India will kick off a six-week-long election starting Thursday. As the election nears, the debate over the Indian economic situation has revved up. The incumbent Bharatiya Janata Party (BJP) has turned in a shining record as GDP growth from 2014 to 2018 remained steadily at and above 6.7 percent, placing it in the top spot among major economies.
Despite the debate, there is no denying the fact that India's economy has been doing well. The average annual GDP growth rate during 2014-18 rose above 7.2 percent, while other economic indicators such as inflation rate and deficit to GDP ratio dropped. Both domestic reform and a favorable international economic environment have fueled India's economic development.
First, India has improved its business environment to attract foreign investment. India scrapped its Foreign Investment Promotion Board in May 2017. Aside from a few sectors such as defense, aviation and media, more than 20 industries now allow 100 percent foreign direct investment (FDI). Since "Make in India" was launched, FDI inflow grew 55 percent and FDI equity inflow grew 63 percent.
Second, the international economic environment benefits India, especially falling crude oil prices, which have granted India more economic leverage. From 2009 to 2014, when the National Congress Party was in office, the oil price averaged $96 per barrel and even once surpassed $100 per barrel. Expensive oil prices have increased India's trade deficit, pushing up prices for gas and oil. This has further triggered rupee depreciation and upset the Indian people. But when the BJP took over, the average oil price was only $61 per barrel, which reduced India's oil import costs by one-third. Therefore, the Modi administration managed to maintain a low inflation rate while implementing expansion fiscal policies.
Agriculture faces challenges. Despite the fact that Indian agricultural output continues to go up, the price of agricultural products remains suppressed. The disposable income of Indian farmers has declined continuously. Apart from low international oil prices, sunken food prices have also contributed to the falling inflation rate. Inflation rates for sectors not related to food and energy still remain high.
The construction and services sectors - two labor intensive industries - have also seen less growth than in previous administrations. This means that India's economic development cannot benefit the public.
Private enterprises' earnings after taxes decreased slightly - especially in 2017 when, due to the disturbance of demonetization and tax reform, private business saw significantly smaller gains after taxes.
Domestic investment and exports slumped. Domestic investment has been lackluster because a considerable amount of non-performing debt has accumulated. Banks are reluctant to issue loans while companies are afraid of borrowing, creating a downward spiral. Economic reform has constrained the export sector since many small and medium-sized enterprises have had a hard time adapting to standardized management, which has brought up their operating costs and negatively affected their international competitiveness.
However, the Indian economy still has great development opportunities in the long run.
First, India has a strong labor supply. The country can cash out its population dividend. India boasts a population the size of China's, but the Indian population is much younger. It also benefits from an English language advantage and relatively low GDP per capita. The competitiveness of labor costs and sustainability of labor supply are both quite high.
The country's tax reform has also facilitated the free flow of commodities across states and promoted economic integration.
India ranked 77th in ease of doing business, according to the World Bank report on business environment. The Insolvency and Bankruptcy Code issued in 2016 has saved trillions of rupees' worth of state-owned assets.
However, the structural barriers that hold back India's economic development still exist. The low efficiency in converting farmland to development use has no clear solution. The intense relationship between environmental protection, labor rights and development must be eased. These have delayed economic development and increased companies' investment costs.
The Indian government has advanced a series of reforms, removing restrictions on companies in the past few years. But the effects are not yet clear. Foreign companies have focused on acquisition of local companies but showed limited interest in launching new factories. Because of this, India's fast-growing economy has struggled to increase the employment rate. The public support for economic reforms is weakened as the Indian people grow less satisfied with economic development.
The problems in India's economic development have been created because the country's political system is mismatched with its social, economic and cultural background. Like Giriraj Singh, head of the Ministry of Micro, Small and Medium Enterprises, once said, too many protests against government policies prevent India from becoming like China or Singapore.
The author is director of Center for South Asian Studies, Fudan University. bizopinion@globaltimes.com.cn
