A soon-to-be third-largest economy with high development deficits

In recent months, there has been considerable talk about the possibility of India becoming the third-largest economy before the end of the current decade. S&P Global in its report ‘Global Credit Outlook 2024’ has argued that India will become the third-largest economy by 2030, and will be the fastest-growing major economy in the next three years. That India is on its way to becoming the third-largest economy overtaking Germany and Japan, the two economies that currently have higher GDP than India’s, was first predicted by the IMF in its World Economic Outlook in October 2022. The IMF also predicted that in terms of nominal GDP, India would become a $5 trillion economy by 2026.

In terms of GDP, India is set to acquire a higher ranking during the next few years due to its significantly higher growth rate. Over the past few years, India has been among the fastest-growing major economies, but in contrast, both Germany and Japan have been in the throes of economic crises. Between 2018 and 2022, the German economy was virtually stagnant and is likely to shrink in 2023, and Japan is expected to record a modest 2 per cent GDP growth in 2023 after a five-year contraction.

While the GDP numbers have been used to make a point about India’s emergence as the third-largest economy, they can be used to make a counterpoint as well. India may become the world’s third-largest economy by 2027, but its status as a lower middle-income country, according to the World Bank Group’s country classifications by income, will remain unchanged. India’s per capita income is likely to be just above $3,600 and will continue to lag Bhutan and Bangladesh, at current rates.

There is, thus, no gainsaying that India’s emergence as the third-largest economy promises little change in the economic well-being of its ordinary citizens. Real change can be effected in the lives and livelihoods in the country if only the development deficits can be addressed, which can result in higher incomes for those who are staring at a bleak future.

The beginnings must be made in agriculture, which has also been the focus of the Narendra Modi government. In February 2016, the government argued that its farm policies would result in the doubling of farmers’ income by 2022. Recalling its accomplishments in agriculture in early 2023, the government informed Parliament that it has “adopted/implemented several developmental programmes, schemes, reforms and policies for reducing input cost on agriculture, higher production and achieving higher incomes for the farmers”. Among its major accomplishments were the increase in budgetary allocations on agriculture, fisheries, animal husbandry, and dairying by 4.5 times between 2013-2014 and 2022-2023, provision of income support to farmers through PM KISAN, and the implementation of the Pradhan Mantri Fasal Bima Yojana (PMFBY). Fixing of minimum support price at one-and-a-half times the cost of production, higher institutional credit for the agriculture sector and promotion of farmer producer organisations were among the other claims.

Although the government has not yet provided evidence of the impact of these policy measures on farm incomes, trends like farm incomes are available from the Situation Assessment Survey of Agricultural Households, conducted by the National Sample Survey Office (NSSO) during the 77th round (January-December 2019). The survey showed the average monthly income per agricultural household, from all sources, was estimated at ₹10,218, as against ₹6,426 estimated during the 70th round conducted in 2012-2013. In other words, farm income had increased by 59 per cent till 2019, but only in nominal terms. The share of wages in the average monthly income of agricultural households estimated during the 77^th round was about 40 per cent, while the corresponding figure according to the 70^th round was 32 per cent. This implies that farmers are turning into wage labourers.

The trends in farm incomes can also be observed from the earnings data of rural workers provided by the Periodic Labour Force Survey (PLFS) from 2017-2018 to 2021-2022. The average wage earnings of these workers in real terms had declined by 6.4 per cent for all workers; this figure was higher for female workers. Although the corresponding figures for casual workers were better, they do not, in any way, suggest that doubling of farm incomes is possible in the near future, at least not until the crisis-ridden agricultural sector gets adequate policy support from the government.

By far the most significant development deficit is the high incidence of undernourishment, which is an unacceptable reality for one of the fastest growing economies of the world. The current government has consistently addressed this issue by providing free ration to 800 million poor. This scheme has recently been extended for five years beyond December 2023. This welfare measure is a positive step for addressing the problem of undernourishment, which according to the Food and Agriculture Organization (FAO), has increased in recent years. The prevalence of undernourishment (three-year average) among the population increased from 14.4 per cent during 2013-2015 to 16.6 per cent during 2020-2022, which implies that the number of people undernourished had risen from 188 million to 234 million.

Further, the share of the population unable to afford a healthy diet has remained at high levels. In 2021, 74.4 per cent of the population could not afford a healthy diet, only a small decline from 78.8 per cent in 2017. The number of people unable to afford a healthy diet, according to the FAO, has remained above 1 billion.

Although the government is supporting the undernourished and should possibly do more given the trends indicated by the FAO, this problem underscores the importance of creating decent jobs in India. The failure to do so during the past eight decades should be considered the most significant failure, overshadowing all achievements of the Indian economy.

(Biswajit Dhar is former professor of economics, Jawaharlal Nehru University, and is Distinguished Professor, Council for Social Development, New Delhi.)

Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.