A large working age population and a head start in services exports will drive India’s future growth but Asia’s third largest economy faces the risk of falling into a ‘middle income trap’ and the rise of artificial intelligence eroding its services industry’s potential, said leading economist Paul Krugman.
Speaking at the News18 Rising India Summit in the capital, Krugman said that global trade has witnessed a transformation from its colonial nature of the 1980s when developed economies exported finished goods to developing countries that supplied raw materials.
In the new trade pattern, India has achieved something that no large economy has managed to do—a strong place in services export, said Krugman, who in 2008 had won the Nobel Prize in economics for his work on international trade theory.
“The unique nature of India’s exports puts it in a favourable position in relation to other emerging markets in the decades ahead. Despite that advantage, India needs to get into the global manufacturing game as well and there is no good reason why it should not be possible,” said Krugman. He added that scaling up merchandise exports will help the second most populous nation after China in creating new jobs for its dramatically expanding working age population.
Krugman said that while India has a first mover advantage in the global services trade, that alone is not sufficient to provide employment in the scale that India needs.
IT sector has been the leading driver of India’s services exports. In 2016-17, the US accounted for 57% of India’s total $111 billion of computer software and IT-enabled services exports, according to Electronics and Computer Software Export Promotion Council (ESC), the Press Trust of India reported on 25 January. Nasscom—the apex industry body for the IT sector had said in June last year that IT and business process management exports are set to grow 7-8% in 2018-19. The sector, however, faces speed breakers from the US market in terms visa restrictions and tax measures that discourage offshoring of work.
Krugman said that India has achieved much more economic growth in 30 years than Britain had achieved in 150 years, but what made the feat less conspicuous was the high level of income inequality in the country. License raj, which constrained growth in the past, has come down substantially, although not gone completely, said the economist. Krugman argued that the growing working age population, an English speaking workforce, edge in services exports and government schemes such as rural electrification will stimulate India’s future growth.
However, growth also brings its challenges to developing economies. Krugman said that institutional problems such as corruption become larger obstacles to growth while emerging markets start competing with developed economies at the highest levels. Also, deployment of artificial intelligence for services like interpretation of medical data can impact offshoring of that requirement to emerging countries.