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Is India Experiencing Its Breakout Moment?

by internationalbanker

By Indranil Pan, Chief Economist, YES Bank





The global growth atmosphere has been challenging since the start of the COVID days. Even as advanced economies have shown resilience, ageing populations in these economies and restrictive monetary policies for longer-than-expected periods have restrained momentum towards the upside. The powerhouse of yesteryear, China, has its own set of problems in the form of real-estate woes, the negative effects of rebalancing the economy away from investment-led to consumption-led growth and an ageing population. The global equation is fragile due to geopolitical flashpoints, continued uncertainties from supply-chain disruptions and commodity-price volatility. The geopolitical fragmentations that threaten global cooperation and trade, along with adverse climate change, also jeopardise global growth.

Amid all these turbulences, the Indian economy surely stands out, showcasing a healthy macroeconomic scenario. Importantly, even during moments of distress during the COVID period, the government kept up its economic-reform momentum, which is showing positive results today in galvanising not only the economy’s current performance but also helping position India to sustain its long-term economic aspirations. Official estimates indicate that the economy has likely grown at a year-on-year rate of 7.6 percent and will also register a strong growth rate of 7 percent in Fiscal Year (FY) 2025. Domestic demand has held up strongly, supported particularly by the urban sector’s discretionary consumption. Agriculture performance has been a laggard in FY2024 due to the El Nino conditions that have affected the Southwest Monsoon, leading to a weak rural economy. However, this will likely change in FY2025, given expectations of a normal monsoon, improving the rural segment’s spending power.

Growth is not the only factor favouring India today. India has managed to bring down retail inflation, especially core inflation. This has resulted from policy steps, including the monetary tightening of the Reserve Bank of India (RBI) and the preemptive measures taken by the government to manage the essential food-grain supply chain. These steps have included price controls and export-restriction measures. The government has also demonstrated fiscal prudence in the post-COVID years. Even with slowing export growth, India has exhibited strong external strength in the form of a contracting current account deficit. India has been included in the JPMorgan Emerging Market Bond Index (EMBI), and the RBI has built up a strong war chest of US$630 billion in foreign exchange (FX) reserves that can handle any adversities on the external front.

Although India is undergoing an election process, the probability of the ruling party staying in power remains high. And this means a continuation of the policy momentum. The government launched the Viksit Bharat 2047 roadmap, which aims to make India a developed nation by 2047, the 100th year of its independence. The vision is of an India in which sustainable and inclusive economic development is the primary focus, supported by world-class infrastructure and a policy framework that will unleash a wave of opportunities on which all citizens can capitalise.

The groundwork for the above has already started. The government has substantially increased capital expenditures in its budget—especially on roads and railways. The previous rounds of economic reforms focussed on the services sector as the critical growth contributor, and this sector surely has pulled the economy along for many years. However, the services sector alone would not have been capable of absorbing eight to ten million people entering the workforce each year or clearing the large backlog of unemployed youth. The government is attempting to implement policies to reenergise the manufacturing sector, which was largely ignored during earlier reform processes. One of the enablers created by the government for the manufacturing sector is the Productivity Linked Incentive (PLI) scheme for 17 sectors, which seeks to incentivise the manufacturing sector through subsidy payments. This strategy is debatable, but the government has tried to protect the domestic manufacturing sector by raising tariffs for their products, thereby reducing the scope of foreign competition.

Furthermore, to help domestic manufacturers become more competitive, the government implemented the National Logistics Policy (NLP), which will likely reduce the economy’s logistics costs. Overall, it aims to boost the manufacturing sector to contribute around 25 percent of gross domestic product (GDP), making India a global manufacturing and export hub and effectively reducing its reliance on the services sector for generating growth and employment. A healthy banking sector with low nonperforming assets (NPAs) and reduced corporate-sector leverage should help boost private capital investments to complement the government’s capital expenditures.

Aside from the push on the manufacturing sector, one should not lose sight of the services sector. The Indian economy is evolving at the best possible time, when geopolitics are leading to the fragmentation of the world order. With businesses looking outside of China, India is well placed to absorb many of them. The expansion of global capability centres (GCCs) in India across sectors—information technology (IT), auto, pharmaceutical and energy—is an example of how India is regarded as a destination with potential beyond mere outsourcing. With its large populace, evolved business ecosystem and significant pool of STEM (science, technology, engineering, and mathematics) workers, India will likely provide global businesses with an advantage. According to the World Economic Forum’s (WEF’s) estimates, between 2023 and 2027, 85 million jobs could be displaced by automation. However, they have simultaneously indicated that 69 million new jobs can also be expected to be created in new industries, such as artificial intelligence and machine learning (AI and ML), business intelligence, fintech (financial technology), e-commerce and so on.

The Digital India programme is a significant enabler of economic well-being. The economy’s digitisation has not only improved the ease of doing business but has also enabled the government to streamline its services and prevent system leakages. Financial inclusion as a theme is receiving a push from digitisation. But much more needs to be achieved. India’s credit penetration, indicated by its credit-to-GDP ratio, is around 51 to 52 percent, significantly lower than Malaysia’s 136 percent and Brazil’s 70 percent. According to the World Bank, the percentage of the Indian population (aged 15 and above) with bank accounts has risen from 35 percent in 2011 to 78 percent in 2021. Furthermore, bank-account penetration among the poorest 40 percent of the population has substantially increased, reaching 78 percent in 2021 compared to 27 percent in 2011. Such efforts are expected to help unlock economic opportunities for the previously unbanked and unserved segments of India’s population.

India’s policymakers have long talked of intrinsic demographic dividends but have not been able to reap the benefits in the true sense. India is the world’s most populous country, with a relatively young population. The country’s current median age is approximately 29 years old, almost a decade younger than those of China and other advanced economies. By 2030, India is projected to have the world’s largest working age group, comprising around 69 percent of its population. As per International Labour Organization (ILO) data, labour productivity, as measured by output per worker, is quite low in India compared to the Association of Southeast Asian Nations’ (ASEAN’s) standards. Important to note: If India is to harness the dividends of its demographic advantages, this young population must be made employable and possess the right skillsets. The government initiated a skill-development programme, but data indicates that only 38 percent of the labour force has skills that match the requirements. Furthermore, female labour-force participation in India is at just 29.9 percent, compared to the 58.2 percent average in ASEAN countries and 70.9 percent in China.

The government must also be at the forefront of investments in arenas such as education and healthcare, which are especially important to boost a young population’s productivity. The “Annual Status of Education Report 2023” (ASER 2023) shows that in the youth age group of 14-18 years, more than half struggle with simple division, and only a little over half can read sentences in English. This implies significant gaps in education outcomes that must be urgently addressed. Similarly, gaps in the healthcare system must be rectified to meet the growing population’s healthcare needs. Only a healthy and educated young population will be capable of driving up GDP and per capita income, much needed to sustain the economy’s consumption power.

Furthermore, even as the gap has closed over the years, income and wealth inequalities remain significant in India and must be addressed. Data indicates that the top 0.1 percent of the population earns nearly 10 percent of India’s national income. From a wealth-inequality perspective, the wealth share of the top 1 percent was around 40 percent in 2022-23.

India’s development process has been a marathon adventure. Given the recent spate of reforms and judging by the economy’s macroeconomic stability, the country is well placed to capture the momentum. But Indian policymakers must make haste in their economic endeavours before they can approach the demographic dividend’s peak. While the number of births will likely outpace deaths in the long term, the rate of increase in the net population has been slowing. India’s fertility rate is already below the replacement rate of 2.1.

The window of opportunity for reaping the demographic dividend will surely not be open indefinitely, and India will have to progress on war footing not to miss the bus again.


The views in this article are personal.


Indranil Pan is Chief Economist at YES Bank. He has a master’s degree in economics and has spent most of his 28-year career in the banking sector. Before joining YES Bank, he worked for Kotak Mahindra Bank and IDFC FIRST Bank. He is the co-chair of the Economic Advisory Committee of the Bombay Chamber of Commerce and Industry and is a member of the Economists Panel at FICCI.


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