SG is a business consultant specialising, inter alia, in the area of foreign investment and development finance .
India's Economic Growth
India is a recent addition to the fast growing economies of the world. From the beginning of the global financial crisis in 2008 to date, India has recorded an average annual growth in GDP of more than 7% (World Bank, 2018). It is predicted that in the near future India’s growth will surpass China. However, because of India’s late start it will take a long time before it reaches China’s level of development.
Factors Contributing to India's Economic Growth
What factors have contributed to this rapid development in India? Much of the success is owed to India’s private sector; from the smallest entrepreneur in the slums of Mumbai to global enterprises like Mittal Steel and Tata Motors. What is remarkable about India’s private sector is that it has been able to prosper despite the lack of support from the country’s policy makers and other numerous obstacles inherent in the country.
Another important contributory factor to India’s growth is its demography. India has a very large working age population and its dependency ratio (percentage of dependants to working age population) is forecast to be one of the best in the world, even better than China. For 2050, India’s dependency ratio is forecast at 47%, whereas China’s is 63% (UN: WPP, 2012). This means that a high proportion of the population is able to contribute to economic activity in the country.
A special feature of India’s large work force is the high rate of literacy in English and IT. This is one of the main reasons why India has become an international hub for outsourcing call centres and other business processes.
Some commentators contend that India’s democracy has helped the economy by creating a free environment for entrepreneurship and innovation to flourish. However, as discussed below, India’s democracy and political institutions have stood more in the way of its development rather than anything else.
Stumbling Blocks Affecting India's Economy
India’s road to economic prosperity, however, is replete with potholes. This could be taken in a literal sense as one of the country’s major stumbling blocks has been the lousy state of infrastructure. Roads, electricity, water, public transport and many more infrastructure and public utilities are substandard and eating away into the productivity of the private sector. According to industry experts the condition of the road network and traffic congestion leads to the increase of transportation costs by as much as 30%.
Although, India has a large workforce, it has an acute shortage of skilled labour in certain areas required for the economy, such as engineers and vocationally trained workers.
India also has many social problems concerning poverty and its social development at present is questionable.
Political Institutions and the Economy
A foremost concern for India’s development has been the country’s so called democracy and political institutions. The problems with the country’s governance have impacted the economy in many ways.
Firstly, the multiparty democracy has led to political instability and the coalition governments with competing interests have failed to implement much needed policy reforms.Secondly, the politicians have taken a populist view to pacify voters and this view has been usually unfriendly to business and the economy.Thirdly, the entire political framework of the country has been rampant with corruption.
Furthermore, the complicated political structure and relationship between central and state government has left many investors confused about who is actually in control. India’s political system has caused many in the country to voice the opinion that if it had a political system like in China, it would be much easier to implement policy reform and develop the country.
Explaining India's Economic Growth Through Development Theories
At first glance because of private enterprise and the democratic model of governance, it is natural to think that India has a capitalist economic model that accords with the Modernisation theory or the Washington Consensus.
However, India’s economy is more closed and regulated than it seems. The degree of India’s protectionism was evident when reforms to open the retail sector to foreign competitors like Walmart was met with strong opposition and put on hold. Although, important regulation ramparts (the ‘license raj’ system – licence for everything) have been brought down, many aspects relating to business and the economy remain highly regulated and subject to bureaucratic red tape.
The government lack fiscal discipline and prioritisation of public expenditure. The government continue to spend on subsidies and loss making state enterprises, and this has led to growing debt and crowding out of private sector credit. Thus, the above mentioned development models fail to accurately describe the economic growth achieved by India and the stark contrast with the policies adopted by China render the Chinese model, dubbed the Beijing Model, irrelevant to explain India’s growth.
There is no cookie cutter approach or one size fits all approach for achieving economic growth. Instead, economic policies should be based on each county’s circumstances or context. Each country may have different factors constraining their economic growth. Economic policy should be implemented targeting these binding constraints. India, realising that its government’s actions were constraining private sector led growth, sought to minimise government intervention by dismantling the ‘licence raj’ system.
Furthermore, there may be multiple policy actions that could be taken to address the binding constraints in an economy. However, all of them may not work for a particular country. Therefore, it is important that a county experiment with policies and practice gradualism in implementing policies; rather than comprehensive policy reform.
This content is accurate and true to the best of the author’s knowledge and is not meant to substitute for formal and individualized advice from a qualified professional.
© 2020 SG