India in need of a long-term growth vision

Is India’s $2tn economy finally on track to reach the long-term target of taking its place as the world’s third largest, behind China and the US? With an improving investment climate, that moment might not be too far away, says Jim O’Neill, a former chairman of Goldman Sachs Asset Management, who is currently honorary professor of economics at Manchester University. “By 2017, India could surpass Italy and Brazil to become the world’s seventh largest economy; by 2020, there is a reasonable chance that it will overtake France and the UK to become the fifth largest,” says O’Neill.International Monetary Fund chief Christine Lagarde on Monday singled out India as a bright star in an otherwise cloudy horizon of global growth. India’s adoption of flexible inflation targeting and the budget’s focus on infrastructure spending and fiscal consolidation are steps in the right direction, Lagarde said.The IMF forecasts India’s gross domestic product to grow 7.2% in the coming fiscal year, compared with the global rate of just 3.5% for 2015. Since Prime Minister Narendra Modi came to power last May, inflation has fallen to around 5% while the revised GDP calculation has put growth for the current financial year at 7.4%. Aided by the plunge in global oil prices, the momentum in Asia’s third largest economy is now outpacing China’s. India’s demographics are considerably better than China’s, and the size and growth rate of a country’s workforce along with productivity are the two key factors that drive long-term economic performance, according to O’Neill. India ranks 60th in the world for economic competitiveness, much lower than China (29) South Korea (25) and France (23). India is placed 142 of 189 countries in the latest update of the World Bank’s ease of doing business ranking. More basically, public health and education standards remain low (102), while inadequate transport, communication, and energy infrastructure standards (85) are undermining India’s productivity growth. India needs to take bolder measures to anchor long-term growth and employ a workforce that will become the world’s largest by 2030. Overtaking Germany and Japan will require firm measure to overhaul education and health standards with a sound economic policy. Make no mistake, India’s consumer-driven economy (one of the world’s 10 largest; and third largest on purchasing power parity) offers tantalising prospects for investors. A $1 spent on India’s infrastructure will have a multiplying effect of $5 in the wider economy, according to Marios Maratheftis, global head of macro research at Standard Chartered. India, for sure, can dream big. But the country’s policy-makers need to learn from mistakes committed in the past to adopt a more stable framework for monetary and fiscal policy. The shallow, short-term economic thinking should give way to a sustainable long-term growth vision to lift millions out of poverty and ensure social inclusion for the marginalised sections. Bold reforms call for bold implementation.