June 18, 2021economicsgeopolitics

Human capital and national power

The biggest change to India's national power in the next decade will come from changes in human capital

I am part of a group of people working on a blueprint for India’s foreign policy for the coming decade. In a discussion this morning, I argued that the biggest change to India’s national power in this timeframe will come from changes in human capital. Even before the Covid-19 pandemic, India — as Puja Mehra argues — had inflicted a Lost Decade upon itself. While the economy needed to generate the 20 million new jobs per year, it was doing a lot less even if you accept the most optimistic figure of 5 million jobs somewhere between 2017-2019. The difference between requirement and achievement being in the order of magnitude, the politically-loaded debate on whether it was 1 million or 5 million does not matter much.

See Ajit Dasgupta’s A History of Indian Economic Thought, Chapter 7

The pandemic has exacerbated the problem and accelerated the timeline of its consequences. We do not have reliable estimates of its real impact, but we do know that it has caused widespread damage and debilitating setbacks to people’s life chances. As Mahadeo Govind Ranade wrote about poverty over a century ago

We need only walk through our streets, and study the most superficial aspects of our economic situation and the fact forces itself upon us…”. It is unclear how people can rebound from the blow they have received in 2019-20.

Michael Beckley suggests a simple but very meaningful measure for net national power: GDP×per capita GDP GDP GDP. Thus national power increases when the economy is larger and when the people are richer. If population grows faster than the economy, then national power might even shrink. Given the massive lead China already enjoys over us, it is clear that India’s power will decline in relative terms with respect to its adversarial neighbour — unless we rapidly raise per capita incomes.

For that we need massive and the right kind of investments in human capital. The need to overhaul healthcare, education and social security have been obvious for a long time. Yet the first two hardly register in electoral politics — voters do not demand them and politicians do not seriously promise them. Social security does figure in political discourse, but as a form of redistribution or gratuity for misfortune.

Employment is certainly politically salient, but the general metaphor is still one of government giving jobs”, not the economy creating it. That government job model is not sustainable: it’s bad for governance and it’s bad for jobs. The growth-led employment model that captured the national imagination in the 1990s and 2000s, and is still prevalent the South, needs to be brought back into political currency.

These are links to my Business Standard and Mint columns that elaborate on this argument.

I have long argued that India’s foreign policy is 8% economic growth. That will only come if India gets serious about its human capital. If not, we are staring at a relative decline in national power at a time when we cannot afford it.

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