The big growth leap: Covid gives India the opportunity to get growth without massive investment

Covid gives India the opportunity to remove a 70-year incubus and get growth without having to invest massively.

Covid-19 has been a totally unanticipated shock—a black swan for all countries in the world. It is compared to the Spanish flu, but that was not as infectious as Covid is. Covid can be caught at a distance, through the environment, unknowingly. Proximity of any kind has to be avoided. It was this insistence on avoidance of contact, even without physical closeness, that made economic activity impossible. Neither consumption nor production can be carried out by one individual alone (Robinson Crusoe excepted).

The only advantage of Covid is that it renders capital stock idle, but does not destroy it. As the mortality rate is just around 2% of those infected, who are themselves a small proportion of the population, the labour force, though rendered idle, has by and large neither reduced nor deskilled or disabled. So, the pattern, across the world, is a drastic drop in output—from 25-30%, with a similar drop in employment for the period of lockdown, which lasts, at most, a quarter or two.

There are two important corollaries of these simple facts. The first, is that, by and large, recovery back to the pre-Covid levels should be straightforward. This is the idea of a V-shaped recovery. Output will grow back up as employment rebounds, without much extra investment. As the capital stock is intact, the investment required will be in bringing back the migrant labourers who have left their metropolitan workplaces for their village. Assuming that will be done, by end-2020, GDP should be back at the 2019 level—zero growth for the whole year.

In the pre-Covid days, the ambition was to double the GDP from $2.5 trillion to $5 trillion in five years. That was a tall order even then, as it required an annual growth rate of 14% in constant dollar GDP. Only a drastic depreciation of the dollar against the rupee would have made it easy. But, the Covid experience suggests an interesting solution for this project.

Normally, discussion of GDP growth relies on investment growth to achieve the goal. The Covid experience has shown us that output can go (back) up with marginal investment. This gives a clue to a radical strategy for achieving the $5-trillion economy goal. This is through full utilisation of labour. Shocking as it may sound, the labour force participation ratio is just about 50%. (I am keeping numbers simple). Indeed, in FY19, when there was a debate about employment generation, there was even a decline in this ratio. India has one of the lowest labour force participation rates for women (around 25%), even compared to neighbouring South Asian economies.

The number employed is around 450 million—400 million men, and 50 million women, broadly. This would imply that if women’s participation was to be doubled, and men’s raised by 10%, India would have 90 million more workers, an increase of 20%. This is a large reservoir of idle labour.

Thus, one way for India to become a $5-trillion economy is to utilise its idle labour force reserve. Again, to keep the numbers simple, if the productivity of the new workers was half that of the existing ones, GDP would increase by 10% almost immediately. But, there is more scope for growth through structural change. At present, 40% of the labour force is in agriculture, which contributes around 15% of GDP. Manufacturing employs 20% of the country’s labour force, and produces 25% of its GDP. The remaining 40% of the labour force produces 60% of GDP. Thus, the labour force in manufacturing or services is three times more productive than that in agriculture.

The key, therefore, is to be able to move half of the labour force in agriculture to other sectors. This has been the royal road of development in every country for the last two hundred years. India rejected this path since its independence due to ambition of being self-sufficient in the machine industry. The Mahalanobis model chosen by India had a capital-intensive strategy for industrial growth and failed to generate employment sufficient to absorb surplus rural labour.

Add to that stringent laws for employment in the formal sector that discouraged large units, and the result has been a huge overhang of open and disguised unemployment. With 20% of the labour force moving to higher productivity sectors, the GDP will get another boost—say another 30%.

Covid gives India the opportunity to remove this 70-year incubus and get growth without having to invest massively.
If land laws could be changed, rural industrialisation becomes possible. That will also ease the problem of recruiting women in the labour force, and ease the migrant labour problem. India has blundered in its economic policy for far too long. It wasted the first 40 years till, in 1991, the economy was bankrupt and had to reform. The following 30 years have been better, but not enough to raise the standard of living sufficiently. Covid gives Modi the chance to make the next big leap.

Prominent economist & Labour peer