Key to India’s 2047 target

Developing competitive scale in specific sectors is essential for India to achieve developed nation status. To maintain its economic growth, Indian businesses must enhance their global competitiveness and foster trade acceleration without negatively affecting local enterprises.

Achieving a globally competitive scale in specific sectors is crucial for India to reach the status of a developed nation by 2047. To maintain its economic growth trajectory, Indian enterprises need to enhance their global competitiveness, thereby boosting trade acceleration without adversely affecting local businesses.

The issue of scaling has historically been a challenge in India. Recognizing the importance of this, the government has taken steps to facilitate easier and quicker scaling by recalibrating the parameters for micro, small, and medium enterprises by up to 50 times, introducing performance-linked incentives in certain sectors, simplifying numerous labor laws into four codes, and consolidating public sector banks. Despite these efforts, significant progress is still required, and the momentum must continue for an extended period for India's leading enterprises to achieve globally competitive scales.

According to the Reserve Bank of India's July 2023 bulletin, to reach the per-capita GDP level of a high-income country, which is projected to be $21,664 in 2047-48 with an annual dollar inflation assumption of 2%, India's per-capita GDP needs to increase approximately tenfold from $2,410 in 2022. Historically, India's best performance in a 25-year period saw a sevenfold increase in per-capita GDP from 1993 to 2017.

Countries like Japan, Germany, South Korea, China, and Vietnam have experienced over tenfold growth within 25 years, largely due to achieving globally competitive scales in certain sectors. Although this can lead to significant domestic concentration risks, the benefits have generally been considered to outweigh the risks by policymakers who supported the growth of these enterprises on a global scale.

Among these nations, China is the most comparable to India. Just before India's liberalization in 1990, China's per-capita GDP was lower than India’s. Over the next 25 years, China's per-capita GDP grew more than 23 times, while India's grew less than five times. The International Monetary Fund projects China's per-capita GDP to reach $14,037 in 2025, likely surpassing the high-income threshold.

Currently, China dominates the global manufacturing sector in foundational elements such as steel, aluminum, APIs, photovoltaics, semiconductor components, automotive, and ship-building due to drastically lower costs, where scale has been a decisive factor. India, with its large economy, diverse labor pool, and resource richness, is seen as a potential player to diversify global supply chains.

There is a school of thought that advocates for India to focus on maximizing its services exports, arguing against diluting efforts in manufacturing where it may not be as competitive. However, this view is considered myopic. The growth of manufacturing can coexist with service sector growth in an environment of abundant labor, robust credit growth, and foreign investment. Additionally, to challenge the global merchandise demand currently dominated by China, a manufacturing participant of substantial scale is necessary.

India's manufacturing sector's share of GDP has prematurely declined from a peak of 17.9% in 1995 to 13.3% in 2022 (compared to the world average of 16.2%), significantly lower than the peaks seen in China, South Korea, Japan, and Germany. By contrast, Vietnam, which had a similar manufacturing GDP share as India in 2010, has seen its share increase to 24.8% by 2022.

Indian enterprises, supported by government initiatives at all levels, must adopt a global-scale mindset. For instance, three decades ago, India exported three times the apparel value that Bangladesh did. Today, Bangladesh exports three times the apparel value that India does, a shift driven by Bangladesh's enhanced competitiveness and larger scale of enterprise.

In the early stages of scaling for competitiveness, job growth may be slow, and income disparity may initially increase. There is typically a delay of a couple of years between improved competitiveness and business order growth, and another year’s delay between order growth and GDP growth. As productivity improves, labor demand may not keep pace with GDP growth, highlighting the need for strategic initiatives like MGNREGA and improved credit access to offset productivity gains until exports significantly increase.

Ultimately, enhancing competitiveness will not only expand the economic pie but also lead to a more sustainable and higher standard of living for all citizens.