An Economic Roadmap for India

NEW DELHI – India’s incoming prime minister, Narendra Modi, has promised to turn his country’s sluggish economy around. When asked recently about his reform plans, Modi responded that his roadmap was simply that “Our GDP should grow.” This seems like an obvious goal, but in recent years India appears to have been losing sight of it.

What will it take to return the Indian economy to sustainable growth? We believe that the following five simple facts about the Indian economy hold the key.

First, India is a “young” emerging market. This means that sustaining a high rate of economic growth for the next five years can come about without making dramatic changes to India’s institutions. A country’s output depends on its inputs, namely its labor force and capital stock, and on the efficiency with which it uses them. When the capital stock – including infrastructure – is deficient, investing in it is one of the quickest ways to generate growth (as long as finance is available). This is the “low-hanging fruit” that Modi should go after right away. It is a much more difficult and gradual process to increase the efficiency of resource use and the skill level of the labor force.

Second, the service sector has been the primary driver of economic growth in the last few decades. Industry’s share of value added is stuck at 25%, and the share of micro and small enterprises in manufacturing employment in India is 84%, compared to 25% in China. This is anachronistic for a country at India’s level of development. The fact that India has moved from an agricultural economy to a service-driven economy with almost no growth in industry is not a virtue; it is an outcome of policies that have hampered manufacturing and mining.