In fact there is a simpler argument to be made. Namely India is operating with such a range of inefficiencies that addressing these over time should naturally bring some growth in the economy.
Consider in recent years, energy price subsidies have been almost entirely abolished, the monetary policy regime has changed fundamentally, large parts of the informal sector have integrated into the mainstream economy, a goods-and-services tax is in place and the banking sector is recognising and dealing with non-performing assets.
All this has cost economic growth, particularly as the banking sector adjusts to much greater transparency about the value of its assets. It implies we can be much more confident about the base on which India’s growth is built, particularly as we consider China’s trajectory over coming years.
India’s service sector continues to outperform China’s service sector and offers large potential for continued economic growth. It contributed 54 per cent to the gross value added in fiscal 2017 and is expected to grow at 8.5 per cent in 2018.
India’s IT sector is expected to reach annual revenue of $US350 billion by 2025 and India’s start-up system continues to expand and indeed to break into new territory.
This increasing economic complexity presents a great opportunity in the form of connecting India’s traditional IT expertise to its newfound gains in manufacturing capabilities.
Noting manufacturing industries near their markets and supply chains tend to create long-term employment, the McKinsey Global Institute says, “with India’s strong domestic IT capabilities, which are increasingly relevant in manufacturing, firms operating in the country can reach customers more effectively, streamline manufacturing processes, and create more efficient supply chains.”
Within India, advances in cities, on gender inclusion and in the digital economy are strengthening the dynamics of production and consumption locally and may be the start of bigger trends; even if the active reform program of the past 18 months has cost growth in the short term.
Homi Kharas at the Brookings Institution estimates in the next decade the world will reach a tipping point where the middle class will be, for the first time ever, the largest income segment.
A majority (88 per cent) of these new billion entrants will live in Asia, leading to big distributional market shifts in favour of both India and China.
Progress in female workforce participation has been made, yet there remains a great deal to be done. In 2016 the World Economic Forum noted regression on women’s estimated earned income, and said India “continues to rank third-lowest in the world on Health and Survival, remaining the world’s least-improved country on this subindex over the past decade.”
Technology and fiscal policy reforms are also boosting consumption opportunities. According to BCG, India’s online consumers grew seven-fold in the last few years (to between 80 and 90 million) delivering $US45 billion to $US50 billion in the decade to 2025.
In the next few years the Indian internet service market is likely to grow, further leveraging this digital ecosystem and the ‘new’ hundred-million consumers who enter the lower middle class segment. Innovative partnerships in this sector are already mushrooming.
India benefits from a youthful population, a heritage of service sector strength, a skilled and wealthy diaspora that is the largest in the world and electronic payment systems rapidly developing to serve its tremendous domestic market.
The relative political stability of India and the strength of the Modi government to continue to make reforms are a source of optimism for the short-to-medium term. The broad agenda of policy initiatives, the push to harness the talents of the diaspora and the efforts to include more women in its workforce and consumer base target the opportunities in the new game of growth and are poised to continue.
Should they succeed the elephant will not become a copycat dragon. Rather, India will have written a growth story on its own distinctly 21st century terms.
Richard Yetsenga is Chief Economist at ANZ
This is an edited version of a piece which appeared on ANZ’s Institutional website.