Modi’s India is on course to top China for growth
Further business and legal reforms are needed to maintain progress
Martin Wolf
India matters now and will matter still more in future. It is a democracy; its economy is fast growing; and it will soon be the most populous country in the world. Westerners should passionately desire India to be a successful model of democratic and market-led development.
An important question then is whether the government of Narendra Modi, in office since May 2014, has made a decisive difference to India’s economic trajectory. The evidence is: not yet.
But the reforms it has introduced might make a more noticeable difference in the years ahead.
A decisive shift in India’s economic policies and performance occurred after the foreign currency crisis of 1991. India’s version of China’s “reform and opening up” raised average growth of gross domestic product per head to close to 5 per cent a year between 1992 and 2017.
The five-year moving average of growth of GDP per head reached 7.2 per cent in the years up to and including 2007, before slowing to 5.8 per cent in the years to 2017. That slowdown is disappointing. Yet, if this rate were maintained, GDP per head would double every 12 years.
That would be transformative — and not just for India, since its population is forecast by the United Nations to reach 1.6bn (17 per cent of the world’s total) by 2040. (See charts.)An important question is whether India’s rate of growth will continue to decline, stabilise or rise yet again. A crucial issue here is the marked fall in the country’s rate of investment, from a peak of 40 per cent of GDP in 2011 to 30 per cent in 2017. If the investment rate were to remain at the latter level, GDP growth is unlikely to rise to over 8 per cent a year, let alone to still higher rates, though it should not fall below today’s rates. In retrospect, the soaring investment rates of the early 2000s were themselves unsustainable. They bequeathed a “twin balance sheet” problem that resulted from the bad debt in banks and many businesses.
Analysis in the country’s recently published Economic Survey concludes that reversing an investment slowdown associated with such stressed balance sheets is a difficult task. The agenda, it suggests, includes cleansing the unhealthy balance sheets, which is now under way. Also important is further progress with easing the costs of doing business, by “creating a clear, transparent, and stable tax and regulatory environment”. Whether a government that recently de-monetised a large portion of the outstanding monetary stock overnight can create such a stable regime has to be questioned. The teething difficulties of the new goods and services tax, itself a valuable reform, did further damage.
Mr Modi indicated his determination to implement vital structural reforms in last month’s speech to the annual meeting of the World Economic Forum in Davos. His agenda is impressive and wide-ranging. The Economic Survey argues that the slowdown of the Indian economy in 2016 and early 2017 has already been reversed: it is now full(ish) speed ahead. Yet, on the basis of what has happened so far, a reasonable bet could be that growth will stabilise somewhere between 7 and 8 per cent a year, provided, significantly, the global environment remains supportive. In all, India should regain the title of “fastest-growing large economy in the world” from China, this year.
What about the longer-term challenges? Removing obstacles to higher investment and encouraging higher savings are both important. The Economic Survey also notes, triumphantly, that India jumped 30 places to break into the top 100 for the first time in the World Bank’s Doing Business, 2018. This is indeed the product of reforms. Yet India still lags 22 places behind China. It also came 164th in effectiveness in enforcing contracts. This reflects the inefficiency of the legal system, which has Dickensian characteristics. India could and should do far better still.
On balance, however, the potential for policy and institutional improvement in what remains a poor country (whose real GDP per head is about an eighth of US levels) should create confidence that rapid growth will continue. Yet the Economic Survey asks, boldly, whether there might now be a tendency for economies that lag as far behind the world’s richest as India still does to fail to catch up. In particular, it notes obstacles that did not exist in the past. These include the current backlash against globalisation, which might slow export growth; the tendency for the growth of industry to peak ever earlier in the development process, or “premature de-industrialisation”; the challenge of upgrading human resources; and the negative impact of climate change on agricultural productivity. The crucial challenge here is education. India continues to fail to provide adequate education to a vast portion of its children — a failure that will affect the quality of the labour force for many, many decades. The survey also makes a strong case for increasing India’s scientific effort and spending more on research and development, especially in the private sector.
A striking structural feature of India, whose significance goes far beyond economics, is social preference for sons. This shows up in the strong tendency to continue to have children until a son is born. India’s stock of “missing women” — women who would be there with a normal sex ratio — is now estimated at 63m. The number of unwanted girls — girls who only exist because parents actually wanted a boy — is also estimated at 21m. Worse, these prejudices are not disappearing with prosperity. While the treatment of Indian women has improved in many ways, benighted son preference persists. Both the outcome and the social attitudes that cause it have to change. They are hugely damaging. Economic development matters. On its own, it is never enough.
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