Having played sports my whole life, there is hardly an outdoor activity which I haven’t tried. I have been known to skip irksome social gatherings just to get out on to the fields. The only sport I despise is running; I cannot imagine why anyone would willingly run a marathon. But I do enjoy watching these endurance contests.
The long-distance race I like following the most occurs once every five years. India’s marathon national elections kicked off with the first round of polling last Friday, and will stretch over 44 days in seven phases.
The outcome of this lengthy exercise is not much in doubt, with most surveys predicting Narendra Modi to return as prime minister with a clear parliamentary majority. But there is a lot at stake for the Indian economy as it tries to realize its full potential and play a more defining role in the world.
Despite global headwinds, India has remained the fastest growing major economy, with real gross domestic product (GDP) expanding by 8.4% year over year in 2023. India’s population of over 1.4 billion is the largest in the world, a title that it is poised to hold for some time to come.
The nation’s growing middle class and a young demographic skew are driving consumption. In 2018, India entered a 37-year period of demographic dividend, an interval in which the working-age population grows faster than the dependent population. Higher capital expenditures by the government over the last few years have been another pillar of growth. Cheap data and an exponential increase in mobile subscriptions are driving rapid digitization, accelerating the formalization of the economy.
External account vulnerabilities to global shocks have faded, with foreign exchange reserves climbing to an all-time high of $646 billion, equivalent to over 10 months of import cover. The rupee was one of the best performing currencies and the least volatile among global peers in 2023. India has fared better than several of its emerging and developed counterparts in keeping price pressures contained, despite heavy reliance on commodity imports. Equity markets scaled new highs, delivering 20% returns last year. Fiscal concerns have been fading, thanks to higher tax revenues and the government’s commitment to reining in public deficits.
The optimism extends beyond the country’s strong domestic performance. Amid tense U.S.-China relations, India is increasingly seen as an alternative to China for diversification of supply chains. The government has been actively courting multinationals to set up shop by offering incentives and spending billions on improving infrastructure. Annual foreign direct investment inflow has almost doubled from $45 billion in 2014-15 to about $85 billion in 2021-22.
That said, India’s strong headline GDP growth masks a host of economic challenges. The benefits of strong economic performance have not trickled down to the bottom of the pyramid. Extreme poverty is falling from a high level, but a high proportion of the population still struggles to make ends meet. 800 million residents qualify for the government’s free food program. Inequality has worsened to a 100-year high. The top 1% of Indians account for over one-fifth of the national income, compared to less than 15% earned by the bottom half of the population. That is higher than countries like the U.S. and South Africa.
India has the world’s largest workforce, but not enough jobs. This situation is a major issue surrounding this year’s election. India’s youth unemployment problem is one of the most acute among its emerging market (EM) peers, and more dire than reported in the official surveys. The labor force participation rate among women is still quite low, relative to other EMs. Millions of young people are becoming a drag on the economy. According to HSBC, India needs to create 10-12 million jobs a year to prevent the demographic dividend from turning into a disaster. That is about twice as many as are being created annually at present.
India seeks to become more of an industrial hub. Our "Make in India" campaign seeks to increase manufacturing’s share of national output from 17% to 25% of gross value added (GVA) by 2025. Though more and more companies are seeking to shift or diversify their supply chains to India, the share of manufacturing in GVA has remained unchanged over the past decade. Infrastructure, along with an improved ease of doing business, will be needed if goals are to be met.
INDIA HAS IMMENSE OPPORTUNITIES, BUT ALSO IMMENSE CHALLENGES.
Growth in the agriculture sector, which contributes 16% to India’s GDP and employs nearly half of the population, has been slowing and faces frequent disruptions from climate change. With some very sensitive borders, the country also needs to invest in shoring up its defenses. Public debt has been rising fast, but a significant chunk is in domestic currency, thereby reducing vulnerability to external shocks. Despite tax cuts and incentives, private investment as a fraction of GDP has been shrinking for more than a decade. It isn’t ideal for the government to do the heavy lifting on both capital and welfare spending.
The two biggest national parties are making big economic promises. The Congress aims to double GDP in the next decade, while the ruling BJP aims to quintuple per capita income by the centenary of independence in 2047. On average, GDP will have to grow by more than 7% annually to hit those ambitious targets. By comparison, India's GDP grew 7.7% last year and averaged 7.2% in the decade before COVID.
The Indian economy needs to maintain its tempo if it wants to finish this marathon task of becoming a developed economy by 2047. More investments in physical and human capital will go a long way toward improving performance. The last miles of a marathon are the hardest, but they are the interval over which successful competitors stand apart from the pack.
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