Geographies in Depth

8 things you need to know about India’s economy

Labourers work at the construction site of a residential complex in New Delhi, India, December 11, 2016. Picture taken December 11, 2016.  REUTERS/Adnan Abidi - RC1C042F8DB0

By 2050, India’s economy is projected to be the world’s second-largest, behind only China. Image: REUTERS/Adnan Abidi

This article is part of: India Economic Summit

India’s economic success in recent years has helped to ensure that South Asia is the fastest-growing region in the world – but it faces significant challenges alongside its opportunities for further growth.

Ahead of the India Economic Summit 2017, taking place in New Delhi from 4-6 October, here are eight things you need to know to understand the current state of India’s economy.

Economic and population growth

India is the world’s seventh-largest economy, sitting between France and Italy. Its GDP growth recently dipped to 5.7%; still, India is growing faster than any other large economy except for China. By 2050, India’s economy is projected to be the world’s second-largest, behind only China.

India is home to 1.34 billion people – 18% of the world’s population. It will have overtaken China as the world’s most populous country by 2024. It has the world’s largest youth population, but isn’t yet fully capturing this potential demographic dividend – over 30% of India's youth are NEETs (not in employment, education or training), according to the OECD.

Image: Visual Capitalist

Some progress tackling corruption

The newly-published 2017 edition of the World Economic Forum’s Global Competitiveness Report finds that, once again, India’s executives consider corruption to be the most problematic factor they face when doing business within the country.

But it also shows that progress is being made. India again moves up the report’s rankings for the quality of institutions, continuing a recovery in this area that began in 2014 with the election of the Modi government. In particular, India now ranks an impressive 23rd among all countries in the Global Competitiveness Index for perceived efficiency of public spending.

Image: World Economic Forum

India’s 29 states are now a common market

Opportunities for corruption have long been created by the confusing patchwork of taxes across India’s 29 states, which also cause delays as goods cross state borders. In July, the system changed: a new goods and services tax means the 29 states are now a common market.

The new system is expected to boost efficiency, growth, and India’s tax take. Despite some technical glitches with the new online tax collection system, early signs appear promising.

Demonetization had mixed success

Last year, Prime Minister Modi unexpectedly declared that India’s highest-denomination banknotes – accounting for 86% of cash – would no longer be legal tender. Instead they had to be deposited in banks. The aim was to retrospectively punish tax evaders, as those with a stash of 'black money' would face awkward questions. Unexpectedly, however, almost all banknotes were deposited.

Disruption caused by the policy may have dampened GDP growth in the short-term, but it could also prove to have long-term benefits. It increased the number of digital transactions being conducted within India’s economy, which are easier to track and to tax: since April, over twice as many Indians have filed tax returns than in the same period last year.

Growth needs to be more inclusive

Broadening its tax base should enable India to make much-needed progress in increasing the inclusivity of its economic growth. India ranked a disappointing 60th among the 79 developing economies assessed in the World Economic Forum’s latest Inclusive Development Index.

This is reflected in growing inequality: India’s richest 1% own 53% of its wealth, up from 36.8% in 2000. For comparison, the richest 1% in the United States own 37.3% of its wealth.

The rise in inequality is compromising the pace at which India is lifting people out of extreme poverty. About one-third of the world’s population living on under US$1.90 live in India – some 224 million people. Oxfam calculates that if India were merely to stop inequality from growing further, it could lift 90 million more people out of extreme poverty by 2019.

When it comes to closing the gender gap, India has a lot of catching up to
When it comes to closing the gender gap, India has a lot of catching up to Image: World Development Indicators

India needs to get more women working

India has made modest progress in closing its gender gap over the last decade, rising from 98th to 87th in the World Economic Forum’s Gender Gap Report, which aggregates a range of indicators from health and education to economic and political participation.

However, it ranks a lowly 135th out of 144 on women’s labour force participation, just behind Yemen. India’s economy would have much to gain from getting more women into the workforce.

Turbulent times for tech

Several leading companies in India’s IT sector are reportedly planning significant layoffs, in part due to concern that the Trump administration’s clampdown on H-1B visas will make it harder to do business in the US.

The growing ability of machine learning to replace human workers is also a challenge. A recent McKinsey report reckons that within a few years, up to half of the 3.9 million Indians currently working in the IT sector will become irrelevant.

But other tech trends are more promising. India has again moved up the Global Competitiveness Report’s rankings on technological readiness – albeit from a low base, still only 108th in the world – on the back of improvements in indicators such as internet bandwidth per user, mobile phone and broadband subscriptions and internet access in schools.

India also has scope to build on its tech start-up scene, which already boasts more companies than anywhere other than the US and UK. The country scored well in the Inclusive Development Index on access to finance for business development.

Have you read?
  • India will sell only electric cars within the next 13 years
  • India’s economy in numbers
  • Demonetization in India: A political and monetary miracle?

A push for soft power

India is making a conscious effort to translate its growing economic clout into 'soft power' on the world stage – for example by promoting International Yoga Day and building more diplomatic missions and cultural centres. India’s space agency is planning a second mission to Mars, while the international outreach of Bollywood films is growing: Dangal recently broke box office records in China for a non-Hollywood movie.

Competition with China for regional influence is coming into sharper focus, notably in a recent military stand-off over the disputed area of Doklam in Bhutan. India has opposed China’s One Belt One Road initiative, which aims to construct new infrastructure for trade by land and sea in surrounding countries – including development of a disputed region of Kashmir.

Nonetheless, the trade relationship between India and China remains important. China is by far the largest source of India’s imports, and its third-largest export market after the US and UAE, providing a strong incentive for cooperation between the rising powers.

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