By William Gumede

The Indian economy is now growing faster than any of its Brics (Brazil, Russia, India, China and SA) partners, outstripping even China. Meanwhile, SA and Brazil are deindustrialising, and Russia’s economy is crumbling because of its ill-considered war with Ukraine.

India appears to be successfully positioning itself to become a hub in global manufacturing supply chains after the disruption caused by the Covid lockdowns and the Russia-Ukraine war, which pushed countries and companies to diversify their supply chains away from China and Russia.

In its April Asian Development Outlook, the Asian Development Bank projected that India’s GDP will grow 6.4% in its year to end-March 2024, driven by private consumption and investment responding to government policies that have improved transport infrastructure, logistics and the business ecosystem.

While most emerging markets have seen dramatic slowdowns in economic growth due to Covid and the war in Europe, India bucked the trend. Government projections for the full 2022 financial year put India’s growth rate at 7%, which means it has been growing faster than China. According to the IMF, India will contribute about 15% to global growth this year.

The country has worked hard to diversify its foreign direct investment (FDI) inflows, and has been rewarded with a rise in investment from countries such as Japan, the UK and United Arab Emirates as it has become more of a hub for global manufacturing supply chains. FDI from the US has dropped over the same period.

The Indian economy has tended to be less integrated into the global economy than that of China. Covid and the Russia-Ukraine war disrupted economies across the globe, but affected countries that were more integrated into the global economy most. It has led to a global economic slowdown, food, energy and logistics price inflation, and many countries adopting restrictive monetary policies.

Western countries in particular have prioritised energy, agriculture and manufacturing supply chain independence. China, whose growth was based on exports, has been particularly hard hit as Western economies have sought to diversify their manufacturing and energy supply chains and “friendshore” production.

By contrast India has prioritised expanding domestic consumption in its vast potential internal market. It has seen agriculture, mining and private sector-based services improve over the past few years, though its agriculture sector in particular is vulnerable to climate change-related risk such as weather-related emergencies, including droughts, floods and fires.

Indian inbound tourism has jumped since the end of Covid-19 lockdowns, and contract services, over the years a priority area for India, has seen an upsurge in demand. The government has introduced labour market and business regulations such as production-linked incentives to ease red tape for businesses and made it easier to hire and fire.

According to India’s Centre for Monitoring Indian Economy, the total value of new private sector investment proposals in 2022 reached its highest level since 1996, with proposals worth 19.7-trillion rupees having been made. The government has also introduced incentives to stimulate manufacturing, particular in electronics and technology.

It has focused on increasing investment infrastructure as a catalyst to unlock economic growth. The country’s next budget is set to heavily prioritise capital expenditure to increase employment, investment and local demand.

Last month the Asian Development Bank noted that in the 2024 fiscal year India is expected to “see faster growth in investment, thanks to supportive government policies and sound macroeconomic fundamentals, lower non-performing loans in banks, and significant corporate deleveraging that will enhance bank lending”.

The country’s local manufacturing has not grown as fast as government would have wanted. Manufacturing is heavily reliant on global demand, and the economic downturns in many countries have depressed demand across the board. On the other hand, the Indian mining sector has expanded because the government has increased coal mining in response to the global energy shortage and price inflation resulting from the Russia-Ukraine war.

It is not all plain sailing. Rumki Majumdar of Deloitte India has pointed out that the Indian central bank has not been able to anchor the rupee against the dollar, and the chronic volatility of the currency remains a challenge for the growing economy.

The Asian Development Bank has also cautioned that geopolitical tensions remain major risks for India’s economy. The country is involved in multiple standoffs on its borders, including with Pakistan and China, and the Russia-Ukraine war will undoubtedly continue to affect energy, food and logistics prices. Weather-related shocks are unpredictable but are an inevitable peril for the economy too.

Dhruv Sharma, a senior economist at the World Bank, has warned that though Indian banks are well capitalised, “spillovers from recent developments in financial markets in the US and Europe pose a risk to short-term investment flows to emerging markets, including India”.

For many years after independence in 1947 India’s economy grew at less than 1% a year on average, but after liberalisation and other reforms in 1991 there was a high growth phase, especially between 2005 and 2008, and recently annual growth has hit 7%.

According to IMF figures India has enjoyed one of the highest rates of poverty reduction the world has seen in recent times, with almost 400-million people lifted out of poverty in the past 15 years. In terms of purchasing power parity and aggregate output levels, India is the fifth largest economy in the world, yet its IMF per capita income ranking of 143 out of 197 countries still positions it as a lower middle income country. In 1991 India’s real per capita income was $600, which has tripled to about $2,000, an economic miracle rivalling China’s.

India’s goal in the short-term is to become a $5-trillion economy, which could be achieved within five years with annual growth of 8%-9%. Former Reserve Bank of India governor Chakravarthi Rangarajan, one of the world’s most respected central bankers who is a former chair of the Economic Advisory Council to the Indian prime minister, has said if the economy grows at this rate its per capita income will rise to about $3,472.

According to Rangarajan, if India is to become a developed economy by 2047, which will be 100 years after independence, its per capita income must reach $13,000. To achieved this the economy will have to grow 8%-9% a year for 25 years, similar to China’s prolonged period of sustained growth from the early 1990s.

William Gumede is an associate professor in the University of the Witwatersrand School of Governance, author of “South Africa in Brics”.

BusinessDay