A new World Bank report, launched today, notes that India will need to grow by 7.8 per cent on average over the next 22 years to achieve the country’s aspirations of reaching high-income status by 2047.
The new India Country Economic Memorandum titled ‘Becoming a High-Income Economy in a Generation,’ finds that this target is possible. Recognising India’s fast pace of growth averaging 6.3 per cent between 2000 and 2024, the report notes that India’s past achievements provide the foundation for its future ambitions. Getting there however, would require reforms and their implementation to be as ambitious as the target itself.
“Lessons from countries like Chile, Korea and Poland show how they have successfully made the transition from middle- to high-income countries by deepening their integration into the global economy,” said Auguste Tano Kouamé, World Bank Country Director. “India can chart its own path by stepping up the pace of reforms and building on its past achievements.”
The report evaluates three scenarios for India’s growth trajectory over the next 22 years. The scenario which enables India to reach high-income status in a generation requires India to: a) achieve faster and inclusive growth across states; b) increase total investment from the current 33.5 per cent of GDP to 40 per cent (both in real terms) by 2035; c) increasing overall labour force participation from 56.4 per cent to above 65 per cent; and d) accelerating overall productivity growth.
“India can take advantage of its demographic dividend by investing in human capital, creating enabling conditions for more and better jobs and raising female labour force participation rates from 35.6 per cent to 50 per cent by 2047,” said Emilia Skrok and Rangeet Ghosh, co-authors of the report.
In the past three fiscal years India has accelerated its average growth rate to 7.2 percent. In order to maintain this acceleration and attain an average growth rate of 7.8 per cent (in real terms) over the next two decades, the Country Economic Memorandum recommends four critical areas for policy action:
- Increasing investment: More private and public investment (increasing the real investment rate from around 33.5 per cent of GDP to 40 per cent by 2035) will be fundamental to long-term growth. The report notes actions such as strengthening financial sector regulations, removing constraints to formal credit for micro, small, and medium enterprises (MSMEs), and simplifying foreign direct investment (FDI) policies will be critical.
- Fostering an environment to create more and better jobs: Overall labour force participation rates have remained low in India (56.4 per cent) compared to countries like Vietnam (73 per cent) and the Philippines (around 60 per cent). The report recommends incentivising the private sector to invest in job-rich sectors like agro-processing manufacturing, hospitality, transportation, and care economy. This requires targeted strategies for labour-intensive sectors, a bigger skilled workforce, greater access to finance and fostering an innovation-driven economy.
- Promoting structural transformation, trade participation and technology adoption: Currently the share of agriculture in employment is 45 per cent. Allocation of land, labour and capital to more productive sectors, like manufacturing and services, can help raise firm and labour productivity. Strengthening infrastructure, adopting modern technology, streamlining labour market regulations and lowering the compliance burden on firms will further drive productivity and competitiveness. These steps will help India catch up to peers like Thailand, Vietnam and China in Global Value Chain (GVC) participation rates.
- Enabling states to grow faster and together: The report argues for a differentiated policy approach whereby less developed states could focus on strengthening the fundamentals of growth (health, education, infrastructure, etc.), while more developed states could prioritise the next generation of reforms (better business environment, deeper participation in GVCs, etc.). The center can facilitate this growth process through more incentive-driven federal programs such as the recently announced Urban Challenge Fund to support better performance in lagging districts and states. More incentives and capacity building will help low-income states improve the efficiency of public expenditure and enable them to catch up with the leaders.
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