India is projected to overtake the Brexit-ridden UK and become the world’s fifth largest economy this year. With India’s total GDP to exceed $3 trillion soon, the country will overtake its former colonial ruler, IHS Markit says in its recently released report.
The report, arriving just days after the new Cabinet was sworn in, also predicts that India will surpass Japan to become the second largest in the Asia-Pacific (APAC) region by 2025.
Last year, the World Bank billed India as the sixth largest economy in the world.
A glowing review of the recent mandate
Within a week of Prime Minister Narendra Modi’s reelection to the Centre, the London-based data powerhouse released a report on Monday, on the economic reality facing the BJP government following its return to power in the national elections.
Despite ominous warnings from other sources, the report has predicted that the economic outlook “looks positive” for the second term of Modi government, with GDP growth forecast to average around 7% per year over the 2019-2023 period.
Since Modi took office in 2014, Indian GDP has increased by 50%, from $2 trillion in 2014 to an estimated $3 trillion in 2019, a total net increase of $1 trillion in just five years, it notes.
The report states that the rising GDP will enable India to continue contributing to the global growth momentum and play an increasingly important role as one of the Asia-Pacific region’s major economic growth engines, helping to drive Asian regional trade and investment flows.
This arrives on the heels of the news that the country has been disqualified as the fastest growing economy in the world.
India’s economy has grown at its slowest pace in almost five years, according to the latest data released by the government, the BBC reported on May 31.
In the last financial year, April 2018 to March 2019, the economy grew by 6.8%. And in the quarter between January and March, it expanded by just 5.8%—falling behind China’s pace for the first time in nearly two years, the report said.
The underside of India’s economic milestones
India recorded the fastest real wage growth in South Asia during 2008–17, according to a report by the International Labour Organisation (ILO). But it flagged two important flaws in the Centre’s vision for economic growth, Qrius reported last year.
First, the growth in wages occurs simultaneously with the increasing wage gap between rural and urban employees, organised and unorganised sectors, agricultural and industrial workers, menial and managerial levels. Secondly, India is also leading the table with the highest gender wage gap in the world, as evinced by the Global Wage Report 2018/19.
The World Bank further ranked it 120th out of 131 countries in terms of female workforce participation.
IHS Markit recognises market concerns
IHS Markit’s report does acknowledge the significant economic challenges facing Modi in his second term of office.
“A key policy priority for the Indian government will be to continue to drive reforms in the public sector banks and reduce the burden of non-performing (or bad) loans on their balance sheets,” IHS said.
“Moreover, the increase in India’s total population between 2015 and 2050 (by around 265 million) is projected at around 350 million, creating significant fiscal challenges for the government in order to deliver adequate physical infrastructure, such as electricity, sanitation, affordable housing, and public transport,” IHS adds in its latest report.
Where are the jobs?
This is a more immediate concern for Indian voters.
With the construction and manufacturing sector’s share in the GDP still at 18% (against the targeted 25%), there is grave concern over how to accommodate the 7.5 million projected to join the Indian workforce per year on average over the next two decades.
According to IHS, this will turn up the pressure on the Modi government to generate sustained and rapid employment growth in both manufacturing and services sectors, and bring down joblessness, which has attained a 45-year high, according to the NSSO report released last week.
Over the next three years, the burgeoning middle class and increasing number of millennials will drive domestic demands for global products and digital commodities, which in turn necessitates radically different skill sets, noted a 2017 report by Ernst and Young titled A Future of Jobs in India, spelling trouble if the government does not exploit technological disruptions to train the workforce and create new kinds of jobs.
‘Make in India’ needs to make a comeback
Continuing to drive the transformation of India’s industrial sector through the ‘Make in India’ strategy should also be a strategic priority, to improve manufacturing sector output growth and generate stronger employment growth, the IHS report said.
“When Modi launched the Make in India strategy in 2014, he set a target of increasing the contribution of manufacturing to GDP to 25%. However, by 2018, the manufacturing sector share of GDP is still at 18%, which still leaves a substantial gap to bridge in order to achieve this vision,” it notes.
In a report on the missing jobs data, Qrius noted in January that the ambitious agenda of Make in India—to “transform India into a global design and manufacturing hub”—failed to address manufacturing bottlenecks and the lack of employment in that sector, owing to saturation of Indian exports.
IHS further notes that rapid infrastructure development in key sectors, such as transport and power infrastructure still remain unfulfilled, immediate priorities, pointing to enormous regulatory burden of government red tape.
Ease of doing business needs to be greater
India was ranked 77 out of 190 countries that are included on the World Bank’s Ease of Doing Business Index for 2019. Despite lagging behind other large emerging markets, such as Turkey (43rd), China (46th), and Mexico (54th) on this ranking, India has made remarkable progress in improving its ranking compared to 2015, when it ranked 142nd out of 189 countries.
Marking an improvement in six out of 10 indicators, including ease of getting credit, construction permits, protection for minority investors, and cross-border trade, India’s climb up the table began in 2016, when it ranked 100th and arrives on the heels of several reforms related to insolvency and taxation. The World Bank further put India among the top 10 economies to register the most improvement in the near future.
“This reflects the considerable efforts made during PM Modi’s first term of office to try to reduce the regulatory burden of the Indian national and state bureaucracies on Indian businesses,” IHS said.
Modi’s first term
IHS said the extent of BJP’s electoral victory was “well beyond market expectations”.
“The resounding victory in the Indian national elections of the BJP led by PM Modi, with another large parliamentary majority, will provide continuity of economic policy for India over the next five years. The large parliamentary majority secured by the BJP has avoided the key risk of a weak and fragmented coalition government governing the nation, which could have undermined momentum for further economic reforms,” said IHS Markit’s Asia-Pacific Chief Economist Rajiv Biswas.
Stating that Modi and the BJP have achieved steady and robust macroeconomic growth over the last five years, the report added that the election results signal a strong vote of confidence from the electorate in the party’s economic track record in governing the nation.
“The BJP government benefited from the slump in world oil prices during 2014-16, which helped to significantly reduce inflation pressures in India. Falling oil prices also substantially reduced India’s oil import bill, which helped to lower the current account deficit as share of GDP significantly,” it said.
Demonetisation episode ‘turbulent’, GST ‘helpful’
A major economic policy reform achieved under Modi’s first term of office was the implementation of the Goods and Services Tax (GST) in 2017 to create a unified single indirect taxation system in India, removing the complex previous system of different state-based indirect taxes, which had created significant inefficiencies, such as higher logistics costs, for firms distributing products across state boundaries.
The GST will help to reduce logistics costs as well as improve industrial competitiveness for industries, it said.
“Nevertheless, India has also faced its fair share of economic challenges during PM Modi’s first term of office, including bad debt problems of the public sector banks as well as economic turbulence during the demonetisation episode in 2016,” it said.
But with the BJP at the helm of government, India enjoyed five consecutive years of relative economic stability, with strong growth and moderate inflation, the report states.
Domestic stability is the one constant that PM Modi has, while dealing with an unstable world, wrote the Economic Times on Tuesday, adding that it is rare for a recent Indian PM, and a huge asset for Modi at a time when India looks to benefit from a flatter, looser, less disciplined global order.
Now, it is time for the first female finance minister Nirmala Sitharaman to face the upcoming challenges head-on; going by the US’s protectionist policies and President Donald Trump’s increasing frequency of sanctions, India as an advancing economic power is probably on the frontlines of a big showdown.
Prarthana Mitra is a Staff Writer at Qrius.
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