The Indian Incline: Understanding India’s stable growth path and how to maintain its momentum

Source: Diplomacy & Commerce media

The Indian juggernaut keeps marching on. Despite plenty of hiccups, stop-starts, and uphill battles, the economy continues to brave the obstacles. This growth is not an anomaly. The World Bank’s thorough analysis of over five decades of data points to India’s growth as being stable, diversified, and resilient. The Bank projects India’s growth will advance to 7.3% in FY 2018–19 and 7.5% in FY 2019–20, reflecting both robust private consumption and strengthening investment.

The nature of India’s growth is constantly discussed and debated. In part, this is because the task of economic development facing India is mammoth. The World Bank notes in order to raise the income of at least 50 % of Indians to levels of the global middle class, the economy not only needs to return to 8 per cent growth or higher, but must also maintain growth for close to the next three decades. It is hardly surprising then, especially given India’s relatively recent economic liberalization, that every economic setback raises questions about the nature and resilience of India’s growth.

This article argues that India’s economic growth is not a recent, but rather, a decades long phenomenon. Having said that there are some key challenges India must confront given the changing global economic and political environment and the article highlights key issues that need to be top-of-mind for policy planners if India is to truly capitalise on her growth potential.

Figure 1: Trade Balance , GDP and Investment : India 2018–19

Indian growth : Historically stable, diverse, steady and resilient

The nature of India’s growth is worth reflecting on. First, looking at long-term trends, India’s growth has accelerated for a fifty year period, with average per capita growth of 5.5 per cent. This stability is unique to India as compared to more variable growth rates for other other Asian economies since the Second World War.

Second, as the Bank notes, “diversification has been the key”. Gains in both in labour, and total factor productivity and increased consumption have largely driven this pattern. Investments and exports have contributed to this rise as well.

Third, India’s growth is characterized by relatively consistent growth across sectors. For example, this year India is poised to surpass 2017–18 food grain production, which at 278 million tonnes was already a record year. In industry too, India’s factory output grew at a robust 7.1 per cent and there was an 8.7 per cent growth in manufacturing output.Capital goods output rose a robust 20 per cent early April 2018, Consumer durables grew 7.9 per cent, up from 4.6 per cent last year. Electricity generation also rose by 4.5 per cent this year.

This resilience of India’s growth can be attributed to the country’s large and spatially diversified economy, as well as to its diversified production structure that is not dependent on a few products, commodities, or natural resources.

Still, there are challenges ahead. While India’s economic growth has traditionally depended less exports compared to China, it has benefited from a buoyant global economy and an open trade environment. This landscape might, however, be changing. For example, the share of India’s manufacturing exports has declined steadily from 10.7 per cent in 2013–14 to to 8.5 per cent in 2017–18. India itself has taken a protectionist turn, recently imposing tariffs on a wide range of products, from mobile phones to perfume, in a bid to encourage domestic production. And, of course, the economy is only now recovering from the effects of demonetization and transition costs related to the introduction of a national Goods and Services Tax (GST).

Figure 2 : Indian Growth Compared to the World

Delivering on future growth: Immediate focus on exports and private investments

To actually deliver on forecasted growth, India needs to durably recover its two lagging engines of growth — exports and private investments — while maintaining its hard-won macroeconomic stability.

Two immediate steps India needs to take is to get exports back on track post GST and demonetization and address challenges of non-performing assets (NPAs) in the banking sector. Among the many preconditions for India to reverse its worsening export trends — ideally a natural competitive advantage for the country given its traditionally inexpensive labour and industrial manufacturing heritage — is an infrastructural boost to bring it on par with the world’s current manufacturing hubs.

Private investment in India is constrained by several factors including issues related to past leverage, credit availability, market demand, and policy uncertainty. In particular, the issue of NPAs clogging the banking system has been a drag on this front. Consolidation of public sector banks, revising the incentive structure, ensuring a level-playing field for private banks and opening up competition is essential for a healthy banking and, consequently, investment landscape The new insolvency and bankruptcy code has been a move in the right direction to address some of these issues.

India’s task is not made easy by a deteriorating external environment. Global interest rates increases had led to a capital outflow and increasing oil prices are bound to be problematic for an oil intensive economy. As the Economic Survey puts it, “The agenda for the next year consequently remains full: stabilizing the GST, completing the TBS (Twin Balance Sheet) actions, privatizing select government owned PSUs, and staving off threats to macro-economic stability.”

Despite these challenges, it is clear that India’s growth can continue. For this growth to maintain its momentum, however, India needs to continue proactively addressing the challenges that exist in order to keep on a straight path.

Kartik Das is an MBA student at The Wharton School (WG’19) and co-Chair of the Wharton India Economic Forum. All opinions expressed in this article are those of the author.

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[1] “India fastest growing economy at 7.4 per cent in 2018: IMF”, Economic Times, May 2018

[2] Global Economic Prospect Report

[3] “India growth story since 1990s remarkably stable and resilient”, Press Release: World Bank IBRD & IDA Press Release Centre, End Poverty In South Asia blog, World Bank , May 2018

[4] “India’s economy is back on track, Can it pick up speed?”, The Economist, March 2018\

[5]” IMF World Economic Outlook, April 2018: Cyclical Upswing, Structural Change” World Economic Outlook Report IMF , April 17, 2018

[6]”Economic Outlook for Southeast Asia, China and India 2018 “, May 2018

[7] “India’s opportunity and role in shaping the Fourth Industrial Revolution”, World Economic Forum Web, 10 April 2018