Can India Regain its Luster?

Not long ago, India was expected to establish a firm grip on the title of the world’s fastest-growing large economy and to maintain this title for the foreseeable future, once-and-for-all overtaking China in this role.  However, things have not gone as expected and the Indian economy has faced major headwinds over the past year.  In fact, after peaking at 9.2% in the first quarter of last year, Indian growth rates have fallen by a third in recent quarters, and have been much lower than anyone in the Indian government had expected.  In fact, India’s position atop the global economic growth rate rankings proved to be short-lived, with China, Vietnam and the Philippines all overtaking India’s rate of economic growth in recent quarters.  These recent struggles stem from a number of decisions taken by the Indian government, including its move to withdraw 86% of the country’s banknotes from circulation and its decision to introduce a new goods and services tax that has proven to be a significant burden for many Indian businesses.  Now, it appears that the Indian economy has slowly begun to turn its situation around, and hopes are rising that India can regain its crown as the world’s fastest-growing large economy sometime next year. 

In the first half of this year, India’s economic slide accelerated, with GDP growth rates falling all the way to 6.1% on a year-on-year basis in the first quarter, and to just 5.7% in the second quarter, the lowest rate of growth in India since early 2014.  In the third quarter of this year, growth rebounded a little, rising to 6.3% on a year-on-year basis, the first acceleration of economic growth in India in seven quarters.  On the downside, consumer and government spending in India remained relatively weak in the third quarter, and export growth was disappointing.  On the other hand, India’s manufacturing sector recorded stronger growth in the third quarter and inventory building helped to boost growth during that period.  In the meantime, investors remained confident in India’s ability to rebound from its slump, continuing a run of better investment numbers that has continued over the course of this year.  Likewise, despite the slump in exports in the third quarter, many manufacturers continue to eye India as a potential location for export-oriented operations as production in China and other manufacturing centers grows more expensive.

The goal of all recent governments in India has been to turn their country into the world’s fastest-growing economy.  For many Indian business and political leaders, there is no reason why India cannot replicate the 30 years of 10%-per-year GDP growth that China recorded between the 1980s and the early 2010s.  However, India faces a number of significant challenges that will make it difficult for it to match China’s incredibly impressive economic performance since the 1980s. 

First, whereas the Chinese government could force economic reforms on the entire country and enact policies that would be followed country-wide, the Indian government enjoys far less control over the actions of state and local governments in India, making it difficult for centrally-driven reforms to spread throughout the country.  Furthermore, many state and local governments are outright hostile to foreign investment and economic reform and this has hampered the ability of the country to attract investment in the services and industries that would allow the Indian government to record consistently higher rates of economic growth.  Likewise, China enjoys a higher degree of political stability and security, a factor that has deterred many investors from committing to India.  In China, the government moved quickly to develop an infrastructure that facilitated the growth of manufactured exports, whereas India’s infrastructure remains in desperate need of massive investment.  Finally, China’s economic miracle, like those of Japan and South Korea before it, was driven by manufacturing goods for export to wealthier markets and, so far, India has failed to develop such manufacturing sectors.

Despite its recent struggles, the Indian economy has the capacity to regain momentum and to return to the higher rates of growth that it achieved in previous years.  One key factor in developing India’s growth potential is the fact that businesses and investors remained intrigued by India’s vast market potential, as India is set to overtake China as the world’s most-populous country in the next few years.  Likewise, manufacturers are seeking new low-cost production locations as Chinese production costs rise, and India is at the top of their list for potential replacement locations for Chinese operations.  At the same time, India already has a strong position in many of the world’s fastest-growing industries, particularly in IT-related sectors.  Now, the government of Prime Minister Narendra Modi must bring state and local governments in line with his efforts to reform the Indian economy and bring more investment into the country.  Likewise, the Indian government has introduced major plans to improve the country’s infrastructure, but these plans must be carried out in order to improve India’s growth prospects.  In the coming years, economic growth in India is forecast to approach 8% per year.  To grow at an even faster pace, more steps must be taken if India is to emulate China’s economic miracle.