What Sort of Emerging Superpower?
A 7-Pager by Ajit Chaudhuri – April 2024
I would like to take the reader back to events of just over 20 years ago – an India Today Conclave in March 2004 whose line-up had an array of high-profile speakers including the PM of India, the President of Pakistan, India’s Leader of the Opposition, luminaries from the fields of politics, business, and sports and, last but not least, Ms. Aishwarya Rai. The theme was ‘Building an Indian Century’ and, in between all the chest thumping (those were the days of ‘India Shining’), there was a sobering talk by a strategic expert named Ashley Tellis – he said that superpower-hood requires the ability to fight two remote wars simultaneously; this in turn requires a navy with multiple aircraft carrier systems; and the cost of maintaining one such system was …. and he reeled off a number that sounded like the GDP of a middle-income country.
The ‘India the superpower’ theme has recently re-emerged, this time on stronger footing. We have been acknowledged as the world champions in procreation. The security aspect continues to be relevant, with India transforming into a blue-water navy, participating in alliances such as the Quad, and changing from Russian to American weapons (from Tu-142s to P8Is for aerial anti-submarine warfare, for example). But it is the economic aspect that is driving the discussion – we are shortly expected to become the world’s third largest economy (though, as with everything Indian, the less said about per capita figures the better); we are the only major economy that is growing significantly (7.6% in real GDP in FY24); and there are strong tailwinds in the form of, for one, the west looking for alternatives to China.
So, two questions! One, are we on the road to superpower-hood this time, or is this mere pre-election hyperbole? And two, if so, what sort of superpower will we be?
On the first, while there are quibbles about the details, most forecasts indicate that yes, indeed we are. According to a December 2021 paper from CEBR (a UK-based consultancy), we will be the third largest economy by 2032 (Germany $4.4 tr, Japan $4.2 tr, India $3.5 tr – but the former two growing at below 2 percent) and the largest by 2080 with the key drivers being favourable demographics, a burgeoning middle class, a dynamic entrepreneurial sector, and integration with the world economy.
The immediate numbers, too, are favourable – high GDP growth, manageable inflation (ranging between 4.5 and 5.5 percent per annum), a low current account deficit (the difference between money spent abroad and money received from abroad, currently about 1.2 percent of GDP), inter alia – but iffy. Iffy because the government has dismantled the country’s statistical machinery through various measures including not holding a decadal census for the first time in 140 years, leading to a former Chief Economic Advisor (Dr. Arvind Subramanian) saying, incidentally at a recent India Today Conclave, that India’s GDP numbers are mystifying and difficult to comprehend.
I’m no pundit but do know that an economy consists of four basic components and, therefore, all growth must come from one or more of public expenditure, private consumption, private investment, and exports minus imports. The numbers indicate that private consumption, which is what people such as you and I spend and constitutes two-thirds of GDP, has grown at about 4 percent per annum in recent years, which is low. Private investment, or what businesses spend, has gone down (this is the part of the economy that is supposed to create jobs, so more on this later) as have exports (exports minus imports, however, has grown because imports have gone down more) leaving the burden of growth on public expenditure or what the government spends (mostly on salaries, infrastructure, and welfare schemes). How can you grow at 8 percent if most of you is growing at 4 percent or not at all?
There are explanations for anomalies such as this beyond the numbers being manufactured out of thin air, such as that some are lead indicators and some are lag and therefore that, for example, public expenditure on highways today will lead to increased private consumption tomorrow. And, despite their iffy-ness, the indications are that we are on the road to economic superpower-hood.
The second question brings an elephant into the room in the form of inequality.
Most view inequality as necessary for capitalism to succeed, the argument being – hard work and success requires reward and vice versa, else there is no incentive to work and to succeed. This in turn leads to growth. Growth also requires failure; it leads to creative destruction and the replacement of the old and inefficient by the new and enhanced. And sustained economic growth is seen as the best way out of poverty – growth at 14 percent, for example, will double average per capita income in 5 years, and the effect of the average income of 1.4 billion people doubling is enormous. Yes, there will be inequality in all this – it is not possible to grow at that rate without displacing, polluting, and extracting (exporting all this via colonialism is not an option anymore), and people will miss out. But they will catch up subsequently, due to the market mechanism converging towards an optimal equilibrium, due to the checks and balances of democracy, and when the trickle-down effects of growth reach them.
Or so the theory goes.
A short review of what prominent thinkers say on inequality may be useful.
Thomas Malthus, famous for the eponymous trap resulting from population increasing exponentially and food supply in a linear manner[1] has a simple but drastic policy suggestion for addressing inequality – restrict the ability of the poor to reproduce.
Karl Marx does not share other economists’ view (especially Adam Smith’s ‘invisible hand’[2] and Jean-Baptiste Say’s ‘supply creates its own demand’[3]) of the market as a self-regulating mechanism capable of achieving equilibrium on its own. He articulates ‘the principle of infinite accumulation’[4] – the inexorable tendency for capital to accumulate and become concentrated in ever fewer hands with no natural limit to the process – with an apocalyptic end for capitalism in the form of the rate of return on capital steadily declining and killing the engine of accumulation or else of its share of national income increasing to the point at which workers unite in revolt.
The prophecy was not realized for various reasons including Marx’s neglect of the effects of increasing productivity and technical progress as a counterweight to accumulation and, nice to know that even he could err in this common manner, him having possibly decided on his conclusions before embarking on his research. Marx’s work is nevertheless important because he articulates the role of accumulated wealth as a socially destabilizing influence, especially in a low growth economy.
Simon Kuznets states that economic growth is a rising tide that lifts all boats, and that income inequality follows an inverted-U curve (the ‘Kuznets Curve’) that initially increases, then flattens, and then decreases over the course of industrialization until it stabilizes at an acceptable level[5].
The philosopher John Rawls provides a basis for the acceptance of inequality as being just[6], saying that a low-income household may be better off in a high income but unequal society than in a low income but egalitarian society (and, by implication, that Mukeshbhai and Gautambhai raking in the bucks may be better for us all).
Thomas Piketty treats capital more as an accounting category, a proxy for wealth, than as an exploitative force a la Marx. He separates income and wealth and asks the questions – what does data tell us about how these have evolved; do the dynamics of private capital accumulation inevitably lead to concentration of wealth (Marx’s view) or do balancing forces such as growth, competition and technical progress reduce inequality (Kuznets’ view); and what lessons can we derive for the future[7].
His key point is that, when the rate of return on capital ‘r’ (i.e., rents, interest, profits, dividends, etcetera) exceeds the economy’s growth rate ‘g’, i.e., when r>g, capitalism automatically generates arbitrary and unsustainable inequalities that radically undermine the meritocratic values upon which democratic societies are based.
He suggests that r>g provides the conditions for inherited wealth to dominate society and inheritors by nature are hostile to the creative destruction necessary for rapid economic growth (the old rich are focussed on keeping what they have and prefer rent-seeking to winning in the competitive marketplace). Plutocracies, or government by the wealthy, are usually high price, low growth, and low innovation societies in which ‘who you know’ matters more than ‘what you know’. They are also highly unequal and deeply unpleasant societies for a majority of their citizens.
Let’s move from the general to the Indian situation. There are two recent papers that throw light on inequality in India.
The first is a 2024 paper by Piketty and others[8] that states that inequality decreased post-independence, began increasing in the early 1980s, has skyrocketed between 2014-15 and 2022-23, and is currently at historically high levels. The current share of the top 1 percent’s income (i.e., earnings, interest on savings and investments, and other sources) is 22.6%, and of the top 1 percent’s wealth (i.e., net worth, or total value of assets owned) is 40.1% of the country’s total income and wealth respectively.
The second is by a team of researchers from the International Labour Organization[9], which paints a grim picture of India’s widely touted ‘demographic dividend’. It states that 83 percent of the unemployed (i.e., working-age people who are not in paid work, education, or training) are youth, with 7-8 million more being added every year. The educated unemployed are in a worse state, with 65.7 percent of school leavers (up from 35.2 percent in 2000) and 29.1 percent of graduates being unemployed, pointing to a failed education system, no jobs available, and stagnant wages. India’s Chief Economic Advisor Dr. V. Anantha Nageswaran lamented while releasing this report that ‘the government cannot solve all social and economic problems like unemployment – in a normal world, it is the commercial sector that needs to do the hiring’. He is correct in that private investment has not stepped up, but his handwringing is also laughable given the government’s role in enabling this.
How so?
The government has driven growth through its own spend and by favouring selected large players through policies such as increasing formalization of the economy (large players have better access to capital and are able to manage the enhanced compliance requirements), disincentives to competition in the form of foreign and domestic participation (high import barriers, arbitrary policies, retrospective tax enforcement, increased entry barriers) and weak regulatory bodies for monopolies and restrictive trade practices. As a result, the number of sectors under oligopoly, with a few dominant players, is significant. But it is the medium and small enterprises that are crucial for job creation and mass consumption, and it is today’s start-ups that will create the growth of the future, and policy-wise both seem to exist mainly in platitudes.
There are two other statistics that alarm me. The first is that India’s income at the 90th percentile is just above Rs. 19,000/- per month – meaning that earning Rs. 2.3 lakhs per annum puts one in the top ten percent bracket in the country. The second is from the PM himself – he says that his government will provide 810 million people with free food through till 2028 – meaning that, in his estimation, 60 percent of the country are unable to feed themselves in a time of high economic growth.
You can draw your own conclusions from all this.
For me, some things stand out (and I have lived in 3 different cities over the past 5 years). The first is the large number of angry young men hanging around twiddling their thumbs. They are either unemployed or under-employed and consist of two types – upper caste educated men whose fathers have jobs, who know that they will not be able to maintain the living standards of previous generations; and first-generation job-wallahs who see education and work as a means by which to emulate the lives of those they see on TV. They have been failed by the education system and the job market, but they are not useless people, they are our delivery boys, security guards, drivers, inter alia, and they make their presence felt by taking over the streets on occasions such as religious festivals. Our politicians have thus far successfully diverted their anger towards minorities, foreigners, and the English-speaking liberally educated classes, and the effects of this on the quality of political discourse are available for all to see.
There is a third type of angry man, not as visible as the other two, who rejects the development paradigm and everything that it stands for, and who just does not want to be disturbed. These young men react to encroachments on to their habitations and their way of life by moving deeper and deeper into the forest and, when pushed into a corner, by resorting to extreme methods to prevent such encroachments. The red corridors and Pathalgadi movements in eastern India are testimonies to this.
The second is the many movements to enable certain castes and sub-castes to gain from reservations in government jobs – forwards claiming backwardness, backwards claiming tribal-ness – and counter movements to block them by those already in those categories. And the fact that there is a rationality to such zero-sum thinking.
The third is the blindness of policy makers to the existence of the poor, with some egregious examples being demonetization and the move to create new Hong Kongs in the Nicobar Islands, and the role played by the media and other institutions in enabling this blindness. I wish that I could say that this phenomenon is restricted to a small group of powerful people and their poodles, but I know of a respected NGO claiming that its field area was free of child labour (and all children were in school) based on sarpanches having certified its non-existence. We all knew it was fallacious, communities were in deep distress after the lockdown and child labour had increased significantly, but the ‘sarpanch has certified so ….’ justification for not doing anything about children who were not in school stopped only when someone made the point that sarpanches had similarly certified that their villages were open defecation free.
And the fourth is that people seem to have intrinsically understood Piketty’s point that when r>g they are better off living off capital than off incomes, and those who have not inherited capital are looking at innovative ways to create it – through government service (and I am not talking here of salary which, while not insignificant, is also not at a level that enables capital formation), cybercrime, politics, entertainment, inter alia.
So, are we on the road towards becoming a Billionnaire Raj?
There are countervailing forces, such as investment in education, training, and skills, and the diffusion of knowledge across society. Our prominent political party, too, is not completely in the hands of ‘heiristocrats’ and there are pushes for policies that enable people with competence and no background to rise (and when they do, it is hoped that they would be a force for a better society and not one that would enable them to commit similar atrocities to the ones committed upon them in the past). And there are many well-educated and innovative people pushing boundaries and setting up the businesses that may enable the creative destruction necessary for sustained growth.
And then, there is war. Wars typically destroy capital and provide a political basis for increased taxation on wealth. I don’t recommend this method of addressing inequality for obvious reasons, key being that the two most likely counterparties are nuclear armed and, as they say, no one wins a nuclear war. But it is worth noting that, historically, sustained shifts towards equality have happened only in the aftermath of war. And given that the world has an established power and a rising one, and given that Asia too has established and rising powers of whom India is one, it may be useful to take into account the historian Graham Allyson’s description of the Thucydides Trap ‘when a rising power is threatening to displace a ruling power, standard crises that would otherwise be contained can initiate a cascade of reactions that produce outcomes none of the parties would otherwise have chosen.’[10] War may not be an outlandish possibility, more so in a 30-year time horizon.
So, what are my conclusions? The key one is that, if I do not want to live in a country where 60 percent of the population need food on the dole and where an airport can be made ‘international’ for 10 days so that celebrities can attend a wedding function, there is not much that I can do about it other than run, and I will not run, or adapt, and I feel uncomfortable even entering a gated community, I doubt I can ever live in one.
Because this is a matter for policy to address, not powerless individual citizens like me, no matter how much I believe that ‘the existence of a billionaire is a policy failure’[11]. What can be done to enable growth with equity at a rate at which g>r?
Let me begin at the top end. Piketty et al have suggested a 2 percent super tax on the net wealth of 167 richest families in India – this would yield 0.5 percent of national income in revenues and create valuable fiscal space for investment in basic health and education. I endorse this. I also recommend strong policy support to work being done in the start-up ecosystem by people such as Dr. Chintan Vaishnav, Dr. Dhruv Nath, Srikant Sastri, Davinder Singh, inter alia, and for platforms such as the Atal Innovation Mission where the next generation of firms are being incubated.
The 50 to 90 percentile in India require the skilling system broadened, deepened, sharpened, and brought to international standards. These are the people who need to go abroad if there are no opportunities in India, and having skills that are in demand and up to standard will enable migration with dignity and leverage.
The 10 to 49 percentile most require functioning public health and education systems, a strictly enforced legal minimum wage rate, and a revamped MGNREGA that applies in urban and rural areas, for people dependent upon agricultural and unskilled labour.
The 0 to 9 percentile require government support to NGOs that work with the poorest of the poor. This would necessitate a sharp policy U-turn from the ‘NGOs are anti-nationals’ stance that defines current thinking among the powers that be, along with recognition of the fact that, despite this being a counterfactual to the ‘road to superpower-hood’ story line, the very poor do exist in numbers in the country.
In addition, my wish list includes three policy areas that cut across the wealth spectrum – support for women joining and staying in the workforce; devolution of power, including funds, functions, and functionaries, to panchayats and municipal corporations in line with the 73rd and 74th Constitutional Amendments; and encouragement to small and medium sized enterprises so that they flourish.
And if not, then a pleasant old-age home for me to see out my future would be nice.
[1] Malthus; An Essay on the Principle of Population; 1798
[2] Smith; The Theory of Moral Sentiments; 1759
[3] Say; A Treatise on Political Economy; 1803
[4] Marx; Capital; 1867
[5] Kuznets; Economic Growth and Income Inequality; American Economic Review 45,1; 1955
[6] Rawls; A Theory of Justice; 1971
[7] Picketty; Capital in the 21st Century; 2013
[8] Bharti, Chancel, Piketty, Somanchi; Income and Wealth Inequality in India 1922-2023: The Rise of the Billionnaire Raj; World Inequality Lab Working Paper 2024/09
[9] India Employment Report 2024; IHD/ILO; 2024
[10] Allison, G; The Thucydides Trap: Are the US and China Headed for War?; The Atlantic, 24 September 2015.
[11] The quote is attributed to Dan Riffle, a policy adviser for an influential Democratic representative in the USA.
