4/16/24, 11:01 AM This time, India's rapid economic growth has legs - Nikkei Asia

OPINION

This time, India's rapid economic

growth has legs
Factors that previously sapped momentum have finally been addressed

Richard Yetsenga
February 16, 2024 17:00 JST

A knitting machine at a textile factory in Andhra Pradesh in 2022: Capital investment in India is now above 30% of GDP,
higher than that of Taiwan and on par with South Korea. © Reuters
Richard Yetsenga is chief economist and head of research at ANZ Banking Group
in Sydney.

The high quality of the Indian economy's recent performance is inarguable. The
country was the fastest growing major economy in 2022 and 2023 and is forecast to
be so once again in 2024.
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There are three tailwinds that suggest this torrid growth phase could last quite
some time yet.

The first is the base. India became a low-middle income economy only in 2018 and
it was not until after the COVID pandemic that per-capita gross domestic product
sustainably eclipsed $2,000. The gains from reform will inevitably be greater when
the starting point is lower.

But economic tinder still needs the spark of reform, the second factor. Here too,
recent progress is palpable, however.

The introduction of a national goods and services tax in 2017 simplified a complex
web of central and state taxes and helped streamline the movement of goods across
India's 36 states and territories.

The rate of highway construction has tripled since 2015. Capital expenditure on
railways, as a share of GDP, has more than doubled over the last decade.

Both the World Bank and the International Monetary Fund have hailed India's
world-class digital public infrastructure, which has enabled the government to
better target welfare programs and improve tax compliance.

Human development indicators show similar trends in improvement. Access to

flushing toilets and cooking gas, infant mortality and household electrification have
all shown extraordinary improvement over the past decade. A decade ago, 40% of
households were without electricity; today the share has shrunk to less than 3%.
Development is improving the lives of more than just the few at the top in India.

The third tailwind is China, which has provided the spark. The reversion of China's
growth rate to the economic mean has prompted both capital and attention to shift
farther afield.

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Over the last four years, net foreign direct investment as a share of GDP has been
three times higher in India than in China. Fifteen years ago, flows into China were
sometimes four times larger than into India. Expats and international expertise
typically follow foreign direct investment.

Also over the last four years -- a hostile period for capital flows into emerging
markets -- net portfolio flows into India have been positive, while China has
experienced its largest outflows in modern times.

The evidence seems clear, yet doubters continue to question whether India can keep
outperforming. Perhaps some expect India to disappoint in the future because they
have been disappointed in the past. There is, indeed, a legacy of disappointed
expectations.

But clarifying the disappointment is important. India's historical challenge has been
not so much about growing quickly as about sustaining growth. Between 2004 and
2010, for example, India's GDP growth averaged 7.2%.

One issue is that India has a reputation for chronic underinvestment, but that is
yesterday's story. Capital investment is now above 30% of GDP, higher than that of
Taiwan and on par with South Korea.

India is the only Asian economy with an investment-to-GDP ratio that is higher
than it was before the pandemic. Its import dependence has also declined, due to
stronger remittances and the rise of global capability centers, which build upon
India's previous success in business process outsourcing. Remittance volumes have
also grown strongly since 2022.

Rather than the closed-economy reality that previously characterized India, the
economy is now more open than China's was at a similar stage of development.
Trade, as a share of India's GDP, has averaged around 50% over the past decade
compared with less than 15% in 1990.

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A market stall in South Bishnupur, India: A decade ago, 40% of India households were without electricity but the share is now
less than 3%. © Reuters

It is true that the average import tariff rate on agricultural goods remains high, but
tariffs on manufactured goods were down to around 10% as of 2008 from above
80% two decades before. After a 10-year hiatus, India has recently begun signing
trade agreements once again, with pacts finalized with Australia and Mauritius and
talks underway with Oman, the U.K. and four other European nations.

Household consumption in India is likely to outperform the rest of the region over
the next year or two, with household expectations regarding income, employment
and spending firing on all cylinders.

India's most pressing macroeconomic policy challenge is to ensure that recent steps
to reduce the near-20% rate of growth in credit are effective and that the benefits of
financial sector reform are not eroded by another boom-bust credit cycle. Tighter
regulations around personal loans and credit cards are likely to help, but sectorwide
lending growth needs to slow further to bring it into better alignment with deposit
growth.

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The government's conservative budget plan for the new fiscal year beginning
in April will help. A sharp slowdown in overall spending and a lower-than-expected
budget deficit target of 5.1% of GDP will take some steam out of the economy, even
as infrastructure spending continues to rise.

Still, to fulfill India’s economic potential, more reforms will be needed. India
remains prone to imposing restrictions on trade to address cost-of-living
challenges, the agriculture sector is still highly protected and production often
subscale, and women's labor force participation is unenviably low.

But there is still time. India's past legacies should not distract from opportunities in
the present.

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