The risks to India’s rise

A FEW decades ago, India was a relatively minor player on the world stage. Despite its size and vast population, the country grappled with what became pejoratively known as the “Hindu rate of growth”, with gross domestic product (GDP) increasing at a tepid annual pace of 4 per cent, or 2 per cent per capita from 1947 when it gained independence, until the 1980s. How things have changed. India’s economy has become one of the world’s fastest-growing, with GDP rising at an annual average rate of 6.2 per cent since 2006. But can India sustain this impressive performance?

A reason why independent India’s economy took so long to grow fast is that the government heavily regulated domestic economic activity for decades, imposing stringent controls on international trade and discouraging foreign investment.

But in 1991, a deep economic crisis forced India’s government to pursue reforms that opened the way for a rapid expansion of trade. India’s share of world exports rose from 0.5 per cent in 1991 to 2.6 per cent in 2022, and its share of trade in commercial services reached even greater heights, contributing to a sharp increase in incomes.

While India’s economic rise was impressive, it was eclipsed by that of China for decades. But in 2021, India’s growth exceeded China’s for the first time. And the International Monetary Fund expects this to continue, with India achieving 6.3 per cent growth in both 2023 and 2024, compared with 5 per cent and 4.2 per cent, respectively, in China. Per capita income is also rising faster, even as India’s population, at some 1.42 billion, surpasses that of China. India now boasts not only the world’s largest population, but also the fifth-largest economy at current exchange rates, and the third largest in purchasing-power-parity terms.

Of course, more work has been done by Indian policymakers and central bankers since the 1990s. Telecoms have been modernised substantially, as anyone who remembers what it was like to make a phone call in India before 2003 can attest. The banking system was stabilised and strengthened under former Reserve Bank of India governor Raghuram G Rajan.

More recently, Prime Minister Narendra Modi’s government increased spending on infrastructure maintenance and upgrades. Electricity access has been extended to cover 98 per cent of households, and cash transfers have improved the lot of the country’s poorest.

Meanwhile, the tax structure has been rejigged (to reduce some of the inefficiencies resulting from differences in sales-tax rates between states) and the bankruptcy code has been improved.

India’s recent economic success has strengthened its international standing and boosted its confidence. Now, with geopolitical shifts, especially the United States-China rivalry, further enhancing India’s position, some are predicting that the country could well be the next global economic superpower. But that will require further economic reforms and, worryingly, Modi’s government seems to be turning away from some of the principles and policies that propelled India’s rise.

For starters, the government has announced a “Make in India” initiative, which uses subsidies, tariffs and other measures to encourage companies to develop, manufacture and assemble products at home, even though liberalising the trade regime is precisely what enabled India’s growth over the last few decades.

Furthermore, with large Indian companies receiving considerable government support, they are enjoying an even greater advantage over small and medium-sized enterprises (SMEs), which are struggling to navigate the rules and regulations governing economic activity. The Modi government appears not to realise that a robust startup culture and dynamic SMEs are essential to healthy economic growth. It does not help that the privatisation of inefficient state-owned enterprises has proceeded very slowly. And when it comes to dealing with the government or the courts, long bureaucratic delays are still the norm.

On the political front, Modi’s government appears to be abandoning the principles of secularism embedded in India’s Constitution in favour of Hindu chauvinism. Modi’s Bharatiya Janata Party has demonstrated scant tolerance for non-Hindus, especially Muslims, against whom the government is accused of discriminating.

There are also serious concerns about the suppression of press freedom and the concentration of economic and political power.

With its large and relatively youthful population, India could benefit from a powerful “demographic dividend” in the coming years. But to make the most of it, the government must ensure that young people have access to quality education and good jobs, and there is good reason to doubt that it can. Already, India is grappling with high youth unemployment. Though school enrolments have risen, the quality of education remains poor, reflected in high adult illiteracy. Labour-force skills are in serious need of upgrading.

A rapidly growing, democratic India would benefit not only Indians, but also the entire world. But the government’s current path leads to a dead end. India’s leaders must abandon it and focus on strengthening education and training, streamlining bureaucracies and levelling the economic playing field. If they do, the 21st century could be India’s.

The writer, a former World Bank chief economist and former first deputy managing director of the International Monetary Fund, is senior research professor of international economics at the Johns Hopkins University School of Advanced International Studies and senior fellow at the Centre for International Development at Stanford University