Earlier this month, India became the fifth largest economy in the world after it overtook the UK (whose GDP declined by 0.1%) at the end of March 2022. Q1 2022 figures put India’s GDP growth at 13%. This growth is partly due to the low growth experienced in Q1 2021 (the quarter we're comparing against) as the country was still battling with the Covid-19 pandemic. Also, in per capita terms, given India’s large population (18x more than the UK’s), the UK’s GDP per capita is still more than 15x of the now-fifth largest country.
Even as fears of an economic slowdown hound many economies globally, India has maintained its high growth trajectory.
Key takeaways:
The growth of the world's fifth largest economy is driven mainly by three key factors: its technology sector, large conglomerates and the government's inward-led growth.
India is known for outsourcing tech and business support services to companies worldwide or directly equipping its people to take on full-time roles in other companies. The business process outsourcing (BPO) and services industry has grown so much in the past decade that it generates annual revenue of $230 billion (about 6% of India’s GDP). It is also the largest contributor to skilled labour, employing about five million jobs in India. Tata Consulting Services (TCS), one of India’s largest BPO companies, has a staff strength of over 600,000 people—making it one of the largest private employers in the world. In July, the company also recorded quarterly revenue of $6.7 billion.
Within the same technology sector, there's a healthy crop of startups which specialise in e-commerce, edtech, agritech etc., and repeatedly receive significant funding from foreign investors. With over 25,000 startups (more than 100 are unicorns), the tech ecosystem has generated jobs and growth in the Indian economy.
Traditional companies are also contributing to the growth happening in the economy, particularly huge conglomerates like Tata, Reliance and Andari groups. In the first quarter of this year, Reliance Industries raked in about $390 billion profit after tax (PAT) in Q1 2022 (a 22% YoY growth), surpassing its pre-pandemic level.
The Indian government has supported the growth of these businesses. Since 2014, the country's Prime Minister, Narendra Modi, has taken an inward-led approach to grow India and make the economy more self-reliant. He increased tariffs, subsidised firms in specific sectors and paused signing new trade agreements with other parts of the world.
These policies are similar to the protectionist stance of the Buhari administration. Remember how the land borders were shut in 2019, only to be reopened at different times between 2020 and 2022, without significant results? For the most part, it even made Nigeria worse off. Similarly, Nigeria's ban on tomato and maize imports and the recent rise in import duties on certain items point to the government's focus on generating growth from the inside.
Another move taken by India, similar to Nigeria's, is the increase in infrastructure development by the government, with hopes that it would increase private sector involvement in developing the economy. Between 2015 and 2019, the country experienced a 6% and 21% compounded growth in highway construction and installed electricity generation.
However, unlike India, these policies have failed to steer Nigeria on a high growth path.
So, what’s different? In this article, we will explore how India's protectionist policies have led to significant growth for the economy and draw out key lessons for Nigeria.
Inward-led growth
India's growth is due to the economy’s self-reliance. The Indian government has implemented several policies to support domestic industries and attract global manufacturers currently exiting China due to supply chain constraints.
India’s first approach is through its trade tariffs which benefit local firms. Since 2014, India has increased trade tariffs across 3,200 product segments, with the average tariff increase being about 18%. Importing agricultural items attract tariffs as high as 35%, while tariffs on low-skill manufacturing imports are around 10%. Some researchers estimate that this tariff will lead to an import decline of about $300 billion—the 2017 import value for the items with increased tariffs— from entering India's borders.
Such tariffs tend to favour local companies competing for Indian consumers' incomes because they increase the cost of bringing competing products into the country. However, they increase the cost of domestic manufacturing as inputs become more expensive to import. According to a report conducted by the India Cellular and Electronics Association (ICEA), India is becoming less and less competitive for manufacturing mobile phones compared to China, Vietnam, Thailand and Mexico (other manufacturing hubs) due to high tariffs. This goes against India's desire to be a global manufacturing hub.
But the Asian country uses corporate tax reductions to attract foreign manufacturers. In 2019, the Indian government announced a drop in company taxes from 35% to 25% and 15% for new firms incorporated between October 2019 and March 2023. This is significant to its vision of being a key manufacturing hub because, sometime in 2014, Nokia closed down its production plan in India after a $700 million tax dispute with the Indian government. The impact of the new tax regime is that several manufacturing companies have begun operations in India. For instance, Salcomp, the world's largest smartphone charger company, set up its production sometime in 2019.
The government has also implemented its $26 billion subsidy scheme to attract manufacturers leaving China. The Covid-19 pandemic exposed the world to the downsides of depending on only one country—China—as a manufacturing hub. Also, China’s increasing cost of labour and geopolitical tensions have led to an exodus of manufacturers out of Asia’s largest economy.
So, India is attempting to present itself as a more desirable destination for them. Basically, the government gives the businesses about 4%-6% of the value of their incremental sales—the sales above a target set—in the form of subsidies. This subsidy, known as production-linked incentives (PLI), is for electronics, mobile phone and pharmaceutical manufacturing companies over the next five years. In addition to Salcomp, Samsung and Foxconn are taking advantage of the PLI scheme to build from India.
Incumbent Indian conglomerates have also complemented the government's efforts to improve the economy's manufacturing. Four of the largest conglomerates: Tata, Reliance, JSW and Adani group, have committed to spending about $250 billion on expanding their production in India and building more factories in frontier areas like renewable energy over the next five to eight years.
Tata, the parent company of Land Rover Jaguar, has several subsidiaries across the automobile, steel, retail, hospitality, telecommunications and defence industries. The 154-year-old company's continuous growth since its inception has translated into further investment from the company into India. For instance, Tata is investing $90 billion—₦38 trillion (about three times Nigeria's 2023 budget)—to build factories in the country.
Formalising the economy
Also key to inward-led growth was changing the structure of the Indian economy by formalising the informal Indian economy: first by implementing a national electronic identity system and then by enforcing a national payment system.
Both are related and aimed at boosting consumer demand to sustain India's self-reliant transformation. In 2010, India launched a unique identification system (Aadhaar) on which other systems—such as the national payment system and a bank verification system—have been built. The United Payment Interface (UPI), the national payment system, was introduced in 2016 to improve financial inclusion, particularly among people in the informal sector in India.
Because more people's identities are known, banks and other organisations (including the government) feed off that information to verify customers and pay people. The UPI also allows individuals to create virtual accounts using their Aadhaar numbers.
Think of the Aadhaar as your National Identity Number (NIN) in Nigeria. What India did was that people who had their NIN could now create bank accounts from their phones instead of registering for their NIN and still separately getting a Bank Verification Number (BVN).
But the UPI takes things a step further. By having the Aadhaar and virtual account numbers, people can transfer money to others, whether they have virtual accounts, existing bank accounts or their UPI apps. Since the UPI is a public good, private banks also have access to it, which is why their customers can access funds through it.
This means that people who otherwise would've been left out of the financial system can now access credit to build their businesses and improve their income. It also improves the distribution of welfare packages directly from the government to people otherwise financially excluded.
Creating a national identity system linked to payments feeds into India's growth story. As more people become formalised, there is a potential for more income among Indians—increasing India's market size, which will be required for India's inward-led growth.
What's missing in Nigeria?
So far, we've seen that for India to implement its inward-led growth. It has taken a supply and demand approach to roll out its policies. On the supply side, India reduced corporate taxes to attract foreign investors and raised import tariffs to support local companies. These policies no doubt have their limitations which we have highlighted above.
On the demand side, India has increased financial inclusion to expand the Indian market for the company's production within India.
Like India, Nigeria's current administration has largely been protectionist in its policies. This has made the cost of production quite high, especially because Nigeria suffers from structural issues (like transportation, electricity and security). However, like many emerging economies, India also faces challenges of delayed infrastructure projects and inefficient state-owned transportation systems. Yet, they’re able to generate rapid growth and invest in infrastructure to sustain (and increase) that growth.
While India can afford to welcome investors into the country by reducing corporate taxes, Nigeria doesn't have that luxury because the cost of setting up a business in Nigeria and the risks involved in running one far outweigh the benefits of such tax rebates.
There are also issues of bureaucracy, which Nigerian businesses have to navigate to survive. Nigeria’s rank at 131 out of 190 economies assessed under the Ease of Doing Business report of the World Bank echoes the difficulty it takes to set up a business in Nigeria compared to the rest of the world. Unlike other countries, these metrics place Nigeria as an unattractive investment destination. Locally, the rising insecurity is enough to make a manufacturer keep her distance from Nigeria.
Like many other emerging economies, India also has a bureaucracy problem, as it is "historically a country swaddled in red tape", as described by Thomas Easton, the Economist Mumbai Bureau Chief. He, however, commends the efforts of the Indian government in reducing bureaucracies by processing permits faster, which eases production and sales. While Nigeria struggles to get that done, businesses are bound to repel from setting up within its borders.
Also, Shoprite's unceremonious exit from Nigeria is proof that Nigerian policymakers have their work cut out for them when it comes to attracting foreign investors. Given our small consumer class, the alternative is for foreign companies to set up shop in Nigeria and export out of the country. But the incentives for manufacturing in Nigeria are also lacking.
Finally, the structure of the Nigerian economy prevents it from being at liberty to implement such stringent policies. Nigeria is sufficiently diversified in terms of the sectors that contribute to its GDP but not the sectors that contribute to its export and foreign revenue—and you know how much we love our dollars. It's no news that Nigeria suffers significantly from the Dutch disease. The discovery of oil drowned out the rest of our economy, preventing us from innovating and exporting beyond oil.
Therefore, for Nigeria to enjoy the benefits India is enjoying in implementing inward-led growth, it would have to first deal with its internal structural issues to attract more investors and unlock its informal sector such that credit and savings can be unlocked to grow the economy.
But there are limitations
Despite how promising India's inward-led growth has been and how much growth it has generated in India's economy, many are sceptical about India's ability to sustain this growth because of the dangers of import substitution. For import substitution to work, there are a few assumptions that must be met: a large domestic market, cheap local production—which is typically sustained by subsidies and comparative advantage in inputs.
However, import substitution, as we've highlighted earlier, increases the cost of production. Manufacturers, which are key to improving the economy and driving income upward, have to pay more for their inputs.
Covid-19 made countries reconsider their supply chain structure such that they are not fully dependent on only a few sources for critical inputs for manufacturing. Essentially, countries want various sources of inputs (where they can easily swap one for the other in times of crisis) or want to depend largely on internal supply, which prevents them from external shocks. So, India is on the right track to reducing its supply chain shocks, by looking inwards and creating a self-reliance structure. But till the country can provide all inputs for production, it would have to nurse the teething pains of this inward-led approach.
India's growth methods also reduce competition for local companies and limit consumer choices. We continue to see this in Nigeria, where local rice has a lower quality but is slightly cheaper than imported rice (even with the increased tariffs and foreign exchange woes).
Finally, as India optimises for increased manufacturing output, its job-seeking population may be left without employment as companies may want to expand their production capacity by being more capital intensive—employing more technology than humans. This year, unemployment in India is about 8%, from 3% in 2017, and labour participation is lower because fewer jobs are available. If this continues, the growth in the economy might not trickle down to the people who need it the most. In 2021, a think tank estimated that while incomes in the richest quintile households increased by 39%, the poorest experienced a 53% squeeze in their income.
These limitations are very valid, and although India is growing now, it would need to be mindful for its growth to be sustainable.
