Although not entirely mimicking mainland China’s super-charged growth path, India has been moving ahead vigorously. Adjusting for purchasing power, the Indian economy is already the world’s third largest. It is now poised for another surge in growth, which is likely to greatly expand its footprint in the global economy.
In essence, several major constraints on India’s economic growth have been reduced in recent years, while more enablers of faster growth have emerged.
Getting stronger
First, the balance sheet difficulties in the banking and the non-bank financial institution sectors prior to the pandemic have been largely resolved. This means that the credit mechanism is now in a stronger position to fund expansion programmes.
The economy will benefit from the reduction in India’s informal sector, from 52% in 2018 to just 20% by 2021
Second, large companies have overcome the over-investment and over-borrowing that had held them back for several years. These businesses have now rationalised their excess capacity and deleveraged. With stronger balance sheets and growing confidence in India’s future, they have regained the incentive to expand productive capacity.
Third, a nationwide infrastructure programme has improved railways, road transport and telecommunications. The number of airports doubled between 2013 and 2023, while the road network has expanded by almost 60%. A telling measure of India’s success is that it now ranks 38th out of 139 countries in the World Bank’s Logistics Performance Index.
Fourth, India’s digital public infrastructure, consisting of the Aadhaar digital ID and United Payments Interface systems, has enabled expanded access to a wide range of public and private services, while also opening up new technology-centric business innovations.
Going formal
Fifth, the economy will benefit from the reduction in India’s informal sector, from 52% in 2018 to just 20% by 2021. The introduction of the goods and services tax has encouraged more firms to register rather than hide in the shadows of the informal economy, while the digital infrastructure has also cut the compliance costs of business operations and enabled access to a wider range of support services.
A more formalised corporate sector supports growth as it is generally associated with more investment in upskilling workers. Formal companies also tend to pay more taxes, enhancing the government’s ability to spend on infrastructure, education and healthcare that in turn improves economic fundamentals.
Sixth, the government has stepped up the provision of basic essentials such as water, electricity and cooking oil, while also introducing enablers for improving lives such as growing the formal banking sector and internet connectivity. For example, internet coverage increased from 4% in 2007 to almost 50% by 2022. The result is a healthier and more productive workforce – and a plunge in extreme poverty.
Constraints remain
These are all powerful forces for promoting economic growth. As a result, India is set to enjoy a new investment cycle which will in turn raise economic growth rates. Yet, not all the constraints on its economic transformation have been overcome.
For example, India’s performance in the World Bank’s Worldwide Governance Indicators has been mixed. Despite progress in areas such as regulatory quality and government effectiveness, the gap with competing middle-income economies remains large. Even if subsidies and incentives are helping to attract investments, it will be sound regulatory governance that will keep the business in and incentivise organic expansion going forward.
Creating good jobs for the population will realise India’s demographic advantage
A backlog of cases to be heard by the Supreme Court and other levels of the judiciary is an issue, with some judicial delays taking years to resolve. This means that dispute settlement can prove an unusually onerous process.
In addition, high tariff walls and a plethora of non-tariff barriers signal some concern over international trade. But that raises the cost of imported inputs, undermining competitiveness.
Another challenge is India’s underutilisation of its workforce. Creating good jobs for the population – and providing them with the education to carry out those roles – will realise India’s demographic advantage. The proportion of India’s potential workforce that is actually employed remains lower than in the country’s peers.
So, challenges remain, yet enough has been done to generate a phase of accelerating economic growth – for a few years at least.
