Overcrowded bus at Mumbai Hindustan Times/Getty Images

Reviving India’s Economy

Given the Indian economy’s massive size and extensive global linkages, its growth slowdown is a source of serious concern not just domestically, but around the world. The good news is that carefully crafted policies that address both short- and long -term impediments can reverse the downward trend.

NEW YORK – Not long ago, India was a poster child for political stability and economic growth among emerging economies. Though the country had a long way to go to eradicate poverty and extreme inequality, when it came to steady GDP growth, it was among the world’s strongest and most consistent performers. Not anymore.

In the second quarter of 2017, India’s growth rate fell to 5.7%. It is now tied with Pakistan – behind China, Malaysia, and the Philippines – on the list of major economies for which The Economist provides basic economic data. Neighboring Bangladesh, which is not on that list, is now growing at over 7% per annum (and Bangladesh’s per capita income now exceeds Pakistan’s).

Given the Indian economy’s massive size and extensive global linkages, its growth slowdown is a source of serious concern not just domestically, but around the world. But it is not too late for India to reverse the trend. The key will be carefully crafted policies that address both short- and long-term challenges.

In the short term, policymakers must address declining demand for Indian products, both among domestic consumers and in export markets. All signs point to falling consumer and business spending in India. In fact, India’s index of industrial production grew by a meager 1.2% in July, compared to 4.5% a year earlier. Output of consumer durables fell by 1.3%; a year earlier, it grew by 0.2%.

Meanwhile, annual export growth has fallen in recent years to just 3%, compared to 17.8% in 2003-2008, India’s rapid-growth phase. This is partly a result of a stronger rupee, which has raised the price of Indian goods in foreign markets. And, indeed, imports have risen sharply as well, as the rupee’s appreciation lowers the relative price of foreign goods: in the first half of this year, nominal merchandise imports grew by 28%.

But there is another potential driver of the sharp rise in imports: people may be over-invoicing, in order to shift money abroad. This could indicate that big traders expect a correction in the rupee’s exchange rate, at which point they plan to sell the dollars that they are now accumulating for a larger sum of rupees.

The World’s Opinion Page

Help support Project Syndicate’s mission

subscribe now

This possibility should worry the Indian authorities – and spur them into action. To boost domestic demand in the short term, India needs Keynesian interventionist policies. To mitigate the rupee’s appreciation, thereby boosting external demand, the Reserve Bank of India (RBI) – one of India’s most respected institutions, populated by qualified professionals – must be given greater policy space and autonomy.

My advice would be for the RBI to lower interest rates further, thereby aligning India’s monetary policy more closely with that of the world’s other major economies. While the current tendency toward very low interest rates is not ideal from a global perspective, the fact is that as long as India remains an outlier, it will encourage the so-called carry trade, which artificially drives up the rupee’s value.

The bigger challenge facing India will be to nurture and sustain rapid growth in the long run. To figure out how to achieve that, it is worth considering the efforts of another major emerging economy: China.

As part of its industrial policy, China’s government has identified specific economic sectors to boost. India can adopt a similar approach, with health and education being two particularly promising sectors.

Despite its success, India’s medical tourism industry still has plenty of untapped potential – not least because health-care costs are rising around the world. The income earned from such tourism could help the country to shore up its own health system, ensuring that all Indians – including the poor and especially children, among whom malnourishment remains rampant – have access to quality health care.

Likewise, India can become a hub for higher education. For the government, the imperative is to create more regulatory space and provide a facilitating ethos for the private sector. An education boom would bring huge returns for the entire Indian economy.

The final piece of India’s long-term growth puzzle is investment more broadly. The experience of East Asian countries, not to mention economic theory, shows that capital investment is among the most effective drivers of sustained economic growth. Even in India, the sharp uptick in growth from 2003 occurred alongside a surge in overall investment.

Yet India’s investment-to-GDP ratio is now slipping, from over 35% in the last eight years to below 30% today. This can be explained partly by an increase in risk aversion among banks, which are concerned about non-performing assets. Falling business confidence may also be a factor.

If India implements policies that boost short-term growth, while laying the groundwork for long-term performance, confidence should rise naturally. Once investment picks up, India will be able to recapture its past rapid growth – and sustain it in the coming years. That outcome would benefit not just India, but the entire global economy.

http://prosyn.org/3OXj3D7;

Handpicked to read next

  1. Television sets showing a news report on Xi Jinping's speech Anthony Wallace/Getty Images

    Empowering China’s New Miracle Workers

    China’s success in the next five years will depend largely on how well the government manages the tensions underlying its complex agenda. In particular, China’s leaders will need to balance a muscular Communist Party, setting standards and protecting the public interest, with an empowered market, driving the economy into the future.

  2. United States Supreme Court Hisham Ibrahim/Getty Images

    The Sovereignty that Really Matters

    The preference of some countries to isolate themselves within their borders is anachronistic and self-defeating, but it would be a serious mistake for others, fearing contagion, to respond by imposing strict isolation. Even in states that have succumbed to reductionist discourses, much of the population has not.

  3.  The price of Euro and US dollars Daniel Leal Olivas/Getty Images

    Resurrecting Creditor Adjustment

    When the Bretton Woods Agreement was hashed out in 1944, it was agreed that countries with current-account deficits should be able to limit temporarily purchases of goods from countries running surpluses. In the ensuing 73 years, the so-called "scarce-currency clause" has been largely forgotten; but it may be time to bring it back.

  4. Leaders of the Russian Revolution in Red Square Keystone France/Getty Images

    Trump’s Republican Collaborators

    Republican leaders have a choice: they can either continue to collaborate with President Donald Trump, thereby courting disaster, or they can renounce him, finally putting their country’s democracy ahead of loyalty to their party tribe. They are hardly the first politicians to face such a decision.

  5. Angela Merkel, Theresa May and Emmanuel Macron John Thys/Getty Images

    How Money Could Unblock the Brexit Talks

    With talks on the UK's withdrawal from the EU stalled, negotiators should shift to the temporary “transition” Prime Minister Theresa May officially requested last month. Above all, the negotiators should focus immediately on the British budget contributions that will be required to make an orderly transition possible.

  6. Ksenia Sobchak Mladlen Antonov/Getty Images

    Is Vladimir Putin Losing His Grip?

    In recent decades, as President Vladimir Putin has entrenched his authority, Russia has seemed to be moving backward socially and economically. But while the Kremlin knows that it must reverse this trajectory, genuine reform would be incompatible with the kleptocratic character of Putin’s regime.

  7. Right-wing parties hold conference Thomas Lohnes/Getty Images

    Rage Against the Elites

    • With the advantage of hindsight, four recent books bring to bear diverse perspectives on the West’s current populist moment. 
    • Taken together, they help us to understand what that moment is and how it arrived, while reminding us that history is contingent, not inevitable


    Global Bookmark

    Distinguished thinkers review the world’s most important new books on politics, economics, and international affairs.

  8. Treasury Secretary Steven Mnuchin Bill Clark/Getty Images

    Don’t Bank on Bankruptcy for Banks

    As a part of their efforts to roll back the 2010 Dodd-Frank Act, congressional Republicans have approved a measure that would have courts, rather than regulators, oversee megabank bankruptcies. It is now up to the Trump administration to decide if it wants to set the stage for a repeat of the Lehman Brothers collapse in 2008.