India’s Growth Crossroads

MANILA – As the slowdown in the world’s major industrial economies drags on, growth in developing Asia is being affected. A serious burden will likely be placed on the region’s major economies, particularly its two giants, India and China. Both countries’ external sectors have clearly been hit hard, while domestic consumption is stagnating. Fixed-asset investment in India rose by only 2.3% in the first half of 2012, compared to 9% in the year-earlier period.

Unlike China, which has shown clear signs of stabilization since mid-2012, there is no clear evidence of recovery in India yet, as delay in implementing necessary reforms, among other factors, has weakened the economy’s competitiveness. While recent government measures are expected to boost economic revival, an additional challenge is that growth must be made sustainable and more inclusive, which requires addressing four key issues.

The first is service-sector upgrades. India already has a large service sector, which has been a major source of growth. Considering the country’s young and growing population, the service sector needs to create more jobs for the millions who will join the workforce every year.

But India’s service sector has been dominated by traditional, low-wage output in informal businesses, such as restaurants and personal services. To achieve inclusive growth, India must shift toward modern services, such as Internet connectivity technology, finance, law, accountancy, and other professional business services. The authorities must reduce burdensome regulations to allow the sector to be more competitive and dynamic (recent government service sector reform is most welcome).