Can India Hold Her Position as the World’s Fastest Growing Economy?

The Indian economy grew at an impressive rate of 7.7% during the fourth quarter (January to March 2018). India’s GDP growth surged past China’s 6.8% growth recorded for the same quarter.

For FY18 (fiscal year ended March 31, 2018), India’s growth rate stands at a disappointing 6.7%, representing a slowdown from the 7.1% recorded in the previous fiscal year (FY17). Despite this, the growth rate achieved in the fourth quarter enabled the country to retain its tag of the world’s fastest growing major economy. And, the government is forecasting 7.5% GDP growth for FY19.

Seeing the Current Achievement in Perspective

We hear people talk about India’s dream run from 2003 to 2008. During this period, the country’s growth rate remained north of 9% for three consecutive years – 9.48% in FY06, 9.57% in FY07 and 9.32% in FY08.

This is misleading! The fillip experienced during these years had little to do with market-oriented reforms or a favorable business environment in the country. It had more to do with growth-friendly economic conditions prevalent globally.

Following this phase, global growth decelerated and stalled, resulting in a slowdown in India’s growth. And what did the government do? It expanded public expenditure and raised fiscal deficit from 2.5% of the GDP in FY08 to 4.8% in FY12. As the government tapered off the stimuli, India’s economic growth faltered… and how!

India reported GDP growth of 4.47% in FY13 and 4.7% in FY14.

What India Should Do to Maintain a High Growth Rate

Not to belittle the tag of fastest growing economy, but is a growth rate of 7% enough for a country that’s not developed? Keeping up this pace is challenging, but we need to forge ahead faster.

Broadly speaking, there are two things to focus on:

Job Creation: India has a workforce of almost 50 crores. So, unemployment is a huge threat. This problem can be tackled by improving all the parameters in the World Bank’s Ease of Doing Business Index in which India still occupies a low position of 100th rank. Making it easier to start a business and get credit, lowering taxes, freeing trade across borders and handing over infrastructure to the private sector to develop more efficiently are some of the moves the government can take to spur job creation. As businesses grow and as more people take on entrepreneurial roles, the economy will be benefited with job growth.

Job creation is primarily a factor of the amount of capital invested and how efficiently the capital is employed. Jobs are created only with capital. Taxes reduce the capital available with businesses and curtail job growth. Efficiently deploying capital means not having to wait endlessly for bureaucrats to grant approvals or worse not give their approval to certain projects. It is by reducing or eliminating taxes and improving the ease of doing business that job growth can be achieved.

Value Chain: It is not about size of India’s exports, but the structure that needs to be focused on. Currently, we’re adding value only in two major sectors – petrochemicals (import oil and export refined petroleum) and jewelry. India needs support to enter the major global value chains if the country is to achieve longer-term economic growth. For this, FDIs need to flow in more freely. Former RBI governor Raghuram Rajan stated in an interview that India needs an uptick in private investment and revival in exports to boost economic growth closer to the double-digit mark.

India has sufficient resources and a huge talent pool. Moreover, the country’s economic condition has become largely positive, with some commendable initiatives in place. What the government needs to do now is to essentially get out of the way. It can do this by removing obstacles that limit the growth of private consumption, continuing with its deregulation initiatives, further liberalizing FDI policies, putting an end to state-led import substitution and steering clear of policy changes aimed at regulating the market.