India Will Not Be The Next China

Summary

India, the fifth largest economy, boasts a young and productive workforce, positioning it to capitalize on global opportunities. Despite challenges like over-regulation and an informal economy, its potential to become a service sector hub could make it a leading economic superpower. The video explores India's economic trajectory, comparing its growth to China and discussing the role of services in its future prosperity.

Takeaways

• 🌏 India is the fifth largest economy globally and is poised to become the most populous country on Earth.
• 🔑 India's economic strength is significantly supported by its young and productive workforce, which contrasts with the aging populations in other countries.
• 🏭 The country has capitalized on world events to attract manufacturing jobs that were previously going to China.
• 📈 India's government has ambitious plans to grow the economy to $5 trillion by 2025, reflecting its rapid growth trajectory.
• 💡 Despite its economic strides, India's per capita output is only a sixth of China's, indicating the need for continued development.
• 🎓 India's English-speaking population is a significant advantage for international business and service sector growth.
• 🚀 The service sector in India has the potential to elevate the country to an advanced economy status by adding more value to products and services.
• 🛑 The Indian economy faced challenges such as over-regulation and under-regulation, which can hinder growth and stability.
• 💔 The country's informal economy, which was a significant portion of its output, poses a risk to creating a two-tier economic system.
• 🌱 The reduction of the informal economy and the push towards formalization present opportunities for increased productivity and tax revenue.
• 🌐 India's potential to become an economic superpower relies on its ability to attract investment and provide its population with the means to grow independently.

Q & A

What is India's current economic status in the world?

India is the fifth largest economy in the world and is expected to become the most populous country on Earth soon.

What is the primary factor contributing to India's economic strength?

India's intense manpower, particularly its young and productive workforce, is a significant factor in its economic strength.

How has India capitalized on world events to its economic advantage?

India has capitalized on world events by scoring a lot of manufacturing jobs that were previously going to China, taking advantage of opportunities that might look like problems to others.

What is the Indian government's plan for the economy by 2025?

The Indian government plans to have a $5 trillion economy by 2025.

What are the challenges India faces in achieving its economic goals?

India faces challenges such as generating only 1/6 of the output per capita as China and dealing with a complex system of licenses and restrictions that were previously in place.

How did the Washington Consensus impact India's economic policies?

The Washington Consensus, a set of policies to open up the economy to trade and private business, led to the removal of India's protectionist policies and its complex system of licenses and restrictions.

What are the potential benefits of protectionist policies?

Protectionist policies can protect local industries by making imported goods more expensive, thus encouraging consumers to buy domestically made products and supporting local businesses and employment.

What are the drawbacks of protectionist policies in terms of economic growth?

Protectionist policies can lead to higher prices for consumers, reduced export competitiveness, and inefficiencies in the economy, ultimately hindering economic growth.

How has India's service sector contributed to its economic growth?

India's service sector, including call centers, accounting, engineering, design, and legal services, has been a significant contributor to its economic growth, providing cost-efficient services to international companies.

What is the potential risk of India's economy becoming over-regulated and under-regulated simultaneously?

The risk lies in the government's inconsistent regulation, which can stifle business growth and consumer spending, while also failing to effectively regulate certain sectors, leading to a lack of confidence in the economy.

What steps has India taken to reduce the informal economy?

India has made efforts to make it easier to find work and run businesses legitimately, and the COVID-19 pandemic also forced many informal workers out of business, leading to a reduction in the informal economy.

Outlines

00:00

🌏 India's Economic Potential and Demographic Advantage

The script introduces India as the fifth largest economy globally, set to become the most populous nation. It highlights India's young and productive workforce as a key economic asset, contrasting with aging populations in other countries. The script discusses India's ability to capitalize on global events, such as the shift of manufacturing jobs from China, and the government's ambitious plan for a $5 trillion economy by 2025. It also touches on the potential for India to lift its population out of poverty, similar to China's economic growth impact, and poses questions about India's path to becoming an economic superpower.

05:01

📉 Historical Economic Policies and Their Impact on India

This paragraph delves into India's economic history, discussing the shift from a hybrid economy of Soviet-style planning and British colonial free markets to the adoption of the Washington Consensus after the 1990s. It explains how protectionist policies and the License Raj system, which involved extensive government control and licensing, hindered economic growth. The paragraph also explores the disadvantages of protectionism, such as increased consumer prices and reduced export competitiveness, and how India's economy began to grow significantly after embracing free trade and reducing government intervention.

10:03

📈 India's Growth Trajectory and the Role of Services

The script outlines India's economic growth since the early 1990s, emphasizing the importance of the service sector in its economy. It discusses India's advantages, such as having the second-largest English-speaking population, which facilitated the establishment of call centers. The paragraph also explains the value addition in the economy through manufacturing versus services and how advanced economies primarily derive their output from services. It suggests that India has the potential to leapfrog traditional economic progression due to its demographic advantages and the service sector's potential.

15:05

🛠️ India's Manufacturing and Informal Economy Challenges

This section examines the challenges India faces in transitioning from a manufacturing-based economy to a more service-oriented one. It addresses the issue of the informal economy, which was estimated to constitute over half of India's output, and the government's failed attempts to formalize it, such as the demonetization policy. The paragraph also discusses the potential for a two-speed economy, where skilled English-speaking workers earn significantly more than the informal sector, and the need for the government to provide financial tools for collective and individual wealth growth.

20:05

💡 India's Economic Outlook and National Leaderboard Ranking

The final paragraph provides an overview of India's current economic status, including its GDP, GDP per capita, growth rate, stability, and industry potential. It assigns scores out of 10 to each category, resulting in an average score of 7 out of 10, placing India on the Economics Explained National Leaderboard. The script concludes by acknowledging India's immense potential, contingent upon government policies that encourage investment and provide financial tools for its population.

Keywords

💡Economic Force

Economic force refers to the power and influence a country has in the global economy, often due to its size, productivity, and ability to capitalize on world events. In the video, India is described as an economic force due to its young and productive workforce, which has enabled it to attract manufacturing jobs previously held by China.

💡Workforce

The workforce is the total number of people employed or seeking employment in a country. The video highlights India's young and productive workforce as a key factor in its economic growth, contrasting it with other countries facing aging populations and skills misalignment.

💡Manufacturing Jobs

Manufacturing jobs involve the production of goods in factories and are often a significant part of a country's economy. The script mentions that India has been successful in attracting manufacturing jobs that were previously outsourced to China, indicating a shift in global economic dynamics.

💡Washington Consensus

The Washington Consensus is a set of economic policy prescriptions considered to be the standard reform package promoted for crisis-wracked developing countries during the 1980s and 1990s. The video discusses how India adopted policies from the Washington Consensus after facing an economic crisis, which opened up its economy to trade and private business.

💡Protectionist Policies

Protectionist policies are government measures to protect domestic industries from foreign competition by taxing imports. The script explains that India had protectionist policies that were eventually reduced to open up the economy, which had both positive and negative effects on its economic development.

💡License Raj

The License Raj refers to the complex system of licenses, regulations, and red tape that businesses had to navigate in India before the economic liberalization of the 1990s. The video describes how this system was a significant barrier to entrepreneurship and economic growth, ultimately leading to reforms.

💡Service Sector

The service sector encompasses industries that provide services rather than physical goods, such as education, healthcare, and banking. The video emphasizes India's potential to become a service sector hub, which could contribute to its economic growth and transformation into an advanced economy.

💡Economic Growth

Economic growth is the increase in the production of goods and services in an economy over a period of time. The script discusses India's sustained economic growth, which has seen its size double roughly every five years for the past three decades, indicating a strong trajectory.

💡Informal Economy

The informal economy consists of economic activities that are not regulated by the institutions of the country and are not included in the country's GDP. The video mentions the challenges India faces with its informal economy, which has been a barrier to tax collection and economic integration.

💡De-Monetization

De-monetization refers to the process of removing certain currency notes from circulation, as was done by the Indian government in 2016. The video discusses the negative impacts of this policy on the economy, including loss of trust in the currency and disruption to businesses and consumers.

💡Economic Superpower

An economic superpower is a country with a dominant economy in terms of size, influence, and global competitiveness. The video explores the potential for India to become an economic superpower, rivaling nations like China and the USA, by leveraging its demographic advantages and service sector potential.

Highlights

India is the fifth largest economy in the world and is soon expected to become the most populous country.

India's young and productive workforce is a significant factor in its economic strength.

The country has capitalized on global events, attracting manufacturing jobs that were previously going to China.

India's government aims for a $5 trillion economy by 2025, reflecting ambitious growth plans.

India's economic trajectory began in the early 1990s, influenced by the collapse of the Soviet Union and economic reforms.

The Washington Consensus played a role in India's economic liberalization, opening up to trade and private business.

Protectionist policies, while potentially beneficial for local industries, can lead to higher consumer prices and reduced export competitiveness.

Subsidies can protect local industries without causing consumer price inflation, but place financial strain on the government.

India's service sector, including call centers, has been a significant source of economic growth and job creation.

The potential for India to leapfrog traditional economic progression due to its unique demographics is discussed.

India's rivalry with China is nuanced, with opportunities to compete in different markets based on strengths in services and manufacturing.

India's economic challenges include over-regulation and under-regulation, impacting business growth and consumer spending.

The government's controversial demonetization move and its impact on currency confidence is highlighted.

The divide between formal and informal sectors in India's economy and the potential for a two-speed economy is noted.

India's potential to become a global service sector hub and economic superpower is emphasized.

The report concludes with India's score on the Economics Explained National Leaderboard, reflecting its economic potential and current challenges.

Transcripts

- [Narrator] 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 as 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

to 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 $5 trillion economy by 2025.

But it still has a long way to go.

India is currently 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 its 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.

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India's current economic trajectory

started around the same time as China's in the early 1990s.

Before this time, India's economy was a loose hybrid

of the Soviet-style centrally planned economy

and a free market system left over from 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 their 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

and a few other videos covering national economies

that needed to be given a kickstart,

so I don't wanna 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.

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 gonna 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 of 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 firsthand

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 gonna have much luck marketing their cars

outside of this uneven playing 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

that 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 being 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 free 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 and 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 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 wanna 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 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 business as an 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 is a 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 outta 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 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 wellbeing

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 outta the ground.

Of course, outsource 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 their 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 researched better,

designed better, and marketed better.

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 gonna be able to sell those products

at a slight markup 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 sell 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 to.

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 company's 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 2020.

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 hard by these outbreaks,

but even before that,

the country's growth had shown signs of slowing.

A popular explanation for this amongst economists

is that India's economy is both over-regulated

andunder-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 slow to offer credit to businesses

and consumers, which means that good ideas

are hard to get off the ground,

and consumer spending is stifled

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.

Unbacked fear 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 strangers this de-monetization 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 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 value adding formal roles

because they will be taxed and their income

would end up lower than what they would've 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 outta business

during COVID 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,

putting it behind only the USA, China, Japan, and Germany.

It gets a nine 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 $2,515,

which puts it in the bottom quarter of the global economies

and gives it a three 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 changing decisions.

The informal economy and the influence

of state-owned companies also have their problems,

and while it's improving,

the country can't get more than a five out of 10.

Finally, industry.

India has enormous potential in this field,

but as we have 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 eight out of 10.

Altogether, that gives India an average score

of seven out of 10, which puts it here

on the Economics Explained National Leaderboard.

Thanks for watching, mate.

Bye.