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India’s Economy Booming, But Critics Warn of ‘Excessive Enthusiasm’

June 15, 2016

By Mandakini Devasher Surie

Move over China, India is officially the world’s fastest growing major economy. According to the government’s latest economic figures, India’s economy grew at 7.9 percent in the March quarter, up from 7.6 percent in fiscal year 2015-2016. During a period of global economic slowdown, India’s economic performance is impressive, and even more so given that just a few years ago, its economy was hovering around 4-6 percent growth rate per year.

India Economic development

India now ranks as the world’s fastest growing major economy. Here, construction workers start work on new high rises in Dehi’s booming Gurgaon district. Photo/Conor Ashleigh

Since taking office two years ago, Prime Minister Narendra Modi has pushed to boost India’s economic outlook by improving its ease of doing business ranking and turning the country into an attractive global investment and manufacturing hub. For an economy that was dogged by high inflation, poor agricultural and industrial production, limited FDI investment, and weak investor confidence, this seemed like a tall order. So what worked?

On the one hand, there are clearly global factors that contributed to the economic upswing. As one of the largest importers of crude oil in the world (India imports nearly 70-80 percent of its oil), the global fall in crude oil prices has had a significant impact on the Indian economy, bringing down diesel and petrol prices for industry and the consumer market, reducing India’s current account deficit, and driving down the cost of India’s substantial fuel subsidies.

On the domestic front, the government has ramped up efforts to promote India as a major manufacturing hub. The Modi government’s flagship initiative, “Make in India” encourages international companies to invest in manufacturing their products in India. In doing so, the initiative aims to expand India’s industrial base, improve skills, and create as many as 10 million jobs a year, and increase opportunities for its growing youth population. The Prime minister also embarked on a whirlwind global tour, meeting with heads of state in 26 countries in 2015 alone, not only to improve India’s foreign relations, but to also raise foreign direct investment. While the program has its share of critics, figures suggest that the government has been successful in boosting FDI – according to Moody’s, FDI in India hit an all-time high of $3 billion in January 2016.

PM Modi Make in India poster

Since taking office two years ago, Prime Minister Narendra Modi has pushed to boost India’s economic outlook by improving its ease of doing business ranking and turning the country into an attractive global investment and manufacturing hub. Photo/Flickr user Goya Bauwens

The government has also taken steps to make the regulatory environment more conducive to operating a business in India. In 2015, India ranked 134 out of 189 on the World Bank’s Ease of Doing Business Index. Through a series of reforms aimed at changing archaic laws and policies, introducing single window and online application processes, and improving access to electricity and other infrastructure facilities, the government has made serious efforts to streamline the process for Indian and foreign companies to start businesses in India. These efforts seem to be paying off. In 2016, India moved up four spots from 134 to 130 on the World Bank’s Index.

While the prospects for the Indian economy are clearly looking good, policy analysts and economists have warned of excessive enthusiasm, and the need to double down on efforts to improve the stability of the economy. Their concerns are legitimate. Despite India’s strong economic performance, there remain a number of domestic policy impediments to much-needed reforms in critical areas such as land acquisition and labor laws that are critical for any long-term transformation of the Indian economy. The government’s failure to build political consensus on a national goods and services tax (GST) bill, that would replace a range of central and state excises and taxes to create a uniform and standard tax on consumer goods and services, has been seen as a major failure.

With an above average monsoon predicted in 2016, the government and industry have expressed confidence in improved agricultural and industrial outputs. But, as critics have been quick to point out, the benefits of a good monsoon may soon be lost should more serious efforts not be made to address the political policy impediments to on-going reform efforts. On coming to power, Prime Minister Modi, himself a former chief minister of the state of Gujarat, stressed the importance of “cooperative federalism” and looking to India’s states as engines of economic growth and development. In practice, however, there has been little evidence of this, suggesting that going forward the government will need to work more closely with state governments to ensure that the growth benefits that have so far been generated are shared and sustained more broadly across the country.

Mandakini Devasher Surie is The Asia Foundation’s senior program officer in India. The views and opinions expressed here are those of the individual author and not those of The Asia Foundation or its funders. 

Related locations: India
Related programs: Good Governance, Inclusive Economic Growth
Related topics: Elections, Urbanization

1 Comment

  1. Hi Mandakini,

    Very valid points and detailed elaboration. I completely agree with you that the Govt. need to work closely with state governments and carry the boom to state level as well. In my humble opinion, only some states are making progress while others lack basic infrastructure, forget the economic growth.

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