Ever since development economics emerged, the big “analysis” has centred around the determinants of the “catch-up” of developing countries’ per capita income levels with those prevailing in the advanced economies. Per capita income growth is not all there is to development and welfare improvement; but changes in per capita income is the most important signal about enhanced development.

The important determinants of per capita income are well identified – investment in both physical and human capital and the harnessing of this investment via growth-friendly policies towards increasing productivity and growth. Once growth is present, every other goal of policy becomes easier – poverty alleviation, reducing income inequality, enhancement of investments in physical and human capital, and achieving political stability.

Unfortunately, after decades of consistent progress and catch-up, the world met with the worst possible world crisis in 2020, in the form of a health and economic shutdown caused by Covid-19.

This crisis was also not without possibilities – for decades, the refrain amongst economists has been to “never waste a crisis.” The world, and India, did experience the worst human crisis ever experienced, at least for the last 100-odd years. However, India, in divergence from most other economies, continued its agenda of structural reforms during the pandemic. These wide-ranging structural reforms, including agriculture and labour reforms and an ambitious programme of privatisation, are expected to contribute towards an acceleration of economic growth and improvements in economic well-being.

These reforms will reinforce ongoing changes in the Indian economy; in particular, the profound changes that have already taken place with regard to India’s labour market. This chapter is about the evolution of the Indian economy, and labour markets, over the last two decades; it also addresses possibilities for the future. It systematically examines various important aspects of competitiveness
and a healthy economy, such as fertility trends, population growth, education and changes in regulation, and connects them to India’s catch-up process and growth prospects.

Broad lessons about development can be obtained through a study of the experiences of individual countries, and no country development is more studied than that of China – from being among the poorest countries just 50 years ago, to now being a global economic power. It is this recognition that guides us in our attempt to understand India’s grasping for greatness, the theme of this book. The chapter is organized as follows. We first provide a macro picture of broad trends in GDP growth in China and India. The question asked is, what future growth patterns are necessary for India and China to re-establish equality in per capita income levels?

In relation to that, we next undertake a review of several aspects of the labour market deserving emphasis and recognition. What do fertility and population trends suggest about labour supply? The unemployment rate of 6.7 per cent in the 2017–18 NSSO-PLFS household survey was a significant increase over the 2–3 per cent levels observed in earlier decades. Was this the result of deficient demand, excess supply or structural change in the labour market and the economy as a whole?

Fertility trends are an important determinant of population growth, and hence growth in labour. In addition, countries undergoing an “education revolution” (like India) encounter several non-linear possibilities in terms of labour supply. In this section, we explicitly examine the reality, as some experts have suggested, of deficient job growth and hence increasing unemployment. The final
section, before conclusions, looks at the nature of labour market regulation and deregulation.

GDP growth is a function of the rate of growth of capital accumulation and the rate of growth of human capital. The latter can be bolstered by an increasing number of people participating in the economy (rate of growth of the workforce), and by increases in the average level of educational attainment and quality of education.

The world economy has undergone a vast transformation in the last 40 years. China and India, who account for two-fifths of the world population, have led the upheaval. The magnitude of the change in the world economy can be gauged by the following simple statistic – between 1500 and 1980, that is, for 480 years, per capita incomes in China and India were approximately equal to each other. In the early half of this long period, per capita incomes in China and India were also equal to the world average. In 2019, China’s per capita income, in purchasing power parity (PPP) dollars, was about two and a half times that of India.

To fill this gap, India must exhibit a strong income catch-up. Usually, a large element of the income catch-up originates from the convergence towards the education levels prevailing in some of the middle-income as well as advanced economies. However, such convergence has to do with both the level of education and its quality.

On the former, there is remarkable progress around the world and for India. Quality of education in emerging economies is development in progress, and while the gap (between developing countries and advanced economies [AE]) has declined, it still remains high – the education quality in most parts of the developing world remains between a quarter and two-thirds of the quality in the AEs.3

As such, differences in education explain part of the India–China gap in per capita incomes. The two countries together have a remarkable record of convergence. In the next first post-Covid-19 decade, it is likely that average per capita income in India and China will finally match average world per capita income, something not observed for the last 200-plus years. Of interest now are prospects for India to catch up with China.

The projection of GDP growth in the two countries, post 2021, is as follows. China, with sustained high levels of income growth for the last 30 years, is now in a declining GDP growth mode. From a peak of 10-plus per cent sustained growth levels a decade ago, China’s per capita growth declined to an average of 6.5 per cent between 2015 and 2019. India’s growth in the two periods was as follows: 7 per cent per annum (2000–10) and coincidentally the same as China, 6.5 per cent between 2015 and 2019. Going forward, the expectation is that Indian GDP growth will accelerate towards 7.5 per cent or higher. On the other hand, China’s growth is likely to stabilise towards 3–4 per cent.

How likely is the forecast of future Indian growth at 7.5 per cent per annum? Quite likely, for two important reasons. First, historically, and for the last 20 years (2000 to 2019), GDP growth averaged
6.7 per cent per annum; for the last ten, it has been the same: 6.7 per cent per annum.4 Second, given the large magnitude of economic reforms ushered in India over the last three years (2019 and the two pandemic years, 2020 and 2021), it is widely expected that GDP growth in India in the post-pandemic world will be the highest (among major economies).

If per capita income growth in India averages 3.7 percentage point (ppt) per annum above China for 25 years, catch-up with Chinese per capita income will be complete at the end of these twenty-
five years. Any excess over 3.7 ppt will mean a catch-up period of less than 25 years; if excess per capita growth in India (relative to China) is only 1.5 ppt per annum, the catch-up will take much
longer – around 60 years.

We believe that the major development story of the next few decades will be the story of India’s growth, both in absolute terms and relative to that of China. The rest of this chapter is concerned
with the determinants of GDP growth in India, via developments in the labour market.

Excerpted with permission from ‘Labour Productivity and Economic Growth in India,’ Surjit S Bhalla and Tirthatanmoy Das, from Grasping Greatness: Making India a Leading Power, edited by Ashley J Tellis, Bibek Debroy, and C Raja Mohan, Penguin.