India continues on its remarkable economic growth journey

The Indian economy is still performing well, with foreign investment and looser regulations driving significant growth in the country. However, low living standards and a host of socioeconomic issues are impeding its ascension to ‘developed’ market status

India is looking to bridge the gap between its current 'emerging' market status and the coveted 'developed' market classification
India is looking to bridge the gap between its current 'emerging' market status and the coveted 'developed' market classification  

“Let the whole world hear it loud and clear. India is now wide awake. We shall prevail. We shall overcome.”

Those iconic words were spoken in 1991 by India’s finance minister at the time, Manmohan Singh, when the country embarked upon its most innovative economic reform yet. Since then, India has experienced extraordinary financial growth (see Fig 1), and is now the world’s sixth-largest economy by nominal GDP. The IMF predicts that by the end of 2018, India will have moved into fifth place, knocking the UK from the position that it has occupied since 2014.

Low standards of living, inadequate healthcare and corruption have prevented the country from escaping its emerging market categorisation

India’s journey to economic ascendancy has been facilitated by a multitude of factors, including an influx of foreign investment and an end to the country’s highly restrictive licensing regulations. These changes have bolstered the country’s international economic standing, allowing it to compete with developed nations like the UK and the US for market dominance in sectors such as technological infrastructure and e-commerce.

However, low standards of living, an inadequate healthcare system and high levels of corruption have impeded progress. These factors have prevented the country from escaping the confines of its ‘emerging market’ categorisation and ascending to the highly coveted ‘developed’ market status.

Road to modernity
India’s autonomous economic story began in 1947, after it was granted freedom from British rule. Prior to independence, the country’s economy had been relatively stagnant, growing at around one percent per year. It began to expand slowly in the late 1940s, but any significant growth was impeded by the country’s centralised, socialism-inspired economic model.

GDP growth in India remained at around 3.5 percent per year up until 1991, with per capita growth struggling at around 1.3 percent. This was down to the extensive nationalisation process that took place during the 1950s, which consolidated economic power in the hands of the state. The process began in 1951 with the Industries (Development and Regulation) Act, which gave the government control over 38 key industries and 171 products, ranging from coal and precious metals to fans and sewing machines. Economic freedom in the country was extremely constrained and regional disparity was common, given that the government had the power to determine the location and size of certain industries. It was handed even more power in 1953 with the Air Corporations Act, which effectively turned the market-driven, consumer-centric civil aviation industry into a nationalised moneymaking machine.

The state’s power was cemented further in 1956 with the Industrial Policy Resolution, which classified industry into three categories. Innovation and development of ‘category one’ and ‘category two’ industries was entirely driven by the state, while ‘category three’ industries were left to the private sector, although operational licences had to be obtained by citizens.


Annual e-commerce sales in India in 2017


Expected annual e-commerce sales in India by 2026


Largest global start-up hub


Number of start-ups across India

Known as the Licence Raj, this series of policies strangled the economy by curbing entrepreneurship and putting the country’s fiscal future entirely in the hands of state bureaucrats. Dr Ruth Kattumuri, founder of the London School of Economics’ India Observatory, told World Finance: “1956 was the first consolidated industrial policy post-independence, and it reflected the government’s socialistic focus for the development of society. The policy structure allowed the state to exercise much more power, making the country much more inward-looking, which was detrimental to growth.”

India’s economic narrative continued in that same vein for the next 35 years, with the insurance, banking and coal industries also undergoing the nationalisation treatment during the 1960s and 1970s. A significant shift came, though, with the government’s statement on industrial policy in 1991. In his book 70 Policies that Shaped India: 1947 to 2017, Independence to $2.5 Trillion, economist Gautam Chikermane remarked: “If the Industrial Policy Resolution of 1956 was the single most important policy that shut India down, the 1991 statement on industrial policy is the overarching architecture that opened all doors.” The statement abolished the Licence Raj, opened up state-controlled industries to foreign technology investment and regulated unfair trade practices: in effect, it set India on the path to becoming the modern open economy that it is today. Chikermane told World Finance: “This was the time that India became serious about GDP growth – it has been the landmark policy of the past 25 years. The India that you see today wouldn’t be there if it wasn’t for this policy.”

Unpacking the nomenclature
Today, India’s economy is caught somewhere between ‘emerging’ and ‘developed’ status. In some areas, it is nipping at the heels of its market neighbours; in others, it lags well behind.

India’s economy is caught somewhere between ‘emerging’ and ‘developed’ status

India was first classified as an emerging market by former Goldman Sachs analyst Jim O’Neill, who coined the term ‘BRIC economies’. He decreed in 2001 that Brazil, Russia, India, and China’s economies were expanding at a much faster rate than those of the G7. O’Neill posited that the BRIC nations could become the four most dominant global economies by 2050, but would have to take certain steps – including political cooperation with regards to trade agreements – in order to progress beyond emerging market status.

An emerging market is defined as a country that has some characteristics of an established market, but does not satisfy all of the demands for it to be categorised as a fully developed economy. According to MSCI, a provider of index data for global markets, the characteristics of an emerging market are: significant openness to foreign ownership and ease of capital flow; good and tested efficiency and stability of the operational framework; and a minimum of three national companies that meet certain market cap and liquidity criteria.

A mixed bag
India has embraced some emerging market characteristics more willingly than others. The country’s operational framework, including elements such as political leadership, health systems, educational opportunities and scientific research, has progressed rapidly since the economic reforms of 1991. By introducing sound fiscal policies of privatisation and tax reductions, the government has allowed industry to take off in cities including Bangalore, Hyderabad and Ahmedabad, which had a knock-on effect on unemployment and quality of living within the surrounding areas. The digital age has also greatly benefitted India, as it has given rise to a new generation of well-educated and highly skilled professionals across STEM industries. To further promote technological development, Prime Minister Narendra Modi has launched various campaigns, including Digital India and Startup India, to bolster digital adoption.

Political corruption remains a significant concern, and one that continues to hold India’s economy back

The country is also becoming more receptive to foreign ownership, with Modi introducing changes to regulation in 2016 and 2018 to make it easier for international firms to invest in Indian businesses. Under these reforms, airlines, some defence industries and real estate brokerages may now be 100 percent foreign-owned, while investment rules in pharmaceuticals and food production have also been relaxed. The government claimed in a 2016 statement that India “is now the most open economy in the world for foreign direct investment”. Kattumuri reaffirmed this, observing: “There is a lot of variation between states, with some more open than others. Modi’s government has really pushed for FDI, in part because Modi himself comes from a state where people are really entrepreneurial, so he has invested his energy into driving private sector investment and FDI.”

Political corruption, however, remains a significant concern and one that continues to hold India’s economy back. Transparency International, an NGO that works to combat global corruption, placed India 81st out of 180 countries on its 2017 Corruption Perceptions Index, due to complex tax and licensing systems, the prevalence of government bribing and state monopolisation on certain goods. According to a 2005 report by the same organisation, more than 92 percent of Indians had first-hand experience of paying bribes to public servants. The country is attempting to crack down on the practice, but the widespread nature of corruption in India means it is a lengthy process.

Still on track
Despite some political reticence, India does fulfil all of the emerging market criteria. In certain categories, in fact, the country extends well beyond the confines of that definition and into developed economy territory. In order to progress to this higher status, a country must achieve a high GDP and GDP per capita, a high level of industrialisation, substantial technological infrastructure, sustainable economic development, and a high standard of living.

India’s GDP is expanding at an exponential rate, having surged 8.8 percent between July 2017 and July 2018. The country is also performing extremely well with regards to other economic benchmarks including purchasing power parity, for which the World Bank ranked it third in the world in 2017. The country was also ranked first in AT Kearney’s Global Retail Development Index in 2017, and it has one of the world’s fastest-growing e-commerce markets, with sales expected to reach $200bn by 2026, up from $39bn in 2017.

However, India’s per capita GDP trails well behind its other economic benchmarks. According to 2017 statistics from the World Bank, GDP per capita equated to $1,939 (see Fig 2), making it 140th in the world. That figure is a far cry from the $12,000-$15,000 benchmark that most economists consider to be the necessary GDP per capita for a country to be labelled a developed economy.

“India is a very populous nation,” explained Chikermane, noting that the large population has a lowering effect on GDP per capita by distributing wealth over a vast number of citizens. “Our GDP is $2.6trn, which is approximately equal to that of the UK, but our population is 20 times theirs. Clearly in terms of per capita, we have a long way to go.” Inequality is also a particularly pertinent problem, as the gap between the richest and poorest residents of the country has widened significantly over the past 10 to 15 years. “The GDP per capita is an indication that India needs to focus on tackling inequality,” said Kattumuri. “This includes exploring how we can provide greater equal opportunities, and how we [can] enable more inclusive growth across different economic and social strata.”

In certain areas, though, India is on par with the world’s developed economies. It is a major exporter of business process outsourcing services, IT infrastructure and software services, all of which drove $154bn of revenue in 2017. It is the world’s second-largest start-up hub, according to Startup Ranking’s latest data, with more than 5,700 such firms located in the country. India has a highly advanced technological infrastructure, underpinned by an efficient quotidian service and manufacturing economy. It has the second-largest telecommunications market in the world and, according to the International Telecom Union’s Global ICT Development Index, India will soon be in the top 10, having been 134th just two years ago.

Faster and faster
It’s clear that rapid growth is a prominent facet of the Indian economy, but the key concern for the country now is ensuring that this growth is sustainable. According to MSCI, sustainable economic development is the vital characteristic that sets an emerging market apart from a developed one. It is defined as growth that satisfies contemporary human needs, but in a manner that sustains natural resources and the environment for future generations. It is here that India falls down.

Classification as a developed economy could provide India with a seat at some of the world’s most prestigious tables

The country does not have the societal infrastructure to support the needs of its population, let alone its future citizens – particularly if population growth continues to gather speed. The greatest issue at present is lack of access to clean water, which affects more than 163 million people across the country – the highest proportion in the world, according to a new study from Water Aid. Some 64.3 million people live in extreme poverty with no access to housing or healthcare. India also has the third-largest HIV epidemic in the world, with 2.1 million people living with the disease at last count.

Lack of sustainable development is also a major concern in the agriculture sector: India placed 33rd out of 34 countries in The Economist Intelligence Unit’s 2017 Food Sustainability Index. While the country has taken proactive steps to reduce food waste in recent years, nutrition remains a significant problem, with an extremely high rate of malnutrition and nutrient deficiency. Water availability is also problematic, as crops and livestock take a heavy toll on India’s already overstretched water system, while there remains a distinct lack of water-recycling initiatives.

“I think our healthcare, our education and the social infrastructure, the human development… They all need to be looked at and we need to work on them,” said Chikermane. “The good news is that we are. For instance, two years ago India had the world’s largest number of poor people, [and] that is no longer the case. Gradually we are pulling people out of poverty. There is also a new healthcare scheme that has just been introduced to try and reach the 100 million poorest households of India. So, one step at a time, we are getting there. However, any scheme needs a huge amount of money because our budget is allocated across a very large number of people. And there are many other needs – healthcare, education, infrastructure, security, defence and so on; all these are requirements that the Indian state needs to negotiate.”

Knock-on effect
While India does exhibit many of the characteristics of a developed nation, inconsistencies across the board and a lack of societal infrastructure hold the country back from attaining the corresponding status. That’s not to say that it won’t ever get there, as many economists have predicted. However, a 2018 report by SBI, the country’s largest lender, warned: “India has perhaps now only a limited window of a decade to get into the developed country tag, or stay perpetually in the emerging group of economies. Policymakers, wake up and smell the coffee!”

If India is to drive up its GDP per capita, it must reconsider the pricing of those aspects of its international relationships

Then there’s the question of what happens on a global level when India does rise to developed economy status. It would be the second Asian country, after Japan, to achieve that accolade, which could have major implications for international markets. “I think the rise of India will be good for the world,” said Chikermane. “India tries to be more inclusive – we are open to trade, we are accepting, we have really embraced globalisation.”

It could also affect business relationships between India and western nations like the UK, which is notorious for using Indian amenities such as call centres as cheap alternatives to employing British workers. If India is to drive up its GDP per capita, it must reconsider the pricing of those aspects of its international relationships. This could have knock-on effects for other countries, as they may find themselves facing the decision of paying inflated bills or risking an internal labour shortage. Moreover, if nations turn elsewhere for cheaper service in sectors such as business process outsourcing, India would lose a significant proportion of its import revenue – and the country doesn’t have many other highly developed industries to fall back on as yet. Such a move could see it knocked back down the global rankings in no time at all.

There’s also the geopolitical aspect to consider. Classification as a developed economy could provide India with a seat at some of the world’s most prestigious tables, including the G7. At those summits, discussion does not solely centre on economic factors, but also incorporates political values. Although India is steadily becoming more closely aligned with the values of G7 nations, particularly with regards to LGBTQ rights, it has not wholly caught up just yet: it has come under scrutiny in recent years for purchasing weapons from Russia, and its crime rates – particularly with regards to rape, kidnapping and domestic violence – are concerningly high. Being considered a developed economy comes with wider sociocultural responsibilities: the economic aspect will not be treated in isolation, but rather as part of a holistic view of the country.

Chikermane is confident that India will “rise to the occasion” in fulfilling the responsibility that comes with being a global economic power. “Given things today, I don’t see India as an aggressive player – it will be an all-embracing, peaceful power, catalysing other countries with regards to trade, FDI, and so on,” he said. With regards to India’s technological prowess and democratic values, there’s much cause for international optimism. First, though, the country must get its house in order.