this is India the fifth largest economy in the world and a country which will soon be the most populous on Earth India's intense Manpower is a big part of what has made it such an economic force on the world stage while countless other countries are struggling with aging populations equipped with skills that are misaligned from what is really needed India still has a very young and very productive Workforce it's that Manpower that has enabled this economy to capitalize on world events that might look like problems to us but are presenting great opportunities to India in the last five years the country has made headlines for scoring a lot of manufacturing jobs that have previously gone to China almost by default today is China's period of intense economic growth appears to be coming to an end it might seem as if it's now India's turn become the workshop of the world and enjoy the wealth that comes with that role this would certainly fall in line with the Indian government's plan to have a five trillion dollar economy by 2025 but it still has a long way to go India is current generating 1 6 the output per capita as China and for all of its success in the last three decades China is still far from a wealthy country itself but that just means that success in both of these countries stands to do a lot of good on a human level for all of the geopolitical problems that China's economic growth has created it has been responsible for lifting hundreds of millions of people out of poverty and that can only ever be a good thing a good thing that can also be replicated in India so could India become the next economic superpower to rival China and the USA what are the advantages that it could utilize to grow its economy to that level and of course what are the challenges it's likely to face that could hold it back once we have done all of that we can put India the fastest growing major economy in the world on the economics explained National leaderboard this episode of Economics 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British colonialism however the collapse of the Soviet Union which was their primary international trading partner at the time combined with overall poor economic performance under this system meant that the country faced such a huge International debt problem that it barely avoided going bankrupt due to a last-minute loan from the international monetary fund when an economy effectively has to be brought back from the dead the IMF uses what is called the Washington consensus now we have looked at the Washington consensus before in a few other videos covering National economies that needed to be given a Kickstart so I don't want to repeat too much here but effectively the Washington consensus is just a list of policies that open up the economy to trade and private business the biggest thing on The Chopping Block in India's case were its protectionist policies for its domestic Industries and its incredibly complicated system of licenses and restrictions that all businesses needed to adhere to 2. now protectionist policies are not always a bad thing these are policies that governments will put in place to well protect their local Industries protectionist policies come in many forms but the most common are trade restrictions like import taxes or quotas if India wanted to defend its local car industry it could put an import tax on all foreign cars shipped to the country which would increase their price relative to domestically made cars the imported cars would still be available but they would be a luxury the benefit here is that most consumers would simply elect to purchase the domestically made Goods even if they were slightly inferior to their International competitors for no other reason than they were cheaper this means that domestic businesses will almost always have a consumer Market which means that they will stay in business and keep people employed sounds great in theory but there are two major problems with protectionist policies the first problem is that they make everything more expensive for consumers obviously the imported goods are going to have their prices artificially inflated and that cost is going to be passed along to Consumers but that also leaves Headroom for domestic manufacturers to raise their prices while still remaining competitive depending on the extensiveness of import taxes and levies it can also mean that businesses end up paying more for component parts that go into end products to be an advanced economy or even a developing economy in today's world it's almost impossible to make everything you need in-house using the example of a car you need to consider the raw materials the component parts the computer chips as well as the Machinery that makes the Machinery that makes the parts that makes the cars some economies theoretically could get close to being totally independent but it would come at a huge cost which means almost inevitably economies need to import things if a manufacturer has to pay import taxes on all the components they end up putting into their final product they are also going to need to pass this expense along to the end consumer now for certain industries especially those that can employ a lot of people or provide a benefit to the economy Beyond just dollars and cents or rupees I suppose this can be worthwhile you are effectively trading higher prices for higher employment and self-sufficiency but this will make those goods less cost competitive which will show up as price inflation in domestic markets we are experiencing first-hand the impacts of trade restrictions today with Russian sanctions in the China trade War obviously extreme examples but exactly the same process now economies can deal with higher prices within reason if we are judging the performance of an economy purely off how cheap everything is then Somalia would be the world's foremost superpower what economies can't deal with though is how this artificially inflated price impacts their export competitiveness which is the second big problem that protectionist policies in the form of trade restrictions can cause a car company that makes inferior products that it can only get away with selling domestically because all of its competitors are heavily taxed is not going to have much luck marketing their cars outside of this uneven plane field this means that the economy is foregoing the chance to create an export market for itself which has the opportunity to create more employment in the long term than the protectionist policies could ever hope to save now there is a way to protect local Industries which doesn't cause these problems which is instead of penalizing imports the government will subsidize local manufacturers with grants tax breaks direct payments or guaranteed purchases the best example of this is probably the USA which subsidizes Farmers because it wants to maintain that local industry both for the employment that it brings but also for the Strategic advantage that comes with been able to independently feed its own population whilst subsidy protectionist policies don't make things more expensive for consumers directly they require the government paying more money instead of receiving money like they would through import taxes which means that eventually the taxpayer is going to have to foot the bill no matter what whether it's through higher taxes or higher prices no matter how they are implemented protectionist policies are a direct intervention in the frame market and anytime that is done it is inevitably going to cause some inefficiencies and this is why typically economies tend to start growing when they Embrace free trade now to be fair the inefficiencies caused by protectionist trade policies in India's case were relatively insignificant compared to the strain on the economy caused by the extreme level of government intervention in almost all business activity as I mentioned earlier India in the decades following Independence drew a lot of inspiration from the Soviet Union's command-style planned economy the economy was run according to a series of five-year plans that would Target specific Industries like Agriculture and heavy industry it wasn't a direct copy however because Private Industry could still exist it was just heavily regulated large heavily subsidized state-owned companies dominated most large Industries which made it impossible for private companies to compete in those markets and even in smaller markets as small even as a corner store it was almost impossible to start a business this was because of something known known as the license Raj which was a system of intense licensing regulation and red tape that businesses had to comply with in order to operate in India I want to quickly mention that this wasn't officially called the license Raj that was just a term applied to the extreme level of government control over business activities which was apparently akin to the British Raj another oppressive ruling system pretty tasteless joke but uh that's what everyone calls it so anyway business regulation and even licensing isn't unique to India and in many cases these regulations serve a very important purpose you don't want just anybody setting up a doctor's office and Performing surgeries but in India's case these regulations went beyond just ensuring business competency and safety they encroached on all aspects of business operations to the point of being totally redundant depending on the business as many as 80 individual government agencies had to be satisfied before a business could even start to produce anything and they needed to be kept happy for as long as the business wanted to stay open this was very limiting to any small business that wanted to get started because this system of licenses and regulations was practically impossible for a regular person to navigate without the help of a team of lawyers which priced out most people from even trying really the only practical way to get around the licensing Raj was to completely ignore it and run a businesses and unofficial unregulated entity if someone came along to enforce the law it was cheaper and easier to just pay them a bribe than it was to set up everything correctly in the first place this was fine for small businesses that could fly under the radar but it meant that large International companies would not even begin to consider India as a center of operations because it was simply too difficult to work with now I have spent a long time talking about systems that were effectively abolished over three decades ago because they went on to show the potential of India simply removing economic restrictions is not enough to get an economy going just by itself we can look at the experiences of countries like Russia which saw its GDP fall significantly following the collapse of the Soviet Union despite adopting free market systems but since 1991 and particularly since 2000 India has been on a very strong growth trajectory effectively doubling in size every five years most of that is because without these government restrictions in place India has been a very good place to do business for a number of really important reasons it is the second largest English-speaking nation in the world with 125 million speakers this big deal for a lot of companies because international business agreements overwhelmingly get handled in English as a neutral language in the 1990s and 2000s this was mostly used to set up cost-saving call centers I'm sure you've all called a company before only to be connected with someone in India it might not sound like a particularly glamorous job but it created a lot of value in the country economics at its core is a study of how people interact with things of value on a macro scale this leads to questions about how systems add or subtract value from the national or even global economy a country can add value by harvesting raw materials like resource which countries do by digging stuff out of the ground this generates a lot of wealth but it is by its very nature unsustainable because eventually those resources are going to run out resource extraction also requires very little Manpower which means that margins are high and the potential for those resources to be exploited by a ruling class and some fossil fuel companies is high look at the list of the most oil rich countries in the world and you'll quickly realize that natural resource wealth does not guarantee economic Prosperity countries can also add value by importing those raw materials and turning them into components or end products this is just manufacturing manufacturing is great for economic well-being because it also requires more manpower per unit output of value when compared to most natural resource extraction this means more jobs spread out amongst more people which creates a middle class that makes outright exploitation harder manufacturing is also much more sustainable than resource extraction because it doesn't depend on selling off a pool of finite resources if a country has a steady flow of material Imports and consistent International demand for the products they produce then they could create an income from this sector almost endlessly unfortunately of course the real world doesn't always work like that and manufacturing-based economies are exposed to International economic conditions both on the side of material Imports as well as product exports pure manufacturing without the addition of more Advanced Services like r d design and marketing is also a Perpetual race to the bottom product companies like Apple or Samsung can Outsource their manufacturing pretty much anywhere and more often than not they will just go to the country with the lowest labor costs and the least restrictive manufacturing laws building an economy around an industry that only remains viable if the workforce is paid very little and companies can get away with doing whatever they want is almost as unsustainable as just digging things out of the ground of course outsourced manufacturing can be a viable industry as a stepping stone of sorts to an economy that runs primarily on Services every Advanced economy in the world derives a majority of their output from services that include everything from schools to Banks if something in the economy is adding value without digging it out of the ground or making it in a factory it's most likely going to be broadly categorized as the service sector the service sector is so important to advanced economies because it is very sustainable and it can make other sectors much more profitable as well imagine two countries that had one Factory each one country focuses exclusively on manufacturing they invest a lot into infrastructure to make it as easy as possible to bring materials in and ship products out they also house a labor force that demands very low wages so they can become The Logical choice for international companies looking to Outsource the manufacturing they will get a lot of business but they are going to be the victim of their own success if this process starts to make their Workforce Rich enough to start demanding higher wages compare this with the other country that still has the factory but also has a strong service sector with companies that have in-house r d design and marketing departments these companies will be able to make their own products and charge a premium for them because they are research better designed better and marketed better if even though most of the value in this example is being created in the service sector the incomes of the entire economy will increase which means that manufacturing sector employees will get paid more to build products that are more complex and add more value we explore this Theory briefly in our video on why economies can grow forever if they are properly managed if an economy uses basic manufacturing to turn steel into knives and forks they're going to be able to sell those products at a slight mark up from the material cost of the raw steel it's a perfectly straightforward process and there is value to be had there at the end of the day the world needs knives and forks but these goods are not special and there is only so much a company can sell these products for before they get undercut by another company in another country that is willing to pay their workers less if instead an economy uses its service sector to design a state-of-the-art and proprietary piece of Aviation or medical equipment out of that same slab of stainless steel they will be able to sell it for much more money and the wages of the factory workers will be a lot less of a consideration since their pay represents a much lower share of the end price of the goods there is a good reason why goods made in advanced economies like Europe or America are perceived as being of higher quality and it's because normally they are and that's not because Chinese or Indian manufacturing is inherently worse it's just because it only really makes sense to manufacture high quality items in these economies because the goods that only saw because they are cheap would not be as cheap as the ones from these other countries but what does this all have to do with India and its potential for future growth well because of its unique demographics India has the potential to LeapFrog the typical slow economic progression an economy makes as it goes through the process of growing from an undeveloped economy to a developing economy and then finally on hopefully to become an advanced economy this is of course where I say the line that nobody can predict the future least of all economists but it's still worth exploring in India's case because even if this scenario does not come true it is a very interesting case study into the comparative advantage of economies most people think that India's biggest Global rival is China but that's not necessarily true they can and probably will compete in different markets it's very hard to Outsource services to China ignoring for a second all of the Sovereign risks that comes with China particularly in recent months most of the population does not speak English and beyond that their business culture is very different from the west but since the removal of trade restrictions and Licensing Raj in the early 1990s India has been a fantastic place to Outsource Services too this is where we get back to our call centers if we were to directly compare call centers in India to factory floors in China these two industries would look pretty similar they both pay low wages and they are both mostly for the benefit of foreign companies these industries are the global economic equivalent of entry-level jobs only the factory floor is an entry-level job at a fast food restaurant and the call centers are an entry-level job at a Fortune 500 companies Global headquarters Factory floor jobs are very difficult to turn into anything other than Factory floor jobs whereas even very basic jobs in the service sector are much easier to turn into more value-adding jobs with training and experience today Indian companies offer far more complex Services than simple customer call centers India has been a go-to destination for accounting engineering design and even Legal Services all industries that no other country on Earth can compete with simply in terms of Manpower and cost efficiency to be perfectly clear India still has the cheap manpower to steal a lot of manufacturing work away from China and they will undoubtedly benefit greatly from this industry before they themselves pass the torch down to another country that comes along and undercuts them but it's India's unique ability to become a service sector Hub that could make it one of the world's foremost economic superpowers in the coming decades but with that optimism it's probably also worth exploring what could go wrong India's economy did something it hadn't done for a long time in 20 20 it shrunk now obviously global economic conditions in the wake of the coronavirus pandemic were the primary driving force behind this and India was hit incredibly High by these outbreaks but even before that the country's growth had shown signs of slowing a puppy a popular explanation for this amongst economists is that India's economy is both over regulated and under regulated at the same time despite the changes made in the early 1990s some government bureaucracy remained specifically in the financial sector where even today the biggest banks operating in the country are state-owned and operated these banks have been slowed offer credit to businesses and consumers which means that good ideas are hard to get off the ground and consumer spending is stifle because it's hard to get a loan for something like a car or a house or education government regulation has also been implemented rather haphazardly in certain instances in 2020 the government had to reverse a major decision to deregulate the agricultural industry because of intense backlash by farmers who fear that they would not remain profitable without government guaranteed prices remember this is effectively a form of protectionist trade Intervention which were the same policies that stifled economic growth prior to the 1990s another example of severe overreach was the government's decision to make certain denominations of their currency unusable after a set date just two months in the future this meant that people had to rush to deposit these notes at Banks before they became useless which had people standing in line for hours outside of just the lost and wasted man hours this caused it created significant doubts about the nation's currency you unbacked fiat currency only works if people believe it has value and by demonstrating that the government was willing to wipe out certain denominations of its own currency on a whim it created ongoing doubts about how safe it was to conduct serious business in Indian rupees as strange as this demonetization sounds the government thought it was necessary because of another hangover from the era of the license Raj which is all of those businesses that decided it was easier to operate outside of official government control in 2018 informal gray Market businesses by most estimates constituted more than half of India's total output raising taxes off informal businesses and workers is obviously very difficult so the government hoped that by forcing people to deposit their cash that they would be 4 forced into reporting their income and paying their taxes it didn't work but it did highlight the problem of the informal economy many workers are reluctant to take the leap into more valuating formal roles because they will be taxed and their income would end up lower than what they would have made working informal jobs for cash in hand large multinational corporations do not do cash in hand work which means that certain companies are finding it surprisingly hard to attract labor in a country of almost one and a half billion people The Divide between the formal and informal sector also threatens to create a two-speed economy where skilled workers who can speak English will become a class of their own earning significantly more than the rest of the population working in the informal economy while this wouldn't necessarily impact headline GDP figures the reason we want economic growth in the first place is to improve the living conditions of the participants in that economy there is good news here though a report published by the State Bank of India found that the informal economy had shrunk from 52 of total economic output in 2018 to just 20 in 2021 part of this reduction was due to government efforts to make it easier to find work and run a business legitimately but another driving force was the fact that many informal workers were just put out of business during covert outbreaks while their formal economy peers could work from home or out of controlled offices India's economy is nothing but pure potential it has a young and skilled population it has the potential to capitalize off the stagnation of China and it can move seamlessly into industries that other developing economies would find it very hard to make the jump to the deciding factor is going to be if the government can convince businesses and investors that India is a safe and lucrative place to invest while also giving its population the financial tools that they need to grow wealthy independently while the nation grows wealthy collectively okay now it's time to put India the fifth largest economy in the world on the economics explained National leaderboard starting as always with size India has a GDP of 3.
5 trillion dollars putting it behind only the USA China Japan and Germany it gets a 9 out of 10. that impressive figure is spread out very thin amongst a large population which means that it only has a GDP per capita of 2515 which puts it in the bottom quarter of the global economies and gives it a 3 out of 10. growth is a more positive story the economy has had a sustained growth rate which has seen its size double roughly every five years for the past three decades it gets an easy 10 out of 10.
stability and confidence as we have seen has been the country's Achilles heel International organizations are still tentative to do business with a country that has demonstrated multiple times that it can make some very strange industry training decisions the informal economy and the influence of state-owned companies also have their problems and while it's improving the country actually can't get more than a 5 out of 10. finally industry India has enormous potential in this field but as we've seen in this video it has a lot of potential that is going unrealized it has the capacity to be the world's largest economy but for now it can't be ignored that its average citizen is very poor by global standards because they aren't producing as much value as they could be even still as one of the largest manufacturers and service centers in the world it gets an 8 out of 10.
