In India, run-rates matter for the economy as much as they do in the nation’s beloved sport of cricket. To meet Prime Minister Narendra Modi’s target of turning India into a developed nation by 2047, the economy would need to hit close to 8 per cent growth every year until then. Ambition is good but to stand a chance of achieving it, India needs to match it with an equally bold agenda of economic reforms.
The world’s fastest-growing major economy is losing momentum. After impressive post-pandemic growth, India’s economic expansion has slowed for three consecutive quarters. In the current fiscal year, growth is forecast to be 6.4 per cent — which would be the country’s slowest in four years. Higher, jobs-rich growth is essential to take advantage of India’s vast young workforce.
At home, high unemployment, persistent food inflation, subdued consumer spending and weak investment are acting as a drag. Global economic conditions are also becoming less supportive. US President Donald Trump has ignited trade tensions and supply chain uncertainty. The Indian rupee recently fell to a record low against the US dollar following Trump’s global tariff threats, raising costs for importers.
If Indians were hoping for answers on how the government planned to crank up long-term growth, there weren’t many in last weekend’s budget. Finance minister Nirmala Sitharaman focused on propping up consumers. She raised the income tax threshold and recast tax brackets, which will boost India’s stretched middle classes. But the majority of Indians work in the informal sector and will see no benefit from the tax changes. Capital investment was increased only slightly.
The budget did, however, slash duties on products including electronics and textiles, which will support manufacturers, and on motorcycles, which may ward off US tariff threats. The announcement of a committee to review the plethora of paperwork that impedes business is also promising. And a commitment to fiscal discipline means that India’s debt path is on a more stable footing just as market volatility is set to pick up.
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What more can policymakers do? The Reserve Bank of India on Friday cut interest rates for the first time since May 2020. Further rate reductions may be frustrated by stubborn price growth. Either way, rather than short-term jolts to demand, Modi’s government should focus on raising India’s growth potential through structural reforms.
Current land and labour laws restrict businesses’ ability to grow by making it onerous to acquire factory space, and to hire and fire workers. Easing these restraints would encourage companies to expand and invest, and attract global manufacturers eager to diversify their supply chains. A further reduction to protectionist duties would also cut cost pressures, and open up coddled industries to competition. Further backing for initiatives that improve workers’ skills and raise India’s low female participation rate would also help companies capitalise on the country’s demographic dividend.
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Economic liberalisation is a budget-friendly way to raise India’s growth rate sustainably. But politics could be a stumbling block. The government’s reduced majority following last year’s election means it will be even more mindful of irking coalition partners. Some industries won’t like tariff reductions either.
But if Modi is serious about putting India on an improved trajectory to become a developed nation, his government will need to make unpopular decisions, and prioritise policies that have a long-lasting impact on growth. Otherwise, India risks growing old before it gets rich.
