Will the momentum last?

India’s economy is expanding at a rapid clip, averaging 8 per cent growth over the past four years. It has never before in its 60 years of independence witnessed such consistently strong growth nor has it been more important for the world economy. India still has many challenges to surmount: a shortage of skilled labour, unequal income distribution, creaky infrastructure and a fragmented political class, to name a few. There is little doubt though that India has already come a long way.

Opening some doors

It seems the fruits of economic liberalization are finally coming to bear, more than 15 years after the government was forced to carry out far-reaching structural and fiscal reforms amid a balance of payments crisis. Several big bang measures were initiated in the first few years of the 1990s, including industrial deregulation, tax reforms, strengthening the financial sector, lowering trade barriers and allowing greater foreign investment.

The speed of reforms has since then been uneven, due to a lack of political consensus and the strength of interest groups. Regional fragmentation in the absence of any major issue to unite a geographically diverse and socially divided population has brought weak governments to the centre time and again. Divergent voices in parliament have stalled proposals to privatize the public sector, cut wasteful government spending on subsidies and allow greater foreign investment in areas such as banking, insurance and retail.

An independent momentum

But the Indian economy seems to have a life of its own. A young population and rising incomes have formed a rapidly growing middle class that is fueling a consumption boom. This, along with the government’s increasing emphasis on building infrastructure, is boosting investment and creating higher capacities.

India’s efficient, profitable and low leveraged corporate sector has drawn international investors to Indian companies. At the same time, Indian firms are also going global, acquiring companies in the US and Europe to widen market access and gain technological expertise. India’s success in outsourcing is now not just limited to software services, but the manufacturing sector is also carving an important niche for itself, with auto components and pharmaceuticals paving the way.

Strong capital inflows and rising exports have buffered the impact of record high global crude prices on India’s oil-sensitive current account, while buoyant corporate tax collections have helped reduce the government’s fiscal deficit.

The numbers game

The booming industrial and services sectors have also helped lessen the impact of erratic monsoon rains on the broader economy. But even though farm output now accounts for just a fifth of the gross domestic product, India remains an agricultural economy. Almost two-thirds of its one billion-plus population depends on the farm sector for its livelihood, and economic reforms haven’t created enough job opportunities in other sectors.

India’s numbers are considered its biggest asset, with a large pool of English-speaking graduates and a fast expanding consumer base. But the country’s demographics also pose its biggest challenge as overall literacy levels are still low and skilled workers are in short supply. Benefits of liberalization haven’t trickled down to the masses while rising aspirations are making people desire more.

State governments try to woo voters through populist policies such as free electricity to farmers, and in some cases even free colour television sets. Despite demands from its coalition partners, the central government has for the most part kept bad economic policies out, steadily reducing the fiscal deficit in the face of spending pressures and refraining from imposing lower-caste job quotas on the corporate sector. But the less privileged sometimes block efforts to modernize the economy, with farmer protests over land acquisitions for constructing wider roads and special economic zones a recent example.

Securing itself

There is plenty of social unrest in India. The country faces a big internal security challenge from insurgencies spread out across its political terrain from the north to the south. The headline grabbing one is the historical dispute over Kashmir with Pakistan.

To be sure, India has come a long way from the political and military tensions with its arch-old rival that threatened to turn into a full-blown war in 2001-2002. India’s strengthening bonds with the US have indirectly helped thaw relations with Pakistan. India’s size makes it an important ally to counter neighboring China’s power in the region while its economic weight gives it a loud voice in international forums, such as the World Trade Organization.

In order to increase its influence on the world and secure itself domestically India will need to sustain its rapid economic expansion through further reforms, such as flexible labour laws and greater openness. For the maximum benefits to reach the largest number of people, India will also need to curb corruption in politics, overhaul the bureaucracy and create a more efficient judiciary.

Our themes

Agriculture
Sustaining growth
Globalising India
Reform and Governance
Regional security