This weekend, with President Barack Obama making his second visit to the Indian capital, many international eyes are 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. But 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.
In 2014, India’s economy grew by only 5.8%, against China’s 7.4%, according to forecasts published by the IMF, and by 5% compared with 7.8% 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,” said Mohan Guruswamy, a Delhi-based economist and analyst.
Some observers are more conservative in their assessment, but few doubt the dramatic change in atmosphere attributable to the landslide victory of Narendra Modi and his Bharatiya Janata party in last year’s election, and the appointment of respected economist Raghuram Rajan as governor of the Reserve Bank of India.
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 later years of the last administration – led by the centre-left Congress party – is marked. Low oil prices have also given India’s public finances a big boost.
However, the IMF warned 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,” said Gian Maria Milesi-Ferretti, deputy director of the IMF’s research department.
“The main challenge for India is creating jobs,” added Guruswamy. “There needs to be rapid industrialisation in India, and that needs reforms of labour 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 India’s 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 the 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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