Daniel Altman

8 Myths About India’s Growth

8 Myths About India’s Growth

Is India different? Last month, India’s finance minister confidently declared that nothing could stop his country from becoming the world’s third-biggest economy. He may well be right, but size alone does not make India a special case. Its growth has been fast, but it is no trailblazer.

Here are eight popular myths about India’s growth, all of which are easily debunked:

India has outperformed other emerging economies in the recent past. In the two decades from 1992 to 2012, average living standards in India did rise faster than those in most countries that started from a similar level. In fact, only nine other countries in the world saw living standards, measured by purchasing power, climb more quickly: Albania, Armenia, Bhutan, China, Equatorial Guinea, the Maldives, Mozambique, Sudan, and Vietnam. Faster growth was to be expected in countries that started out with lower living standards than India’s, but several of these — Albania, Armenia, Bhutan, China, and the Maldives — actually started out with higher purchasing power. Relative to them, India underperformed.

India will grow faster than other emerging economies in the future. For the next five years, the International Monetary Fund projects that living standards in several countries will grow faster than India’s. Among them, again, are countries with a higher starting position: Bhutan, China, the Republic of Congo, and Georgia. India will likely outperform many other economies that have similar living standards today, but it hasn’t unlocked every secret of economic growth just yet.

When India finally opens its markets to trade, exports will supercharge its growth. India is not the easiest place to be an exporter, but it’s hardly the most difficult, either. In terms of both time and money needed to ship a container of goods, India ranks in the middle of the pack, according to the World Bank. If anything, exports could become more expensive for Indian companies if the United States and others forced India to drop some of its remaining export subsidies. In 2011, India’s exports and imports represented 54 percent of GDP, about the same share as in China. It’s unlikely that exports will change the growth story anytime soon.

The urbanization of India’s huge rural population will lead to unprecedented increases in living standards. Urbanization has been a critical ingredient to economic growth for many countries. Simply putting labor next to capital by attracting people into cities tends to raise workers’ productivity and, eventually, their incomes. More than two thirds of India’s population still lives in rural areas, compared with less than half in China. But India is not under-urbanized compared to other poor countries; if you look at how living standards compare to urbanization among all the world’s countries, India sits right on the best-fit line. There’s no reason to believe that urbanization will help India’s growth more than it has for any other country.

India’s service industry will provide a huge boost to employment. India’s legions of call-center staffers, software developers, and information-technology experts have led some analysts to proclaim a "service revolution" that will provide an alternative to manufacturing as a path to prosperity. Yet economists suggest that India’s service sector has merely caught up to international norms, and there is no particular reason to believe that it will take over a much bigger share of the economy as the country grows. The literacy rate in China is much higher, and it’s not clear that India even has more English speakers. Moreover, as wages rise in China, the opportunity for India to raise living standards through manufacturing — not services — will expand enormously.

India has more mathematical, scientific, and engineering geniuses to drive its economic growth than other countries. In absolute terms, this may be true; after all, India has a population of more than 1.2 billion people. But a population this big will have more people at either end of the distribution of economic ability: more geniuses, and more people with serious challenges to their cognitive capacity. The question is whether the extra geniuses will have a positive effect that is disproportionate to India’s population. If this were true more generally, populous countries like Germany and France would have higher living standards than smaller countries with similar advantages, like Switzerland and Denmark. Clearly, this is not the case.

As a democracy, India is more conducive to free-market capitalism. The links between democracy and economic growth have interested economists for decades, and the rise of state capitalism in non-democratic countries like China and Saudi Arabia has posed an ideological challenge. India is often touted as the world’s biggest democracy; the World Bank’s Worldwide Governance Indicators rank it in the 59th percentile for "voice and accountability" of citizens and government, just shy of several members of the European Union. Still, India’s markets are far from free. The Heritage Foundation’s Index of Economic Freedom calls India "mostly unfree" with a ranking of 119 out of 177 countries, as a result of heavy government involvement in the economy, from regulatory requirements to trade barriers. It’s also one of the toughest places in the world to start a business.

The British legacy of a strong legal system gives India an edge. If it does, it’s not a very big edge. Geographical factors like coastline, rainfall, and temperature can explain a big share of the differences in living standards between countries today. Controlling for these factors, former British colonies tend to do better than the average among all countries. But among the former colonies, India is one of the worst performers. Indeed, its living standards are worse than you might have expected given its geography. That may be because the vast majority of India’s workers operate outside the strictures and protections of the legal system, in an environment more reminiscent of London’s 19th century slums than Canary Wharf.

To sum up, there’s little basis for any sort of mystique surrounding India’s economic growth. On its current path, India shows no obvious signs of rewriting the textbooks; on the contrary, it has confirmed much of what economists already understood about urbanization, industrialization, trade, and institutions. Don’t get me wrong — India is undoubte
dly a fascinating country for many other reasons. But to an economist, it’s just another poor country that happens to be very, very big.