In 2004, The Economist boldly predicted that India’s economic growth rate would surpass China’s within two decades. Fast forward to 2010, and the timeline was dramatically shortened with a forecast that India might overtake China in GDP growth as early as 2013. Although it ultimately took until 2015 for India to claim the title of the world’s fastest-growing major economy, the country’s economic trajectory has been nothing short of remarkable.
Since 2015, India has consistently outpaced China in terms of economic growth, a feat largely attributed to its rapid population increase. However, when examining living standards, per capita GDP (PPP) provides a more accurate measure. It wasn’t until after the COVID-19 pandemic that India surpassed China in this regard.
India’s Growth Performance and Future Projections
India’s economy has shown robust growth, with the third quarter of this year seeing an 8.2% increase, up from 7.8% in the previous quarter. With a population growth rate of just under 1% annually, this translates to a per capita growth rate of approximately 7.2% to 7.3%.
While this growth rate is less than what South Korea or China achieved during their peak industrialization periods, it is still substantial enough to transform India significantly in a short span. According to the International Monetary Fund (IMF), India’s per capita GDP (PPP) is projected to reach US$12,101 by 2025. Sustaining a 7.2% growth rate for thirteen years could elevate this figure to $29,878, slightly above China’s current level.
“Two decades of 7.2% growth would bring India to $48,609 — about as rich as Hungary or Portugal today.”
Even under a more modest growth scenario of 5.4% in real per capita PPP terms, India could reach a per capita GDP of $26,633 in fifteen years, aligning with current levels in China and Thailand.
Policy Reforms and Economic Resilience
India’s recent labor law reforms aim to attract investments and simplify business operations. The new legislation, grouped into four codes, replaces outdated laws and provides companies with greater flexibility in hiring and firing, enhances safety standards, and extends social security benefits.
This reform is particularly significant as it allows women to work night shifts, potentially increasing female labor force participation. Historically, manufacturing booms have been driven by women transitioning from rural to urban employment in labor-intensive industries.
While this reform alone won’t guarantee two decades of 7% growth, it demonstrates the Indian government’s commitment to pro-growth policies. The theory proposed by A.O. Hirschman in the 1950s suggests that economic development fosters political support for further growth. As living standards rise, there is increased motivation to continue reform efforts.
Financial and Manufacturing Sector Reforms
India’s financial system requires reform to facilitate company scaling. High capital costs currently hinder borrowing and growth. Addressing these issues could involve improving bond markets or focusing on bank finance, a common strategy in economic growth “miracles.”
Additionally, boosting the manufacturing sector is crucial. Suggestions include repealing restrictive regulations, easing land conversion laws, negotiating more trade agreements, and reducing bureaucratic red tape.
Despite being the world’s fifth-largest manufacturer, India’s economy remains service-intensive, with manufacturing contributing only 13% to GDP. However, recent developments in electronics manufacturing, including increased iPhone production, signal potential growth in this sector.
“India clocked the highest goods exports for November in 10 years…exports rose to $38.13 billion — up 19.4% from a year earlier, the biggest jump since June 2022.”
Challenges and Opportunities Ahead
India faces several challenges, such as linguistic fragmentation and geopolitical tensions with China. However, federalism can be a strength, allowing different states to pursue diverse economic models, enhancing resilience.
China’s efforts to monopolize global manufacturing may pose a threat, but India’s attractiveness as a production base for multinational companies like Apple remains strong due to its democratic governance and large domestic market.
Despite skepticism about India’s ability to build a high-tech economy, historical parallels with Japan’s rise in the early 20th century suggest that India could similarly defy expectations. As India continues to implement reforms and leverage its vast resources, the potential for sustained economic growth remains promising.
In conclusion, India’s journey towards becoming a developed nation is fraught with challenges but also ripe with opportunities. The country’s ongoing reforms, coupled with its demographic and economic strengths, position it as a formidable player on the global stage.
