India Economy: The uneven policy road ahead

India is set to overtake Germany and Japan shortly in aggregate GDP to emerge as the third largest global economy.

By Rajat Kathuria

India, a widely diverse country of over 1.4 billion people and a self-proclaimed fast growing major economy, has multiple challenges confronting it.  Even as the new government prepares to assume office, its economic agenda is cut out. The period immediately after a national election is perfect for tough policy decisions, and vital momentum can be generated early on in the electoral cycle. That is the good news. On the flip side, imminent coalition politics will render such action a little harder. On balance, I imagine change will occur, but more slowly.

India is set to overtake Germany and Japan shortly in aggregate GDP to emerge as the third largest global economy after US and China, a feat already accomplished in 2011 if GDP is measured in Purchasing Power Parity (PPP) dollars. With more than 7.5 percent real GDP growth in the last three financial years, India is now the fifth largest economy in the World GDP ranking list along with endless bragging rights (See Table 1) Projections are also optimistic about the future. The International Monetary Fund (IMF) in April 2024, raised India’s GDP growth projection for FY25 by 30 basis points to 6.8 percent on the back of strong domestic demand, rising public infrastructure spending, and a swelling of the working-age population. The World Bank too forecast growth at 6.6 percent for FY25.

Growth contributed to an unprecedented fall in poverty. The poverty headcount rate fell from 37 percent in 2004-05 to 22 percent in 2011-12, pulling 140 million people out of poverty. Recent estimates by the NITI Aayog show that multidimensional poverty (MP) in India declined from 29.17 per cent in 2013-14 to 11.28 per cent in 2022-23, with about 250 million people moving out of depravation during this period. Growth, while necessary for the fight against poverty of all types, is hardly sufficient. The same holds for another socio-economic indicator that signposts one of India’s most stubborn fault lines i.e. productive job creation. Without significant improvement in labour intensive manufacturing, however India will be unable to achieve that, and without more trade it will not be competitive in manufacturing.

The perception that benefits of faster GDP growth in India are being undermined by low employment creation and the accompanying pro-rich bias was highlighted during the election campaign.  In the 4 decades between 1982 and 2022, the share of the national income going to the top 10 percent has almost doubled to about 60 percent. The bottom 50 percent and top 1 percent shares are estimated to be 15 percent and 22.6 percent in 2022. The wealth distribution is even more skewed as one would expect. There are other harmful spillovers of the growth model – severe local air pollution and damage to health that also affect the poor disproportionately. Thus, even as India records rapid growth, it must ensure that growth is more inclusive and sustainable in the days ahead.

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Creating jobs has been high on the political agenda at least since the 2000s if not earlier. The ambition of ‘Targeting Ten Million Employment Opportunities Per Year' of 2002 or roughly 1 million jobs per month was hiked to 20 million jobs per year, but that ambition remains unrealized.  Unemployment among youth with a graduate degree is at an all-time high of 29 percent, with overall youth unemployment hovering around 10 percent. Rural youth are increasingly seeking nonfarm employment. The share of manufacturing employment has been stagnant, at around 12 per cent. Construction and services have absorbed excess labour but on the whole jobs are predominantly self-employment and casual employment and nearly 90 per cent is informally employed. The share of wages in the net value added by industries has shown a secular decline while the share of profits has climbed, reflecting a capital intensive production process, exactly opposite of what a labour abundant country like India needs. India thus needs to boost labour intensive manufacturing growth to absorb more workers to realise the principal intent underlying the ‘Make in India for the World’ initiative and to reverse the ‘jobless’ stigma that has typified the Indian growth story, which by and large has been flattering.

India’s other ambition to achieve $1 trillion in exports by 2030 cannot be efficiently achieved without integrating with Global Value Chains (GVC), which in turn requires a healthy prescription of openness, Foreign Direct Investment (FDI) and import competition. An import tariff or rise in protection is akin to an export tax. India’s hard earned lesson that export promotion and import substitution are conflicting policies looms large over its trade policy and economic agenda. India needs to create a balance.

We have always supported multilateralism in the World Trade Organisation (WTO) and elsewhere. At the same time, we sidestep discussions on Services and e-Commerce in the WTO, revealing an ambivalence to more engagement. India needs to also rethink staying out of large Regional Trading Agreements such as the Regional Comprehensive Economic Partnership (RCEP) and Comprehensive and Progressive Trans-Pacific Partnership (CPTPP). Globally, these are the two mega RTAs and staying away reveals a reluctance to embrace trade for strategic advantage. As opposed to the dominant narrative, openness will also aid competitive labour intensive manufacturing and speak to one of India’s stubborn problems of productive job creation or lack thereof.

Finally, the European Union’s Carbon Border Adjustment Mechanism (CBAM) that seeks to impose taxes on carbon intensive exports to the EU from 1 January 2026 for a few sectors such as steel and aluminium is an opportunity to develop a carbon pricing mechanism at home. It will help us to meet sustainability goals and international commitments. Putting in place an open, inclusive and sustainable growth model with supportive policies will aid labour intensive manufacturing, create much needs jobs, stem burgeoning inequality, and also speak to India’s vaunted ambition of becoming developed by 2047. We should start the journey in earnest, now!

Rajat Kathuria is Dean, School of Humanities and Social Sciences and Professor of Economics at the Shiv Nadar Institution of Eminence. 

Views are personal, and do not represent the stand of this publication.