Structural reforms could put India on path to outpace China

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India is currently the 10th largest economy, but on a per capital income basis only 142nd in the world.

Although the new government is off to a promising start, much deeper structural reforms are necessary if India is to raise its growth significantly and become a middle-income country over the coming decades. Modi will need to shift his focus from improving bureaucracy to changing India’s growth model fundamentally.

Due to the rapid rise in the country’s working age population, India will also need to create an additional 10 million jobs per year to absorb the growing labour force. Since the economy began to liberalise in 1991, India has been excessively reliant on services-led growth – manufacturing will now have to take up more of the slack. Modi’s campaign slogan ‘Made in India’ will therefore need to be made a reality.

India now appears to be at the start of a cyclical recovery due to the confluence of three favourable factors: falling commodity prices, the start of an interest rate easing cycle, and the government prioritizing economic reforms. The government’s current incremental approach to reform will boost potential growth, but a larger and more sustained improvement will require deeper reforms.

India faces a once in a generation fork in the road. The government needs to improve the education system, reduce labour and land restrictions, modernise the power industry, improve infrastructure, and encourage greater foreign direct investment.

If internal opposition and intransigence at all levels of government cause the reform movement to slow and stall, then India will fail to meet its potential, with serious implications for social stability, the region, and also for global investors, who have started to buy into the growth story.

 

Alex Wolf is Emerging Markets economist at Standard Life Investments

 

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