Doubts swirl as India aims to be a developed economy by 2047: ‘there is a big gap’

Narendra Modi’s ruling BJP has vowed in an election pledge to attain developed economy status for India within the next 25 years
But observers caution that uneven development, stalled reforms and a perpetually ‘tough’ business environment are still hurdles to overcome

India

Biman Mukherji

Published: 8:00am, 22 Apr 2024

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Narendra Modi has an assortment of obstacles to surmount, ranging from stalled reforms to high business costs, before he can fulfil his election pledge of propelling India to developed economy status by 2047, economists say.

His ruling Bharatiya Janata Party (BJP) made the promise in a manifesto released on Sunday last week that also vowed to accelerate India’s infrastructure development and transform the country into a global manufacturing powerhouse.

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The Indian prime minister’s party aims to capitalise on reforms rolled out amid his decade in power that have successfully transformed India into one of the world’s fastest-expanding major economies, at a time of slower growth in China.

Despite a challenging global environment, India’s gross domestic product grew by as much as 7.8 per cent in the year to March, according to International Monetary Fund estimates. China, meanwhile, reported GDP growth of 5.2 per cent in 2023.

But economists say a host of legacy issues that could hinder investments still need to be tackled for India to achieve developed nation status.

“Modi has managed to capitalise on the economic growth gains of India as a personal achievement,” said Antonio Fatas, an economics professor at INSEAD business school. “It is fair to say that he and his government are seen as partially responsible for the growth rate of recent years.”

Indian Prime Minister Narendra Modi speaks at a ceremony in Mumbai marking the start of ‘Make in India Week’ in 2016. His economic protectionism is part of the reason for his enduring popularity, economists say. Photo: AFP

Part of the reason for the Indian prime minister’s enduring popularity at home is that he has been “very protective” of local industries, Fatas said.

“This protection comes at a cost to the economy’s overall performance,” he said. “While India has been doing well, it should have done better given how low its GDP per capita is.”

To ascend to developed-nation status, India’s turbocharged growth needs to lift all sectors of society, including the poorest and those living in remote areas, according to economists.

“When we talk of becoming a developed economy, the target has to be clear. A developed nation’s per capita income per year is about US$10,000-US$11,000. Right now, we are a little over US$2,500,” said N R Bhanumurthy, vice-chancellor of Dr B.R. Ambedkar School of Economics University in Bengaluru.

“There is a big gap. What is important is the extent of growth that is inclusive and distributive.”

Cars are seen on an assembly line at a Renault Nissan manufacturing plant in Oragadam, in India’s southern state of Tamil Nadu. Photo: Reuters

But New Delhi needs to prioritise reforms of land and labour laws, as well as capital availability, to achieve inclusive growth, Bhanumurthy said.

Labour reforms, in particular, could be instrumental in enhancing young Indian’s capabilities, he said, so the world’s most populous country can tap its so-called demographic dividend – referring to the fact that around 65 per cent of India’s population is under the age of 35.

While the country’s elite science and engineering colleges continue to churn out graduates who service the global technology sector, many young adults – especially in remote and rural areas – struggle to find jobs because of poor quality education.

Nearly one in five Indians aged 15 to 24 – some 18 per cent – were unemployed as of last year, according to the latest International Labour Organization estimates cited by the World Bank.

Modi has promised to prioritise labour reforms, already passed by parliament in 2020, if he is reelected. Opinion polls have projected the ruling BJP to win.

Implementation of India’s new labour code has stalled, despite winning parliamentary approval, amid resistance from labour unions who oppose its easier hiring-and-firing provisions and restrictions on their activities.

As its population swells, can India chart a China-like path in manufacturing?

Grass-roots challenge

India’s business environment remains challenging despite the government’s efforts to implement reforms such as productivity-linked incentive programmes aimed at stimulating the manufacturing sector, said Debashis Basu, a chartered accountant, author and portfolio manager.

“The talk may be of India being a global [investment] destination after China, but the fact is foreign direct investment into India is not increasing because doing business is tough in India,” he said.

According to government data, FDI into India fell nearly 13 per cent year on year in the April-December period, from US$36.7 billion to US$32 billion.

Officials insist the figures reflected a temporary dip, but economists have expressed concerns over high import duties, slow government approvals and opaque rules. Still, global manufacturers such as Tesla and iPhone maker Apple have expressed interest in opening factories in India.

Tesla CEO Elon Musk had been expected to announce plans for a new plant in India this week, taking advantage of a new EV policy that relaxes import restrictions. But on Saturday he abruptly postponed his planned trip, citing “very heavy Tesla obligations”, and said he looked forward to visiting later in the year.

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Musk’s postponement amid ongoing elections invited a jibe from opposition politician Jairam Ramesh, general secretary of the Congress party, who said “he too has now read the writing on the wall”.

But Finance Minister Nirmala Sitharaman dismissed such speculation, telling local media the government “will do everything to make it attractive” for major companies to invest in India.

More global firms have certainly shown an interest in recent years as they look to diversify their operations out of China. While some Indian states have fared better than others by offering incentives to foreign firms, others have lagged in encouraging investments.

“What people don’t realise is that for reforms to progress it has to sink down to the grass-roots level,” Basu said. “There are too many rules at the state and district level. It is not just the central government and what Modi wants that determines the fate of projects.”

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Most analysts agree that Modi’s BJP has sped up development of infrastructure such as roads and airports, but noted that port development still lagged behind other nations, especially China.

Biswajit Dhar, vice-president of the Council for Social Development, a research and advocacy NGO, said India needed a clear strategy to improve efficiencies and boost manufacturing. This included developing ports and nurturing innovation by promoting research and development, he said.

Doing so meant resisting “earning political brownie points” by rolling out policies like free food programmes, he said. “We need to create jobs. Only when they get that will they climb up the income ladder.”