Aspiring for a US$10 trillions economy:

Implications of digitalization and formalization

Surender Kumar[1]

 

Introduction

Today’s India is aspirational and it needs to grow at a much faster rate to be free from the disease of poverty.  Indian economy is poised to be the third largest economy of the world, even in nominal terms, in the coming years but it is not sufficient to make the country free from poverty. We could bring people out of poverty only by increasing the size of the economy not only in relative term but also in absolute numbers. The high economic growth period coincides with the period during which the highest number of people could be brought out of the poverty.

 

In the last 30 years Indian economy graduated from a low-income country to a lower middle-income country. The size of the economy has increased from US$ 0.7 trillions to US$ 2.94 trillions by 2019. The credit for this success might be, to a large extent, attributed to economic reforms, which tried to unshackle the economy from the chains of license permit raj and put the country on the path of progress with some faith in the fundamental of a market economy.

 

Government of India targeted to increase the size of the economy to US$ 5 trillions by 2024, but the target seems to be delayed by couple of years due to the ongoing COVID-19 crisis, which has exposed the vulnerability of the economy. Per capita income has declined to US$ 1961 in 2020 from US$ 2152 in 2019.

 

We wish that the country should touch the figure of US$ 10 trillions gross domestic product (GDP) by 2030. To achieve this target the economy is required to grow at a compound annual growth rate (CAGR) of 14 percent per annum continuously till 2030 (Figure 1). Achieving such a high growth rate for about 10 years is though unprecedented and seems difficult, but it is not infeasible if a favorable policy environment and required resources support it. This short note points out some measures that help the country in achieving such a growth scenario. Of course these measures are not a complete policy prescription.

 

Per Capita Income and Growing Inequality

Per capita income increased about four times in the last three decades, from less than US$ 500 in 1991 to US$ 2152 in 2019 which if translated in per day income comes out to be less than US$ 1.5 at the outset of economic reforms to about US$ 6 in 2019.  At the prevailing level of per capita income, an average Indian can fulfill her daily minimum requirements of life but this level of income is not sufficient for a modern life of dignity. If the economy attains the target of US$ 10 trillions GDP by 2030, the per capita income will be slightly more than US$ 7000. Though this level of per capita income is considerably lower than that of developed countries, but it will be able to provide a dignified level of living to an average Indian.

 

Note: data for the period 1996-2020 is sourced from the WDI, and beyond it is projected assuming that the GDP will be US$10 trillions by 2030.

 

 

Per Capita Income and Growing Inequality

Per capita income increased about four times in the last three decades, from less than US$ 500 in 1991 to US$ 2152 in 2019 which if translated in per day income comes out to be less than US$ 1.5 at the outset of economic reforms to about US$ 6 in 2019.  At the prevailing level of per capita income, an average Indian can fulfill her daily minimum requirements of life but this level of income is not sufficient for a modern life of dignity. If the economy attains the target of US$ 10 trillions GDP by 2030, the per capita income will be slightly more than US$ 7000. Though this level of per capita income is considerably lower than that of developed countries, but it will be able to provide a dignified level of living to an average Indian.

 

It is worth to note that though the economy is growing, the growth in the income of well-to-do sections of the society is much higher than the growth in income of poor and middle class people, i.e., income inequalities are growing. Moreover, the economic growth is not uniform across the country, i.e., well-off states has benefited more from the 1991 reforms relative to the poor states. Regional disparities are increasing. Structural transformation could not occur in a desired manner. Though the share of primary sector or agricultural sector in the national income declined substantially from about half of the GDP to about 15 percent but the share of labour force engaged in the agricultural sector is yet more than 40 percent. The per capita income in the agriculture sector is less than half of the national per capita income.  There is a need to substantially increase employment opportunities in the country and employing the people productively.

 

Modernization and Digitalization of Agriculture

Over the last fifty years, though we have attained self-sufficiency in food production, agriculture sector is prone to lower cereal yield and high volatilities. Cereal yield is about half of China; the cereal yield in India was 3248 Kg in 2018 in comparison to 6100 Kg in China. The volatility of Indian agriculture can be judged by the coefficient of variation (CV) in the cereal yield. The CV is more than 12 percent for the period of last 25 years, about 50 percent higher than China, reflecting the dependence of Indian agriculture on natural factors such as monsoon and primitive technologies.

 

Low yield-high volatility coupled with increasing cost of production is the major cause of increasing miseries of Indian farmers. It is necessary to raise agricultural productivity and the cost of production should be brought down substantially to raise the standard of living of Indian farmers. Modern technology, especially digitalization, will help in attaining the twin objectives of raising productivity and lowering cost of production if supported by the required market reforms in the sector. Digitalization of agriculture will also reduce volatility in the sector.

 

Conventional practices involve uniform rates of applying critical inputs such as fertilizers, irrigation water and pesticides, and disregard spatial and temporal variability of croplands. However, sustainable agricultural practices require site-specific crop management decisions as agricultural landscapes are characterized by considerable spatial and temporal heterogeneity. Digital technologies provide information and computational tools that detect, quantify and provide site-specific management practices that apply right amount of inputs rates with right soil and at right time.[2] These technologies enable monitoring and detection of variability in crop health, soil fertility and yields in the fields. They have potential to vary input application rates based on precise fertility levels and crop requirement in a field. The application of digital technologies raises agricultural productivity and reduces costs of production and environmental harms.

 

Adoption of digital technologies requires enabling infrastructures such as access to broadband, availability of technology providers and technical assistance. Most importantly the adoption decisions of the farmers are dependent on information sources and farmers’ trust. Therefore, the policy decisions should generate enough trust between the governments and farmers. The concern of trust deficit is evident from the current farmers protests against the three agricultural reform acts. Market reforms coupled with digitization of the sector will substantially raise farmers’ income and standard of living in the rural sector.

 

Modernization and digitalization should involve all the production and value chain activities disregard to the fact which sector they belong to.

 

Formalization and Judicial Reforms

The second concern is related to formalization of manufacturing and business enterprises. Informal and small enterprises account for a large proportion of manufacturing and trading in the country. Formalization and realization of economies of scale not only increases output and efficiency in the economy but also creates dignified employment opportunities. Therefore, the question is why do Indian enterprises want to stay informal and small despite many efforts by the Government of India such as demonetization, introduction of goods and service tax (GST) and many more.

 

It is a well-known and well-established fact the enforcement of property rights and contracts are essential for the development of formal sector, investment and growth. A well-functioning independent sound and efficient judicial system is a pre-requisite for the protection of individual property rights and enforcement of the contracts. In India, though we have an independent judiciary but it is not efficient. Informal mechanisms cannot be perfect substitute of well functioning judicial system.

 

India ranks 163 in 190 countries in the World Banks’s “Doing Business” indicators for “enforcing contracts” in 2020.  Main problem of Indian judicial system especially of the lower courts is the slow rate of case-disposal and the associated large backlog of cases. A recent study, using state level information, shows that fast courts have a strong positive effect on firms’ value added and profits, fixed capital investment, employment creation and net entry, especially in contract intensive industries.[3]

 

Another study shows that adding a judge to a court with vacancies increases case disposal rate by 6 percent implying an increase in profits of a median firm by about INR 53000. The state tax revenues increase by INR 7.6 millions in a year at a value added tax rate of 18 percent as there are approximately 800 formal firms are in a district in the country. Moreover, the study also finds that filling up a judge vacancy in a district court stimulate bank lending in local credit markets through improved loan recoveries.[4] These studies reveal that an efficient judicial system enhances production, profits, employment and government revenues. A well-functioning judicial system stimulates the credit expansion in the economy for productive purposes and encourages firms to become formal and realize economies of scale.

 

Environmental Concerns and Climate Change

Last but not the least, it should also be recognized that the growth trajectory followed by today’s developed economies is not available to our country. The western world developed using a carbon and natural resource intensive growth path, which is in conflict with the nature. The growing environmental problems expose the vulnerability of this economic model. Air and water pollutions are considered the major causes of growing morbidities and mortalities in the world especially in the emerging economies like India.

 

Climate change is a reality and the vulnerability of Indian economy to the deleterious effects of climate change is well known. The effects of climate change are not confined to weather exposed sectors such as agriculture but also affect labour and capital productivities. Therefore, the growth trajectory of the Indian economy should be in harmony with nature.

 

Conclusion

Digitalization of agriculture, manufacturing and businesses, strengthening of judicial system, reforming administrative machinery, faith in fundamental of markets and creating an environment of trust between different stakeholders such as farmers, businesses and governments coupled with the required physical and social infrastructures will definitely help in realizing the goals of a poverty free Bharat and a US$ 10 trillions economy by 2030. These policies will bring the desired structural changes in the economy by the working of both ‘labour-push’ and ‘labour-pull’ factors and thereby create productive employment opportunities in the country.

[1] Professor and Head, Department of Economics, Delhi School of Economics, and Dean, Faculty of Social Sciences, University of Delhi, Delhi 110007

[2] Madhu Khanna et al. (2021) Digital Transformation for Sustainable Agriculture in the US: Opportunities and Challenges, Keynote address at the 31st Conference of International Association of Agricultural Economists.

[3] Amit Amirapu (2021) Justice delayed is growth denied: the effect of slow courts on relationship specific industries in India, Economic Development and Cultural Change, The University of Chicago Press. https://doi.org/10.1086/711171

[4] Manaswini Rao (2020) Examining the role of Judicial Institutions in Economic Development, Doctoral Dissertation, University of California, Berkeley