Changes in labour, physical capital and productivity norms can help India hit 8% growth

economictimes.indiatimes.com:

To assess India's growth potential, we undertook a growth-accounting exercise. Created by Nobel-winning economist Robert Solow in 1957, it breaks down GDP growth into contributions from its basic drivers — labour (workforce adjusted for their skills), physical capital (machines and infrastructure) and productivity. A business-as-usual approach, in which these drivers evolve in line with recent trends, may not make for an exciting future.

India's potential growth would average 6.2% till 2030, below the 10-year average growth of 7.1% by 2019. Growth would then slow down to 4% by 2050. India's nominal GDP may still exceed $7 trillion by 2030, becoming the third largest globally, but its per-capita income will tread an ordinary path.

Unfortunately, this scenario may not be groundless. India's labour force participation rate (LFPR), the share of people employed in their working age (15-64), has slowed, especially among women. The World Bank estimates India's LFPR at around 53%, 15 percentage points lower than Asia's (ex-India) average, and down from 60% in 2000.

Mean schooling years among adults, a marker of skills among the workforce, at 6.7 years, is below Asia's average of 9.3 years. Net capital formation has slowed in the last decade. Only productivity rose before Covid-19, with its growth averaging a resilient 3% during 2011-19.

We suspect the positive impact of rapid technology adoption in shoring up productivity. However, another set of assumptions reveals India's true economic potential. If LFPR rose to 60% by 2050, mean schooling years among adults met levels in Malaysia or South Korea (12 years), growth in capital formation picked up, and productivity growth averaged 3.5%, India's potential growth would average 8%