Note4Students: 

Mains:  Challenges related to Indian economy ;

Mentor comments: India aims to achieve a $30 trillion GDP by 2045-2050, driven by robust consumption and exports. Current projections estimate GDP growth at around 6.3% annually, with nominal growth potentially reaching 10-12%. To realize this ambitious target, India must enhance private sector involvement, improve infrastructure, and foster industrial clusters. Urbanization and technological advancements in agriculture will also play crucial roles in boosting productivity and employment. Maintaining a steady growth trajectory is essential for transforming India into a global economic powerhouse while addressing income inequality challenges.

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Why in the News? 

India should pursue rapid economic growth through liberal policies that harness the potential of the private sector, remaining undeterred by criticisms regarding income inequality.

Demographic Dividend

• India’s demographic dividend is poised to peak around 2041 when the share of the working-age population (20-59 years) is expected to hit 59%. This window of opportunity provides a chance for India to achieve higher economic growth by engaging more people in the workforce.
• By 2020, India had one of the youngest populations in an ageing world, with a median age of just 28, compared to 37 in China and the US, 45 in Western Europe, and 49 in Japan. This youthful population can drive innovation and productivity.

Gender Disparities

• Female Labor Force Participation Rate (FLFPR): India’s FLFPR stands at 37%, significantly lower than that of countries like China and Japan, which range between 60%-70%. This disparity represents a vast untapped resource, as increasing women’s participation in the workforce could lead to substantial economic benefits and poverty reduction.
• Post-COVID Recovery: The FLFPR was reported at 26% in 2019, but post-COVID-19, many women have returned to work, primarily in agriculture. This trend underscores the importance of creating more diverse employment opportunities for women in various sectors.

Economic Growth and Poverty Reduction

• Historical Context: From 1991 to 2011, India’s economic liberalization led to a significant reduction in poverty, with the poverty rate dropping from approximately 50% to around 20%. This period saw 35 crore people lifted out of abject poverty, illustrating the direct correlation between economic growth and poverty alleviation.
• Growth Elasticity of Poverty Reduction: The growth elasticity of poverty reduction in India is relatively low, at just over 0.12 between 1995 and 2012.
  • In contrast, countries like China exhibit a higher elasticity (0.28), suggesting that while growth has reduced poverty in India, it has not done so as effectively as in other nations, indicating room for improvement in how growth translates into poverty alleviation

Structural Challenges

• Labour Utilization: India has struggled to leverage its surplus labour effectively in low-end manufacturing sectors. The inability to transition workers from low-productivity sectors like agriculture to manufacturing hampers economic diversification and growth potential.
• Dependency on High-Tech Sectors: The IT sector has provided an alternative growth pathway, but it has limitations in terms of employment generation. 

Economic Growth Requirements

• Sustained Growth Rate: To avoid falling into the middle-income trap, India needs to maintain a nominal growth rate of around 8% until 2047. This is crucial for increasing its GDP and per capita income significantly, especially given that it grew at approximately 9% over the last 25 years.
• 3I Strategy: The World Bank recommends a “3I strategy”—Investment, Infusion, and Innovation. While investment and infusion (adopting foreign technologies) have been effective in the past, India must now focus on fostering innovation to escape the middle-income trap.
  • Countries like South Korea successfully implemented this strategy, which included substantial investments in education and public universities to develop necessary skills for growth.

Way Forward: 

• Focus on Manufacturing and Exports: To maximize the potential of its workforce, India should prioritize low-skilled, employment-intensive manufacturing with a strong focus on exports.
  • Historical examples from South Korea, Taiwan, and Vietnam demonstrate that such strategies can lead to sustained economic growth and job creation.
• Investment in Human Capital: Enhancing education and skill development is essential for preparing the workforce to meet the demands of a rapidly evolving economy. This investment will help improve productivity and earnings, thereby reducing poverty.
• Avoiding Protectionism: As India seeks to attract global manufacturers, it is crucial to maintain an open trade policy to facilitate growth. High tariffs could hinder the import of necessary goods and technologies, which are vital for boosting domestic industries and exports.