In several of his speeches at election rallies prior to the general election, Prime Minister Narendra Modi underlined a key economic prospect—that India would become the third largest economy in the world quite early in his third term. Modi, who had won the election twice before for the Bharatiya Janata Party (BJP) on the promise of a stronger economy and business-friendly policies, felt that glossy figures regarding India’s economy still resonated with the masses. The election, however, proved that Indian voters were concerned about a host of pressing issues, not least of which were the dearth of jobs and high prices. The BJP subsequently won fewer Lok Sabha seats than it expected to, making it dependent on allies to form the government. But that hasn’t stopped Modi from showcasing India’s strides on the economic front, or even saying the country is on track to becoming a developed nation. “When India celebrates 100 years of Independence (in 2047), we will do so as a developed country,” he told industry honchos in Delhi in a post-budget interaction on July 30. “Today, India is the fifth largest economy in the world. The day isn’t far when India will become the third largest in the world.”
To be sure, the Indian economy has performed well, and much better than most of its peers on the global stage. It made a quick recovery from the pandemic, and has grown at 8.2 per cent in FY24. Inflation, though near the upper end of the Reserve Bank of India’s (RBI) tolerance band of 6 per cent, has not been as runaway as in some other emerging nations. Not only does India’s economy look more insular and robust compared to its neighbours, its resilience and growth stand in stark contrast to even the developed world, especially the US and Japan, who have been gripped by concerns of an impending recession. The numbers speak for themselves. India’s foreign exchange reserves, which serve as a financial cushion and help bolster the rupee, stood at an all-time high of $674.9 billion as of August 9. Multinational firms have opened scores of global capability centres in India, underlining its strength in services exports, which grew at a faster clip than exports of goods. Indian airlines carried 154 million passengers in FY24, 12 million more than in pre-Covid FY20, while passenger vehicle sales were a record 4.2 million.
Aiming for higher growth
But given the size of the economy and the magnitude of India’s problems, even the 8 per cent growth may not be adequate. Economists say the growth numbers seem inflated as they come after a steep fall into the negative territory during the pandemic, and would be around 7 per cent this year and the next. After all, the pandemic had taken a toll on the economy. The years 2019-2024 saw India’s economy add only Rs 34 lakh crore compared to 2014-2019, when the country added Rs 42 lakh crore to the GDP. Some, like former finance secretary Subhash Chandra Garg, see the country growing at not more than 6 per cent. Crisil, a ratings firm, expects India to grow at 6.7 per cent till the turn of the decade but does not want to put out an estimate beyond that due to uncertainties in the geopolitical scene. “Even 6.7 per cent growth sustained will take us to a $7 trillion economy (from the $3.9 trillion at present) by the end of the decade,” says Dharmakirti Joshi, its chief economist. That should buttress India’s position in the GDP rankings, push it to No. 3 behind the US and China, and ahead of Germany and Japan, assuming that those economies grow slower than ours.
While 7-8 per cent growth may take us to the big league in terms of the size of the economy, it may not contribute significantly to prosperity, which is measured by per capita income. With a per capita income of around $2,700 (Rs 2.3 lakh) compared to over $13,800 (Rs 11.6 lakh) for high-income economies, India counts among the lower middle income countries. At the current growth rate, India will need 75 years to reach a quarter of America’s per capita income, according to a recent World Bank report. “If India wants to replicate what the East Asian countries or China did, then it will have to grow much faster,” says Joshi.
The question, then, is whether India can sustain the current growth and even grow at a higher rate to improve its prosperity and give enough jobs to the millions of youth that enter the workforce every year. “Even at 8 per cent, we would not recoup the losses we made earlier,” says Madan Sabnavis, chief economist with Bank of Baroda. “With a normal monsoon, India’s growth will be over 7 per cent this year. Sustaining it and getting it to 8.5 or 9 per cent is a challenge for the economy.” India will need to focus sharply on a few areas in order to grow at a faster pace.
Making growth sustainable
The country will have to work on several quarters simultaneously to make its growth consistent.
Boost consumption: One area of definite concern has been consumption. Demand for goods and services has not been growing as fast as India’s GDP. Private final consumption expenditure, an official terminology to denote individual demand, grew only 3 per cent in FY24, even as the GDP grew 8.2 per cent. Spending less on products and services is symptomatic of inadequate income and job insecurity or even joblessness. “It is not only mass products that are affected by the slackness in demand, even premium products have been affected,” says Sabnavis. In the March quarter, fast-moving consumer goods company Hindustan Unilever saw its profits drop 6 per cent as consumers bought fewer goods, while rival ITC’s profits were flat.
Attract private investment: A lag in consumption has a debilitating impact on private investment. Fresh private investment plans by the private sector fell 15.3 per cent in 2023-24, says data from Projects Today. Lagging private investment, despite big tax relief offered to corporates, has been a concern for the government. But private investors won’t put money in loss-making projects. The Centre has been pumping investment into infrastructure in the hope that private investment would take off at some point, but its pace has been rather slow. “Capital is a major driver of growth,” says Joshi. “There is scope to increase India’s investment to GDP ratio and push up growth too.” New investments also improve the prospects for millions of India’s young job-seekers.
Tame inflation: High prices of goods have been another deterrent. With lower disposable income on the one hand and high inflation on the other, the consumer tends to put off buying decisions. Higher prices of vegetables, cereals and fruits took India’s food inflation to a six-month high of 9.4 per cent in June. The Centre stepped in to curb high food prices through more imports of certain food products and a ban on exporting items like basmati rice, but all these have had limited success, given the vagaries of India’s weather. Moreover, core inflation (which excludes fuel and food) is close to 5 per cent because of higher cost of inputs.
Focus on green energy, digital technology and environment: Is India still harping on developing traditional industries that add little value on a global scale? Garg tends to believe so. “We can no longer grow by making more and more textile mills or steel or cement. That will meet some domestic demand, but that won’t give us the growth to move ahead of others,” he says. According to him, the three sectors that India needs to focus on are green energy, digital technology and sustainability. The world over, big investments are taking place in the alternative energy space. According to the World Energy Investment 2024 report by the International Energy Agency, out of the total $3 trillion investment that countries will make in energy, $2 trillion would be for clean energy technologies and infrastructure. India has announced big plans and said that the country will see an investment of Rs 30 lakh crore to meet its target of 500 GW of renewable energy by 2030. This needs steadfast implementation.
India has moved much ahead in its quest to build digital infrastructure, thanks to the high proliferation of mobile phones and the internet, but more needs to be done to ensure better pan-India connectivity so that the benefits of technology seep down to the most deserving. What India lacks, says Garg, is technology innovation. That leaves us with the need to import technology. “However, we have some policy cobwebs. For instance, we will not cooperate with China, or allow Chinese investment to come in.” That sets us back by several years, he adds. China, on the other hand, is capturing the world market with its products. For instance, in electric vehicles, it has an 85 per cent market share, while India’s share is just 2 per cent. Sports, travel, entertainment and personal services (captured in the acronym ‘STEPS’) will be the drivers of growth in the future.
Improve efficiency: Joshi believes that what drives growth in the long run are capital (investments), the quality and quantity of labour, and efficiency. Efficiency will play a more important role than in the past because when physical infrastructure is created, connectivity improves and turnaround time gets reduced. He advocates the need to push through reforms in land and labour to improve ease of doing business. “Reforms are very critical from the point of view of running a growth marathon. How quickly the country moves will determine how fast it will grow,” he says.
The next two decades to 100 years of India’s independence will be a race that will test the country’s resilience in some very challenging times. If it can leverage its human capital to take a growth leap, India will ensure better opportunity and more prosperity to the millions of its citizens.
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