India has come a long way in modernizing its economy, reducing poverty and improving
living standards for a large segment of its population.
Its economy has been one of the largest contributors to global growth over the last decade,
accounting for about 10% of the worlds increase in economic activity since 2005, while GDP
per capita in PPP (purchasing power parity) terms is today three times as high as in 2000.
Yet, this period also witnessed a rise in inequality, which has been mainly driven by income
gaps between Indias states, and a growing urban-rural divide. India continues to have the
largest number of poor in the world (approximately 300 million are in extreme poverty), and
nearly half of the poor are concentrated in five states.
Growth has slowed in recent years and several challenges remain unsolved. Bringing more
people into the process of generating growth and sharing the gains more widely will
make India more resilient for the future.
With one of the largest and youngest populations in the world, India needs to create millions
of good-quality jobs in the near future to ensure decent living conditions for the vast
majority of its citizens.
The country is often cited as an example of an economy that is modernizing by jumping
directly into services without passing through manufacturing. The weight of manufacturing
in India has been relatively stable over the past two decades, at much lower levels than
China and ASEAN countries. Business services a high value added sector represent a
larger share of economic activity in India than in Europe.
Will India be able to achieve shared prosperity without a growing manufacturing sector?
Agriculture accounts today for only 16% of total value added (down from 44% in 1965), but
still employs about half of the Indian population. Productivity in this sector did not increase
significantly in the past decades, limiting improvements in living standards in rural areas.
Despite Indias relatively strong record in terms of economic growth over the last decade, its
middle class remains small and getting a job is no guarantee of escaping poverty.
India must take further action to ensure that the growth process is broad-based in order to
reduce the share of the population living on less than $2 a daymany of whom are
employed in informal and low skilled jobs. Educational enrollment rates are relatively low
across all levels, and quality varies greatly, leading to notable differences in educational
performance among students from different socioeconomic backgrounds.
The gender gaps in labour force participation and wages are both high, showing that Indias
women are not benefiting equally from economic opportunities. India scores well in terms of
access to finance for business development and real economy investment (investment
channelled towards productive uses), yet new business creation continues to be held back
by administrative burdens. India also under-exploits the use of fiscal transfers compared to
peer countries.
Educational enrolment rates are relatively low across all levels: barely above the median for
its peer group on pre-primary and primary, and below the median for secondary, vocational
and tertiary levels.
Only 1.4% of secondary students are enrolled in technical and vocational programs, limiting
the talent pool for skilled labor. The average level of education is only 7.3 years and a
gender gap continues to persist, with boys benefiting from two more years of schooling than
girls. India ranks 31st out of 37 lower middle income countries in providing equal
educational opportunities for men and women, which translates into low levels of female
participation in the labor force.
The gap in educational attainment between children from the top and bottom quintiles in
India is 8.7 years, with those in the bottom quintile receiving only 2.8 years of education on
average and those in the top income quintile receiving 11.56 years. The disparities in
educational attainment by income are greater in India than in most other countries with
similar income levels, and can be important in transmitting inequality down the generations.
The gap is much smaller in Vietnam, Thailand, Indonesia and the Philippines and larger only
in Laos. Thailand stands out for having the best educational outcomes in this peer group on
average (nearly 5 more years than India).
400 million people remain unbanked in India and disconnected from the financial system
despite impressive gains in recent years. Most unbanked are poor and female: only 27% of
individuals in bottom quintiles and 37% of women have access to a bank account. Finance
can help poor households optimize severely constrained resources across their lifetime.
Barriers to Entrepreneurship
Yet, only 7% used their savings account to start a business (the proportion is even smaller
for those in the bottom 40% of the income distribution). A last-placed ranking on small
business ownership is evidently not for want of good ideas, as India scores fourth on a
measure of patent applications. But budding entrepreneurs are held back by red tape and an
inefficient justice system, with relatively low rankings for indicators such as the time and
cost of starting a business, enforcing a contract and resolving insolvency.
A quarter of Indians still do not have access to electricity and almost a third of the urban
population live in slums. 65% of the population does not have access to improved sanitation
and access remains unevenly distributed. This is also the case for clean drinking water.
Connecting India
Despite many clusters of excellence in the IT industry and a vibrant service sector, India is
not fully leveraging ICTs (information and communication technologies) for the benefits of its
entire population. Regulation of the ICT sector is among the most competitive in the world
and costs are low by international standards. Yet, the uptake of ICTs in India remains very
low. Fewer than one in five Indians access the Internet on a regular basis, with only 1 percent
of the population having fixed broadband (more worryingly, this figure has not gone up
significantly in recent years). Smartphones are the privilege of the very few, with 5 mobile
broadband subscriptions for every 100 population, while less than two in five Indians are
estimated to own even a basic cell phone.
India has been slipping behind other countries in developing Asia over the last decade. Until
2007, internet usage was in line with the median performance of other economies in the
region. Since then, countries such as Thailand and the Philippines have experienced a
tremendous increase in the uptake of ICTs. Connecting India will mean investing in both
physical and human capital to bridge the gap with other emerging markets. ICT could help
fulfil Indias ambition to become a global manufacturing hub. Furthermore, ICT could do
wonders in improving productivity in agriculture and the services sector, while boosting
access to some basic services among the rural population.
India has a great deal of opportunity to enhance the generosity and progressivity of its social
protection system so that it can give its citizens the safety net needed to take risks and
participate fully in the economy and society.
Increasing its narrow tax base can also give India more fiscal space to make these much
needed social expenditures, particularly in health. Indias public health system remains
limited in coverage. Out-of-pocket expenses are high, limiting affordability. This translates
into poor (and unequal) health outcomes. Inequality adjusted life expectancy is 25 years
while in many peer countries like Thailand and Vietnam there is only around 10 years
difference between high and low-income individuals.
Authors: Gemma Corrigan, Economist, Economic Growth and Social Inclusion Initiative,
Inclusive Growth, World Economic Forum. Attilio Di Batisto is a Quantitative Economist at
the World Economic Forum.
Image: Passengers ride an overcrowded bus as they head towards their village to celebrate
Dashain. REUTERS/Navesh Chitrakar