From Nehru’s tryst with destiny to Modi’s economic muscle

INDIA’S anticipated ascent to the status of the world’s third largest economy by 2027 or 2030 has been a long time coming. There is a new buzz among investors about the country that is expected get there in the next several years.

With a gross domestic product (GDP) size of US$3.73 trillion at the end of the 2022-23 financial year, India is currently the fifth largest economy in the world behind the United States, China, Germany, and Japan. It is expected to overtake both Germany and Japan, and occupy the third place after the US and China.

The script for the country’s rise was written in the 1970s when it was already being praised for becoming the 10th largest industrial nation in the world. The scriptwriters were the best economic brains in India, working under Congress governments.

The remarkable rise of Indian industry was engineered by the policy of the country’s first prime minister, Jawaharlal Nehru, to make major investments in creating a large industrial base consisting of enormous state-owned manufacturing plants. These behemoths were praised as being the “commanding heights” of the nation’s economy.

The triumph was seized upon by some major multinationals operating in India. Siemens India used the “10th largest industrial nation” catchline in their advertising campaigns in the 1970s to signal that the company was indeed a proud participant in the industrial development of India.

The Congress government in power enjoyed the moment, but it was a fleeting one. The moment passed and industrial growth flagged.

The culprit was the Congress Party’s wrong-headed policy of import substitution, self-sufficiency, and “Licence Raj” that chased the dream of self-reliance to conserve scarce foreign currency, and in the process the state choked businesses by making them apply for licences before they could acquire foreign machines or technology. Economic growth ground to a virtual halt.

Nehru had made the country look good at home and abroad, but after a while the sheen wore off. The state-owned factories, being large employers of the poor masses, started to make losses and became unsustainable. The state-owned units began falling off those “commanding heights” as the government launched an effort to privatise some of them.

It was eventually in 1991 that the Congress government realised its errors and reversed course. Its New Industrial Policy put an end to investment licensing and restrictions on foreign and domestic firms. It also ended the public sector’s monopoly in many sectors and put in place a policy of automatic approval for foreign direct investment up to 51 per cent.

The new policy clearly stated that “industrial licensing will henceforth be abolished for all industries, except those specified, irrespective of levels of investment”. Exception to this rule was granted to 18 industries but even this list was pared down later to include only five sectors on grounds of health, safety, environmental concerns and security: (a) arms and ammunition, explosives and allied items of defence equipment, defence aircraft and warships; (b) atomic substances; (c) narcotics and psychotropic substances and hazardous chemicals; (d) distillation and brewing of alcoholic drinks; and (e) cigarettes/cigars and manufactured tobacco substitutes.

Since the Congress Party launched economic reforms in the 1990s, the country saw an explosion in information technology and manufacturing. The path was cleared for faster economic growth. With the exception of narcotics, the above-named sectors are currently open to foreign trade and investment.

When the Bharatiya Janata Party came to power, it resumed the unfinished task of selling off state firms, and the new prime minister, Narendra Modi, launched the “Make in India” programme to bring large-scale foreign investments into the country. His government continued the good work of building physical infrastructure and to modernise business practices.

A bold projection by Deloitte has indeed come true. The professional services firm said a few years ago that India’s healthy economic growth had already surpassed France to become the sixth-largest economy. “By 2019, it may become the fifth-largest economy, and possibly the third-largest,” Deloitte said.

Many Indians were sceptical. The weight of expectations put pressure on the BJP government to roll out new programmes such as “Make in India” to boost manufacturing and to improve its standing on the ease of doing business yardstick.

The ratings agency, Standard and Poor’s, now estimates that India will become the third largest economy by 2030, and its GDP is likely to grow from 6.4 per cent in 2023 to 7 per cent in 2026. The agency said on Dec 5: “We see India reaching 7 per cent in 2026-27 fiscal...India is set to become the third-largest economy by 2030, and we expect it will be the fastest-growing major economy in the next three years.”

It will happen even sooner, according to the International Monetary Fund which sees India clinching the “third biggest economy” spotlight by 2027. But to reach there, India must maintain sustained growth of at least 6.5 per cent over the next few years amid geopolitical uncertainties and a global economic slowdown. In such a bleak scenario, India will have to rely on its domestic demand to power its growth through private consumption and investment spending.

However, S&P’s Global Credit Outlook 2024 states that the critical challenge lies in determining whether the country can successfully evolve into the next major global manufacturing hub.

It is in this area that India needs to achieve the pace set by China. According to the rating agency, the country should be transformed from a services-dominated economy into a manufacturing-dominant one by developing its logistics framework.

Even at a lower than ideal estimated growth rate of 6.4 per cent in fiscal year 2023-24 – a decline from the 7.2 per cent recorded in the previous financial year – the country will still reach the status of the third-biggest economy in the world. The rating agency expects that the growth will lag at 6.4 per cent in 2024-25, and then rise to 6.9 per cent in the subsequent year and reach 7 per cent in 2026-27.

The future of India is its workforce, the so-called demographic dividend of a youthful country. There is wide consensus that in order to achieve the full potential of labour, the country must further enhance the skills of workers in addition to the efforts in this direction that have been made, as well as to raise the participation of women in the job market, which lags behind men.

The signs are good. India reported a higher-than-anticipated GDP growth rate of 7.8 per cent for the September 2023 quarter, up from 6.1 per cent in the previous period, on higher government spending, increased private capital expenditure, and strong services growth. Resurgent domestic demand, and manufacturing and services activity helped growth during the quarter.

There are still some areas of concern. First, consumer demand in the rural areas, having shown signs of improvement, remains vulnerable to unpredictable monsoons that could lower crop yields and farm income. Second, India’s exports are likely to remain weak as the global economy is shaky.

Nonetheless, the economy will be rescued by rising domestic Indian demand. The IMF has raised its growth projection to 6.3 per cent for 2023-24 from its July estimate of 6.1 per cent, owing to stronger-than-expected consumption in the September 2023 quarter.

In the growth story, the country’s burgeoning domestic digital market with its vast reservoir of startups in financial and consumer technology would be a sector to watch.

We have seen how the Congress belatedly unshackled businessmen in the 1990s. The challenge for the BJP government is to ensure that India retains its hard-won status as a leading world economy.

The writer is editor-in-chief of the Rising Asia Journal www.rajarf.org