have long recognized manufacturing growth, in particular the exporting of manufactured goods, as a key generator of wealth, yet India has lagged in this area. Manufacturing makes up just 14% of its GDP, a decline from 17% in 2010; by comparison, the service sector comprises 48% of GDP, an oddity in a country as poor as India.
Luckily, geopolitical events are giving India a window to ramp up manufacturing, which the Modi government is slowly taking advantage of through its “Make in India, Make for the World” initiative. As tensions have ramped up between the US and China, American companies have increasingly sought to move their factories into “friendly” countries with lower security risks.
For instance, last year Apple began assembling its flagship iPhone 14 in India through its manufacturing partner Foxconn, which will soon be building a new $700 million factory in the city of Bengaluru; analysts predict that India could be producing 25% of all iPhones within just two years. Additionally, airplane manufacturer Airbus, in partnership with Indian company Tata Group, announced that it would begin to produce its C-925 transport aircraft in Gujarat, the first time a private company would produce such a vehicle in the country.
So on the manufacturing front, progress is being made, and one of India’s major priorities will be to increase employment in those sectors. Overall, to reach its ideal point, whether high or upper-middle income, India will have to stay its course while also watching out for common pitfalls.
For instance, as overall incomes rise, income inequality will become an increasingly bigger concern, as the skyrocketing wealth of businessmen like Gautam Adani has highlighted. Furthermore, it’s important to note that Gautam Adani was one of the government’s main partners in its infrastructure push. Adani Group’s current crisis has therefore raised questions over whether Modi’s current infrastructure strategy is sustainable.
India will have to balance the importance of domestic conglomerates—such corporations, known as “national champions,” played a key role in the development of both Japan and South Korea—while also making sure it doesn’t develop its own version of American Gilded Age robber barons.
But ultimately, the future looks bright for India. If it plays its cards well, it may be the most important country of this century. Full-blown development by 2047 might be a distant dream. But the key change is that for the first time in a long time, both India’s leaders and its citizens are able to imagine that dream, to imagine their country actually improving for the better.
“India will do India’s thing,” Professor Joshi said. “My optimistic hope is that Narendra Modi is right, that it will be a more developed country than it is today for a lot more people.”
