Traffic on the Howrah Bridge in West Bengal, India

Infrastructure investment will be key to supporting India’s future growth

Could India become the world’s next growth engine? After repeated false starts, the country could now be at a transition point.

India is already one of the world’s fastest-growing major economies. Nearly half its 1.3 billion population is under 25; it provides 18 per cent of the world’s total workforce; and by 2025 some 550 million Indians will be defined as middle-class. Recent reforms could help to make India the world’s third largest economy within a decade.

Recent reforms could help to make India the world’s third largest economy within a decade

Annual growth was a sluggish 3.5 per cent before the liberalisation reforms of 1991 doubled the rate. But each time it tried to run faster, India was tripped by creaking infrastructure or macro instability such as high inflation or the gaping budget and trade deficits.

This time it could be different, however. With many other large economies facing structurally lower growth, the new India can play an important role in driving the global economy.

The already sophisticated IT sector, India’s most successful export, is evolving, helped by automation and advances such as mobility, analytics and cloud computing. Technology start-ups in areas including education, bio-tech and health bring together India’s young population and entrepreneurial spirit.

Internet penetration, online purchases and e-commerce lag behind China by seven years but are set for rapid growth, with youthful consumers embracing digital payments and smartphones.

Developed countries can export to this growing young consumer class but the ongoing economic reforms mean that, as India’s investment cycle turns, imports of commodities such as oil and iron ore and machinery should increase, too. And improved macroeconomic fundamentals, including a benign inflation outlook, are leading to a rapid rise in capital inflows, particularly investment from abroad.

This new India will thus have an impact on many companies and countries around the world.

India is currently the world’s fifth biggest economy. But it accounts for just 3 per cent of global GDP and is 15 years behind China in terms of GDP per head.

However, India can learn from China’s experience. The importance of reforming both the economic and social sectors, rising up the manufacturing value chain, tapping the demographic dividend, and investing abroad is well understood, but we expect India’s path to be different. Where China’s growth was export-led, India’s will likely focus on domestic demand.

Disruption caused by reforms such as the new Goods and Services Tax means last year’s 7.1 per cent growth will not be repeated this year. But a steady recovery means that, over the next 10 years, India will likely overtake Germany and Japan to become the world’s third largest economy in nominal GDP.

However, there is much to do to ensure this is not another false start. India needs to make it easier to do business, strengthen its banking system and invest heavily in infrastructure. And while it accounts for a quarter of the world’s total IT exports, its share of global merchandise exports is just 2 per cent. It needs to rely less on services and improve a manufacturing sector that has suffered from decades of insufficient reform.

This research was first published on 12 September 2017.

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