How do you supercharge one of the fastest-growing economies in the world?

India – heralded by the International Monetary Fund as an “elephant starting to run” – now makes up 15% of global growth, fueled by reforms, foreign investment and strong domestic demand. And it’s set to pass Japan and Germany to become the world’s third-largest economy by 2030, according to estimates from HSBC.

Even so, the nation faces risks from international trade wars and high oil prices. And the World Economic Forum’s Global Competitiveness Report 2018 shows scope for further reform: while India ranks 58th out of 140 in the overall index, it’s behind China and Russia, and slips to 75th when assessed for labour-market efficiency.

The Global Competitiveness Report shows scope for additional reform in India.
Image: World Economic Forum Global Competitiveness Report 2018

“India’s economy has enormous potential,” Shilan Shah, a senior economist at Capital Economics told the World Economic Forum in an interview. “Over the longer term the challenges are very much on the reform front, the labour market is still very dysfunctional and there hasn’t been much evidence that the government wants to tackle that.”

Taking steps

To spur the economy, Narendra Modi’s government has already reformed monetary policy, introduced a new banking code, as well as a goods and services tax to bolster internal trade, and taken steps to improve the business climate.

One of the most effective measures has been the introduction of one tax rate for all of India’s states, creating one internal market, Shah said, while another is the action taken to restore confidence in the banking sector. He identified structural rigidities and bureaucracy in the labour market as key barriers going forward.

“India needs to reinvigorate reform efforts to keep the growth and jobs engine running,” said Ranil Salgado, the IMF’s head of India. A “reform and streamlining of the complicated web of labour laws” could help bolster growth, he said.

The scope for improvement is further underscored by much lower per-capita income – about $2,000 per year – than that of other large emerging economies.

Other large emerging economies outpace India on a per-capita income basis.
Image: IMF, World Bank

In the Global Competitiveness Report, corruption was considered the key barrier to business in India, followed by difficulty accessing finance and high tax rates. This is also highlighted in the IMF report, which cited complex business regulations, lengthy litigation, corruption and bureaucracy as obstacles.

Shah told the Forum the government had made a “great deal of progress” in tackling corruption and said that was among the reforms that had helped the economy to grow “on a more durable basis”.

Outmoded regulations

Modernizing labour laws would be helpful for the future, he said, an idea underscored by the IMF, which said outdated regulations currently prevent firms from expanding and can push economic activity into the informal and unregulated parts of the economy.

And those rigidities make it harder for women to join the workforce, with female participation among the lowest in the region. The Forum’s 2017-2018 Global Competitiveness Index ranked India 129th out of 136 in its sub index measuring female participation in the labour force.

Reforming the labour market could boost female participation.
Image: IMF, World Bank

Despite these challenges, India still enjoys robust growth and the nation’s central bank forecasts gross domestic product will expand 7.4% in the fiscal year ending in 2019 and 7.5% the year after. Capital Economics predicts longer-term the economy will continue to grow at 7.5% a year, should policies continue to go in the right direction.

HSBC estimates the nation’s economy will be $5.9 trillion in 2030, the world’s third largest after China and the US.

“India’s economy has enormous potential, given its population size, and the fact that it is still relatively small in terms of per capita size,” Capital Economics’ Shah told the Forum. “It’s now beginning to grow very quickly.”