A Blip in India’s Growth Path
There’s no doubt that the Indian economy was enriched over the course of recently reelected Prime Minister Narendra Modi’s first term. As a result of policies designed to democratize contemporary financial technology for poor and rural Indians, laws intended to ease the bankruptcy process, incentives for domestic production, and the allowance of foreign direct investment, India’s economy witnessed tremendous GDP growth between 2014 and 2019. Growth rates reached 8% in 2016 and in 2017, even accounting for the effects of worrisome moves such as demonetization and the rollout of a goods and services tax (GST).
Despite economic successes, prominent economists — including Abhijit Bannerjee, the 2019 recipient of the Nobel Prize in Economics— and analysts at leading newspapers like The Financial Times and The Economist, aren’t so optimistic about the near future of India’s economy. Since 2018, public confidence in the economy, a crucial indicator of financial horizons, has diminished. Data released by the Reserve Bank of India show that consumers are manifesting this lack of confidence in their spending habits through reduced discretionary spending; this reduction can also be explained by expectations of a tightened labor market. A slew of other signs, including reduced wages, increased layoffs by small business owners, sluggishness amongst young entrepreneurs and startups, and delayed production throughout the automobile industry highlight the ways in which India’s economy is burdened. Leading economists, such as Arvind Subramanian, have also expressed concern and skepticism with respect to India’s self-reported economic data, suspecting inflated growth figures. By incorporating expert-backed recommendations aimed at revitalizing the Indian economy, emphasizing sustainable growth by targeting underdeveloped sectors of the economy, and opening channels to the global economy, India has the potential to sit alongside the world’s most developed economies. I want to make clear that the reforms proposed in this article are intended to guide India’s long-run economic policy just as much as they are intended to address its short-term problems; they shouldn’t be construed as quick, band-aid solutions to be abandoned once the country’s economic vital signs stabilize.
The largest obstacle facing India’s slowdown is the Modi administration’s blatant refusal to acknowledge any vestige of it. Members of the administration have chosen to ignore data published by the Reserve Bank of India, manipulate expert opinion, silence critics, and resort to soundbite journalism that reinforces their fixed, and frankly inaccurate perception of the state of the economy. While it is true that the administration has done much for the economy, the euphoria of progress has turned into policy-based inertia and inflexibility with regard to the changing economy. A simple acknowledgement of recession could mobilize Modi’s administration to seek reform and respond to the conditions with the help of skilled economists.
Another major issue is India’s overreliance on domestic consumption as a driver of growth. It’s worth noting that consumption is, and should be, a majority mainstay of economic well-being. But diversifying an economy’s growth components is crucial and India’s private investment market is severely underexploited. Krishnamurthy Subramanian, the Chief Economic Advisor to the Government of India, argues that in an economy like India’s, where GDP per-capita is under $10,000 USD, investment will hasten growth much faster than consumption. This makes sense, since private investment in capital coincides with a demand for laborers to use that capital. As a result, an increase in labor leads to increases in consumer spending. Rather than appeal to existing consumers, a shift in focus towards private investment will create new consumers with deeper pockets. The Modi administration has already taken some steps to encourage private investment, such as corporate tax rate cuts from 30% down to 22%. Yet, the investment component of GDP still hasn’t been tapped into resourcefully enough. Problems of private investment are problems of uncertainty; the two can become negative feedback loops for one another, even as they divorce further and further from the economic reality. Fundamentally, India’s administration needs to restore confidence in the private sector by means of sound policy and public spending into infrastructure, an action that has proven to have effects that multiply throughout the economy.
As successful as Modi’s liberalization of the economy has been, it hasn’t been enough to correct India’s deep-seated protectionism. The National Trade Estimate Report on Foreign Trade Barriers (NTE) ranked India as having the “highest tariffs of any major world economy”, at around 13.8%. It is inevitable that reducing tariffs would reduce domestic prices, giving consumers more purchasing power. It would also make domestic producers more competitive on the international stage and incentivize startups and technology companies to globalize their operations. Many of the general critiques of free trade such as protection of infant industries, ensuring high levels of employment, and consumer protection can be addressed and countered quite easily when we analyze the net impact of trade under lower barriers.
A final point I want to bring up regarding India’s long-term economic growth has to do with a significant absence of women in the labor force. While educational attainment among women has increased, albeit slowly, as of this year, less than 25% of the working-age female population is employed. It’s clear that increased female labor force participation is a huge determinant for increased growth, the U.S. being one of the most recent and salient examples. I think it’s safe to say that encouraging female labor force participation should be a universal goal, regardless of cultural and societal norms; as such, India must rethink the way women are treated and valued in society. While changing cultural attitudes towards women in the workforce is crucial, having progressive women in positions of authority is just as important in driving forward policies that incentivize and promote female participation. A need for prohibitive child labor laws, gender-based affirmative action programs, and accessible trade networks (an indirect way at fostering female participation) coupled with the more difficult task of reexamining and reframing a woman’s role in society are all imperative for India to engender long-term, sustained growth.
India has certainly seen significant growth over the past decade, in large part due to policies administered under Prime Minister Modi such as the Make in India initiative and intentional cuts to the corporate tax rate. Yet, the administration’s refusal to acknowledge an observed slowdown is a huge roadblock for a country that still classifies as “developing”. If done properly, India can reorient itself towards a path of sustainable growth and global integration.
