50 years of India’s steady outperformance

IT may not have seemed so at the time, but 50 years ago India reached a turning point. There was an economic crisis and political turmoil. The decisive action a year later was the imposition of Emergency rule by Indira Gandhi. But that was overturned in less than two years. What proved more long-lasting was something barely noticed at the time: A new direction in economic policy, away from Mrs Gandhi’s overtly Leftist phase. There followed in due course an end to India’s long-term under-performance as an economy, and over time the birth of a new ‘India story’.

International mention of India is now more likely to refer to it as a rising power rather than as a country

of poor people.

Until the mid-1970s, India had been growing more slowly than the world economy. The transition in the second half of the 1970s followed some 15 years of crises in the form of wars, failed harvests and even famine, a traumatic rupee devaluation and two oil shocks. Many of these events had contributed to a loss of national self-belief after the early optimism under Jawaharlal Nehru.

But once the economy stabilised, what followed was a half century of steady outperformance. Growth outpaced both low-income and middle-income countries, as well as the world economy. The country consequently has an international heft today that it never enjoyed before. Yet, it has not been a ‘shining’ record, because of continuing poor socioeconomic metrics and rising inequality.

Prior to the transition, India’s share of the global economy had been on the decline — from 2.7 per cent in 1960 to 1.9 per cent in 1975 before the decline slowed, stabilised and eventually improved. Even in 2013, India’s share of the world GDP was slightly smaller than in 1960. Now, in 2024, it is 3.5 per cent of the global GDP. And since the economy is growing at twice the global average, India is the third-largest contributor to global growth.

Per capita income similarly improved. From 8.4 per cent of the global average in 1960, India’s per capita income dipped to 6.4 per cent in 1974. The numbers improved to 13.5 per cent in 2011, and further to 18.1 per cent in 2023. That is a near-trebling over five decades. Yet people in most countries enjoy a much better standard of living. Indeed, there are hardly any countries outside of Africa and in India’s own South Asian neighbourhood where per capita incomes are lower. A long road lies ahead.

What transforms the India story is the size of its population. Per capita income is modest, but when multiplied 1,400 million times it makes the Indian economy the fifth largest. Already, India is the second-largest market for mobile phones and motorcycles/scooters, and the third- or fourth-largest for aviation and cars. Growth in these product and service markets has been underpinned by a burgeoning middle class. Businesses catering to it have generated great wealth for investors, leading to the rise of dollar-billionaires (at 200, the world’s third-largest tally), while the stock market ranks fourth by market capitalisation.

Up to the mid-1970s, close to half the population lived below a bare-bones poverty line. Today, less than 10 per cent of the people are officially poor. International mention of India is now more likely to refer to it as a rising power rather than as a country of poor people. Yet, India continues to feature as only a ‘medium development’ country in its human development, while countries like Vietnam have attained ‘high development’ status. India is unlikely to make it to the ‘high development’ category for another decade or more — beyond which lies the ‘very high development’ category comprising the developed economies, to which the country aspires.

Even here, though, the numbers are improving. The mean years of schooling have improved from 4.4 years in 2010 to 6.57 years now. India also has more than the WHO-prescribed ratio of a doctor per 1,000 population, and life expectancy has finally crossed the 70 threshold.

Higher incomes find reflection in a more varied and richer diet. Milk consumption has multiplied 10-fold. So has fish consumption, while the consumption of eggs has increased more than 20-fold. Add to this the rapid growth of horticulture — fruits and vegetables. Meanwhile, household savings as a share of the income have gone up 70 per cent, even as average incomes have multiplied six-fold in real terms.

More important than all these may be a change in mindset. India in the mid-1970s was still committed to socialist rhetoric. Apart from large-scale nationalisation of several industries, there was also price and production control on everything, from paper to steel, and sugar to cement, even bathing soaps and cars! The inevitable result was shortages and black markets. State governments routinely sided with trade unions in industrial disputes. But things have changed. Indian politics is now more populist than socialist, the Communist parties are in the ICU, and governments want to change labour laws to facilitate business. Tax rates have become reasonable.

Indians have become enthusiastic share-market capitalists. In 1974, the biggest public issue of shares totalled all of

Rs 12 crore (about Rs 350 crore in today’s money). In comparison, in the last couple of years, several companies have done public issues of Rs 15,000-21,000 crore (LIC, Adani, Vodafone, etc). As recently as a decade ago, mutual fund companies managed sums equal to less than an eighth of bank deposits; that share has doubled to more than a quarter. The next five years could see India add more to its GDP, in absolute numbers, than it has done in the last 10.

And yet, there is no story in India without a counter-story. The production of consumer durables has not increased at all compared to seven years earlier, and has gone up by an annual average of just 2.8 per cent for non-durables. Clearly, consumers are financially stressed, especially in the lower rungs of the income ladder — probably reflecting the lack of enough work on good wages. Only when that changes will the economy be able to get to the 7-plus per cent rate that once marked out the truly high-growth economies.