A 10-Step Program for
India’s Economy
By Jim
O’Neill Jun 23, 2013 6:00 PM ET
It’s fashionable to
say the era of strong emerging-market growth is over. As the U.S. recovers, the
global cost of capital will rise, holding back investment; against this
background, avoiding the next crisis is the best that most emerging economies
can do. If you take this view, India might seem a perfect example, with its
widening current account deficit, heavy public borrowing, persistent inflation
and weak currency.
I don’t think so.
As a general matter, emerging-market gloom is overdone. India, in particular,
could teach the pessimists a lesson.
Last week, I made a
quick visit to see the chief minister of Gujarat, Narendra
Modi. He’d asked me to give a presentation on how India could
realize its still-enormous potential. I went through points I’d first discussed
in a paper I co-wrote with Tushar Poddar in 2008: Ten Things for India to Achieve its 2050 Potential.
It’s striking to me that, five years later, our recommendations don’t need
revising. (They do need elaborating, and I’ll get into more detail in an
updated study and further columns. Modi and I are planning a conference of
experts before the end of this year.)
I’ll state no
opinion on Modi’s chances of becoming prime minister after next year’s general election -- it has been announced that
he’ll lead the opposition Bharatiya Janata Party’s campaign. He’s a
controversial figure. Detractors call him a sectarian extremist. I will say
this: He’s good on economics, and that’s one of the things India desperately
needs in a leader.
Cultivating Growth
Like all Indians,
Modi loves acronyms. Me too. I admire his MG-squared -- minimum government,
maximum governance -- and P2G2 -- pro-active, pro-people, good governance. That
sums it up pretty well. I don’t think it’s a coincidence that Gujarat has
avoided the slowdown that has almost halved India’s national rate of growth.
The state just keeps on growing at double-digit rates.
Long-term growth
depends ultimately on just two things -- the number of workers and how
productive they are. India’s demographics are remarkable. The country is on
track to grow its workforce by 140 million between 2000 and 2020. That increase
is the equivalent of the working population of France,
Germany,
Italy
and the U.K. combined.
Even with
unspectacular growth of a little more than 6 percent a year, India’s
economy could be 40 times bigger by 2050 than it was in 2000 --
about as big as the U.S. economy will probably be by then (though
not as big as China). But it could do so much better than
that. Growth of 8.5 percent over the entire period is possible -- with growth
of more than 10 percent over the next 15 to 20 years not out of the question --
provided it makes some changes.
It’s all about
productivity. India scores poorly on indexes of economic variables that are
critical for economic efficiency -- worse than Brazil,
China and even Russia. To change that, it needs to do 10
things:
1. Improve its
governance. This is probably the hardest and most important task -- the
precondition for the rest. Modi is right: Whoever leads the next government in
2014, India needs maximum governance and minimum government. There is no point
having the world’s largest democracy unless it leads to effective government.
2. Fix primary and
secondary education. There has been some progress here, but a huge number of
young people still get little or no schooling. I sit on the board of Teach for All,
a global umbrella organization for groups that
encourage the brightest graduates to spend at least two years teaching. Today
India has about 350 teachers in these programs. It could do with 350,000 or
more.
3. Improve colleges
and universities. India has too few excellent institutions. Its share of places
in the Shanghai ranking of the world’s top
universities should be proportional to its share of global gross domestic
product -- meaning 10 universities in the top 500 (it currently has just one).
Make that an official goal.
4. Adopt an
inflation target, and make it the center of a new macroeconomic policy
framework.
5. Introduce a
medium to long-term fiscal-policy framework, perhaps with ceilings as in the Maastricht Treaty -- a deficit of less than 3
percent of GDP and debt of less than 60 percent of GDP.
6. Increase trade
with its neighbors. Indian exports to China could be close to $1 trillion by
2050, almost the size of its entire GDP in 2008. But India has little trade
with Bangladesh and Pakistan. There’s no better way to promote
peaceful relations than to expand trade -- and that means imports as well as
exports.
7. Liberalize
financial markets. India needs huge amounts of domestic and foreign capital to
achieve its potential -- and a better-functioning capital
market to allocate it wisely.
8. Innovate in
farming. Gujarat isn’t a traditional agricultural producer, but it has improved
productivity with initiatives like its “white revolution” in milk production.
The whole nation, still greatly dependent on farming, needs enormous
improvements.
9. Build more
infrastructure. I flew in to Ahmedabad via Delhi, and out via Mumbai, all in a
day. I got where I needed to go -- but it’s obvious how much more India needs
to do. Adopt some of that Chinese drive to invest in infrastructure.
10. Protect the
environment. India can’t achieve 8.5 percent growth for the next 30 to 40 years
unless it takes steps to safeguard environmental quality and use energy and
other resources more efficiently. Encouraging the private sector to invest in
sustainable technologies can boost growth in its own right.
I’ll have a lot
more to say about the details as this project moves forward. For now, suffice
to say that India’s potential is vast -- and given the will, it can be tapped.
(Jim
O’Neill, former chairman of Goldman Sachs Asset Management, is a
Bloomberg View columnist.) 
