Ahead of US President Barack Obama’s second visit to Delhi, many international eyes were on the Indian economy which, after having flagged for several years, is showing significant signs of renewed vitality.
A decade ago, India was frequently bracketed with China as one of the BRIC economies — rising global powers whose young population and sheer size gave them huge potential. However, while China has romped ahead, growing at double-digit rates, India, the world’s largest democracy, has sometimes struggled to live up to those hopes.
The IMF last week predicted that India could overtake China to become the world’s fastest-growing major economy by next year, with a growth rate of 6.5 percent, topping its prediction for China of 6.3 percent.
Last year, India’s economy grew by only 5.8 percent, against China’s 7.4 percent, according to forecasts published by the IMF, and by 5 percent compared with 7.8 percent for China in 2013.
“That’s a reasonable assessment. China has hit a demographic trap. But India’s working population is increasing all the time, producing, saving and consuming,” Delhi-based economist and analyst Mohan Guruswamy said.
Some observers are more conservative in their assessment, but few doubt the dramatic change in atmosphere attributable to the landslide victory of Indian Prime Minister Narendra Modi and his Bharatiya Janata Party in last year’s election, and the appointment of respected economist Raghuram Rajan as Reserve Bank of India governor.
Rajan surprised financial markets by cutting interest rates earlier this month, as the falling cost of oil dampened the risks of inflation. Modi, who was elected on a pro-development platform, has promised to push through some of the major reforms long called for by financial institutions and foreign investors, cutting red tape, slashing subsidies and easing the path for overseas firms.
Though some are growing impatient at the delay in big-ticket measures, the difference to the sense of drift of the lattter years of India’s last administration — led by the center-left Congress Party — is marked. Low oil prices have also given India’s public finances a big boost.
However, the IMF said that the prospects for a pick up in growth could be threatened by “any slackening in the reform momentum.”
“I think the reform plans of the new prime minister are promising. We are going to have to see the speed of the implementation,” IMF research department deputy director Gian Maria Milesi-Ferretti said.
“The main challenge for India is creating jobs,” Guruswamy added. “There needs to be rapid industrialization in India, and that needs reforms of labor laws and land acquisition procedures, among many other things.”
Few doubt, however, the scale of the obstacles that remain. Bureaucracy and red tape, as well as a huge deficit in infrastructure and a severe lack of skilled workers, could all combine to put the brakes on growth. Bad loans are a major issue for Indian banks, and much of the country remains mired in poverty. Ministers admit privately that skill levels are very low.
The government also currently lacks a majority in the upper house of India’s National Assembly, a problem which, thanks to India’s voting system, is unlikely to be resolved until 2017 or later. This makes passing major reforms significantly more difficult.
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