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Economic Reforms and Growth Prospects: India’s Agenda for the Global Economy

by Neeta Baporikar - 20 June, 2024, 12:00 265 Views 0 Comment

Introduction

India’s economy is of global importance with a large young population and an open and democratic political system. It is already the third-largest economy and contributor to global economic growth, yet there is considerable untapped potential. With more than a sixth of the world’s population, India produces only 7 per cent of the world’s output. India has enjoyed a step up in growth rates over the past few decades supported by reform efforts and the expansion of its aspirational, consumer class. Given the challenges of policy making in such a large, diverse country with a federal structure of government, reforms will likely proceed incrementally and be politically opportunistic where the central and state governments have important roles to play.

Economic Reforms and Growth Prospects

India’s growth path will be driven by how effectively it harnesses and rewards the efforts of its greatest natural asset – its people. India has the second largest population in the world with more than 1.3 billion people. India’s largest state, Uttar Pradesh, is bigger than Brazil, the world’s fifth most populous country. Within the next decade, India’s population will overtake China’s to become the world’s largest. By 2035, the United Nations projects that India’s population will have reached almost 1.6 billion people, on its way to a peak of almost 1.7 billion by the early 2060s. India is the world’s third largest economy measured in purchasing power parity (PPP) terms and, on some measures, will be the fastest-growing large economy in the world in the coming years. India’s population has benefited from this strong economic performance.

A greater recognition of the urgency for reforms to lift productivity has led to important policy achievements, including the implementation of a national GST in 2017. As well as simplifying the tax system the GST sets new precedents for cooperation among the states. Future reforms will likely proceed incrementally. Both the central and state governments have the political appetite to do more, and both levels of government have important roles to play. The Central Government has direct control over several important areas, including the financial sector, international trade and investment policy. Though India’s state governments control crucial elements of the business environment, the Central Government has fostered a political dynamic in favour of reform, which will see uneven progress between states. Organizations such as NITI Aayog have used initiatives like competitive federalism to help states recognize the need for, and speed up the pace of, reform.

India’s Agenda for the Global Economy

India’s economic reform an agenda for the global economy rests on the following premises.

India’s Growth Model: Like other emerging economies, India’s growth has been marked by major shifts in the structure of its economy, most notably away from low-productivity agriculture. The shift away from agriculture and strong growth in services is not unusual for a developing economy like India. As a result, an early shift to services has supported, rather than hindered, rapid growth. The strong expansion of the service sector has been enhanced by a series of notable reforms including financial market deregulation, a relaxation of foreign ownership regulations and moves to increase competition in a wide range of service industries. India’s services success extends to exports, where a range of services are globally competitive, reflecting comparative advantages. Over the coming decades, the services share of the economy is likely to continue to rise and the share of manufacturing stabilize. As incomes rise, the demand for consumer goods and services is expected to grow strongly, creating opportunities for domestic manufacturing.

International Openness: India’s structural transformation towards higher value-added production would be aided by further moves to open the economy. Historically, India’s size and the appeal of self-sufficiency have encouraged a degree of insularity. While the trend is positive, India’s openness to trade remains among the lowest in Asia. While India is unlikely to pursue an export-oriented growth model to the same extent as East Asia, greater openness would enable India to leverage its comparative advantage in labour-intensive production, encourage innovation and lift productivity.

Workforce Opportunity and Challenge: India has a great economic opportunity provided it can create an environment that supports education, training and job creation for the millions of youth set to enter the labour force. Over the next two decades, India’s working-age population is predicted to increase by almost 200 million, to over one billion, to become the world’s largest. While the rate of increase is expected to slow, the working age share of the population will continue to rise out to 2035

India’s human capital formation lags behind many high-growth East Asian countries. Firms operating in India cite access to skilled labour as a key constraint to growth. Current government initiatives are moving in the right direction, but India will need further substantial investment in its education system to make the most of its people. Further capitalizing on a skilled workforce will require India to increase women’s workforce participation and generate more productive jobs. 

Potential and Essential Structural Shifts

  • Reforms to complex labour and land regulations would likely reduce informality, lift productivity and attract investment usher urbanization and the transfer of labour to more productive sectors.
  • Sustain strong investment to achieve high growth in the coming decades and focus investment into infrastructure that enables growth, particularly in transport, energy and communications, is critical to determine the growth trajectory.
  • Improving business climate to attract and increase investment. Important areas that continue to affect the business environment include the effectiveness and pace of the judicial system, and business licensing regulations.

But broadly the potential and essential structural shifts needed to focus and address are automation and digital connectivity, climate change, domestic consumption, gender equality, labour inputs, poverty and equality, productivity, technology and water scarcity.

Conclusion

While deep-set structural drivers enable us to project the broad direction of India’s growth, it is unlikely to be linear or evenly distributed. This is partly due to the inherent uncertainties associated with forecasting over such a long horizon but also the complexities of India’s economic model and reform path. India’s economic progress will be influenced by an accelerating global rate of technological change and by trends and events in ways we cannot foresee. However, India’s success will have significant implications for its international economic and strategic weight. By 2035, the global economy is likely to be increasingly weighted towards Asia, as India, China and the ASEAN economies catch up to slower-growing advanced economies. Even with an average annual growth rate of only 6 per cent, India’s economy would be more than two times larger by then. In PPP terms, India’s share of the global economy will likely increase from 7 percent to around 13 per cent, making it one of the major poles of global economic power. India’s economic progress will not be linear. Constraints on investment and infrastructure pose a challenge, while the services-oriented growth path will take it into uncharted territory.

Neeta Baporikar
Author is a Research Focused Professor, Namibia University of Science and Technology, Namibia.
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