The Indian economy isn’t ready for takeoff just yet, despite its fast GDP growth

The Indian economy isn’t ready for takeoff just yet, despite its fast GDP growth

In actuality, the Indian GDP has increased by less than 4% since the final quarter before the epidemic and just over 3% for the last three years.

India’s government statisticians noted a 13.5% growth in the quarter from April to June of this year. As a result, the nation swiftly overtook Great Britain to establish itself as the nation with the greatest economy and the quickest rate of development worldwide.

Unfortunately, the good news about India’s potential for progress ends there. These GDP projections were underwhelming because India shut down during the same quarter of last year due to the deadly Covid epidemic caused by the Delta virus; according to a Bloomberg survey of analysts, growth would have topped 15%.

In reality, India’s GDP has grown by less than 4% over the past quarter and by little more than 3% over the past three years. The current fiscal year expires in March 2023 and is unlikely to break any records since, according to the majority of analysts, real growth won’t even reach 7% from a low base.

If you look for them, you could find reasons to be optimistic. For instance, capacity utilization recently surpassed 75% in India’s industrial sector, the most significant level in more than ten years.

Some economists claim that this demonstrates that the problem of weak private sector investment, which has dogged the Indian macroeconomic system for the last ten years, won’t be a growth inhibitor moving forward. Although they are 2.5 percentage points lower than they were before the outbreak, investment levels as a proportion of inflation-adjusted GDP remain below average.

Some Indian authorities think it’s just a matter of time until high investment and growth return, and that the good policy reforms implemented in recent years, such as the reform of indirect taxes and new industrial strategies that emphasize local manufacturing, will pay off in the long run.

However, such an assertion has been made several times previously.

If India wants to get back on the path of rapid economic growth, it simply cannot afford to get complacent. The country’s combination of policies still lacks a solid understanding of what investors require. In a world of rising interest rates and a risk-off mentality, India still lacks sufficient investible projects with the right risk-return profile.

Even now, a sizable amount of capital still enters India, but it primarily comes from sources that can accept some risk, like private equity, or it goes to companies who are seen as being skilled at managing political risk, like Adani Enterprises Ltd.

Smaller companies or those in the infrastructure industry, which support employee growth and broader economic progress, receive less attention. Even foreign portfolio investors have noticed that over the past 10 years, returns on Indian equities have not exceeded the far more open US market. Future government initiatives ought to focus on increasing the private sector’s ability to obtain funding by reducing environmental risk.

That necessitates implementing measures that have been known about and advocated for a long time but were shelved in favour of more conspicuous subsidies and interventionist policies.

For instance, modifications to the legal and administrative systems no longer apply. In India, resolving conflicts is still a nightmare. India is ranked 163 internationally for contract enforcement in the World Bank’s 2020 Ease of Doing Business report. In the courts, it took an average of 1,445 days to settle commercial disputes. The Indian government maintains that since the World Bank ceased disclosing its impartial evaluations of the business environment, these numbers have improved.

However, investors in India still have a real concern about going to court. Even the conventional government bankruptcy procedure has stalled; last month, the National Company Law Tribunal announced that it will only hear “urgent” cases because 30 of its 63 court locations are still vacant. The scope of arbitration, particularly international arbitration, might be increased as a measure to make up for the lack of judicial and administrative advancements. In contrast, India has reversed course in the last 10 years, unilaterally exiting bilateral investment agreements and taking actions to defend the primacy of regional courts. Since they were faulty ideas, they need to be remedied.

The way people think has changed. India must demonstrate to potential investors that the country offers a secure environment for their money as well as the possibility of good returns. That calls for a very different set of changes than the ones the administration has felt confident implementing thus far.

Unless authorities take swift action to alter the general risk profile for investment in India, it is unlikely that private investment would increase to the levels required for sustained and transformative high growth.

edited and proofread by nikita sharma