Addressing institutional shortcomings, promoting human development, and strategically leveraging regional economies are necessary to realise growth potential
By Aradhna Aggarwal
Narendra Modi Has taken charge of the office of Prime Minister at a time when India is poised to become a $5-trillion economy, propelled by growth rates of 7-8% in most years over the past two decades. Amid concerns about China’s economic slowdown and strained trade relations with the US and its allies, many experts and international entities have projected India as a potential new economic and political superpower. Bolstered by these projections, in 2023, Modi launched the slogan of “Viksit Bharat” or Developed India by 2047, which he has consistently reiterated after resuming office. The pivotal question is: Can he navigate India along this transformative path towards becoming a developed nation?
Reaching the high-income threshold of $13,845 GDP per capita (as of 2022) within 25 years from India’s current GDP per capita of $2,090 (2022) requires substantial growth acceleration over an extended period. China’s experience shows that despite maintaining impressive average annual growth rates of 8.5% in GDP per capita at constant 2015 USD for 41 years during 1978-2018, which peaked at 9.1% between 1982 and 2012, it has yet to surpass the high-income threshold. In comparison, analysing India’s GDP showing over the past decade reveals mediocre performance with no acceleration in the annual growth rate. The average annual growth rate in GDP per capita at constant 2015 USD during 2014-2022 (4.6%) remains somewhat lower than the previous decade’s rate (5.3%).
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This mediocre growth performance is directly linked to a steady decline in private gross fixed capital formation (GFCF) as a percentage of GDP since 2011-12, dropping from 31% to 25% by 2021. Foreign direct investment (FDI) has also shown sporadic growth patterns despite India’s potential to attract FDI due to economic and geopolitical conditions, and strained US-China relations.
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Weak private investment has impeded the structural transformation of the economy, perpetuating structural underdevelopment. A significant share of the workforce (45.6%) and land (46%) remains stuck in low-value-added agriculture, which contributes only 15-16% to GDP and is responsible for around one-quarter of the world’s greenhouse gas emissions. The share of manufacturing, which has the potential to pull labour out of agriculture, has been shrinking in GDP, while the rapidly growing service sector struggles to absorb labour due to its skill-intensive nature. This has led to a situation of jobless growth, marginalising the vast unskilled/semi-skilled workforce, and funnelling them into low-value-added formal/informal/uberised sectors, exacerbating inequalities and distress particularly in rural areas.
Sustained and substantial growth requires the economy to transform from an agrarian into an industrialised economy, which hinges on mobilising private investment. Many view policy reforms as crucial for mobilising investment. However, policy reforms alone are not a panacea for development challenges. Despite critical institutional reforms, infrastructure development, digital innovation initiatives, and improvements in the business environment such as a notable jump of 79 ranks in World Bank’s Ease of Doing Business Index, economic performance remains moderate considering the low base. Of primary importance are the challenges surrounding policy-making, implementation, and prioritisation that determine the structure of economic incentives. I highlight four critical areas that need immediate attention.
Policy-making: This faces hurdles such as silos (development of policies by various departments in isolation irrespective of their cross-cutting nature), lack of stakeholder engagement, frequent reversals, and delays in decision-making, undermining institutional trust among investors. Policies lack robust mechanisms for monitoring and independent evaluation and are often subject to the whims and fancies of top leadership irrespective of the need, potential impact, and reactions. Rectifying these issues is imperative for fostering a conducive environment for investors.
Weak policy implementation: This can erode the effectiveness of the most well-crafted reforms. The hype around the ease of doing business index has little substance as it focuses on rules and policies; actual implementation is not captured. Policy implementation, a key to mobilising investment, is hindered by issues like absenteeism, incompetence, indifference, and corruption within public service departments/agencies. Rampant corruption hampers the effectiveness of initiatives like e-governance, eroding trust in institutions. This is exacerbated by the lack of interministerial/intergovernmental coordination. Countries that have strengthened implementation capacity, ensured accountability, and promoted transparency and efficiency are more successful in promoting investment than others.
Human development: This emerges as a crucial focus area with India’s competitive advantage shifting towards skill-intensive activities. Investment in education, health, innovation, and technological development is critical for maintaining global competitiveness and fostering productivity growth. Addressing deep-rooted societal divisions, which have diminished social capital, perpetuated nepotism and favouritism, and affected behaviour and attitudes at the workplace, can further enhance productivity.
Regional economies: In a globalised world, these garner increasing attention, necessitating spatial policies that leverage local competencies and target areas with high productivity potential. In this context, special economic zones are a potent instrument for fostering new regional economies, driving industrial concentrations, and catalysing transformation in cities. However, they have been long neglected by the government, and require immediate attention and support.
While India’s growth trajectory holds promise, realising its full potential requires concerted efforts towards fostering inclusive and sustainable development. This entails addressing institutional shortcomings, promoting human development, and strategically leveraging regional economies.
The author is a Professor at Copenhagen Business School and senior advisor to Team ‘Skill, Technology and Trade’ at NCAER.
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