How to future-proof India’s economy

Steady and resilient growth performance by multiple Asian economies has led to the centre of gravity of global geopolitics shifting towards Asia. Amid the changing power balance between nations, India has emerged as a bright spot and potential global leader. With an average growth rate of 7.2%, a favourable demographic profile and a large and growing consumer market, India is likely to be the most compelling growth story of the decade.

Based on the results of the Global Competitiveness Index 4.0, a new methodology that captures the drivers of long-term growth in the Fourth Industrial Revolution, the country’s growth momentum is set to last. India ranks 58th out of 140 economies, with a score of 62.0 on a 0-100 scale. Significantly, the sustained structural reforms initiated by the government seem to be bearing fruit.

India is the most improved G20 economy, with a gain of 1.2 points and five places from the 2017 index. It ranks second among the BRICS and leads South Asia by a wide margin. It remains the region’s principal driving force, outstripping other South Asian countries in all areas of competitiveness except health, openness to foreign competition and mean years of schooling.

India has shown that the right structural reforms and strong macroeconomic stability can be pivotal for a country in improving its investment climate. The economy appears to have recovered from the temporary disruptions caused by the demonetization exercise, as well as by the introduction of the GST. While its GDP growth rate dropped below 7% in the fiscal year 2017, it has since recovered to 7.3% in 2018.

At the same time, the government’s inflation targeting mechanism has ensured that inflation has hovered around the target rate of 4%. Despite pressure on emerging market economies, India was able to improve its macroeconomic stability score from 88.7 to 89.8.

India has made the most significant improvement on the innovation capacity indicator. It ranks 31st, with a score of 53.8, driven mainly by the excellence of its research institutions and quality of its scientific publications. This has been complemented by a high level of entrepreneurial spirit, with the country ranking 23rd on the entrepreneurship indicator. Its path towards digitization, the support of entrepreneurship and the harnessing of technologies have been given a further boost by the World Economic Forum Centre for the Fourth Industrial Revolution India that Prime Minister Modi opened in October.

The country also saw improvement in public sector performance and e-governance structure. The introduction of a new insolvency law has helped make the legal system more efficient at settling disputes, which no doubt will be viewed positively by both foreign and domestic investors. Improved monetary policy framework and easing access to finance conditions has also delivered a strong performance on the SME financing indicator, where India ranks 16th. This can be attributed to the recent amendment to rules on the priority of secured creditors and outside reorganization of debt proceeding.

India’s competitiveness performance of course greatly benefits from the sheer size of its economy. It ranks third, with a score of 92.7, behind only China and the US.

Despite this good performance, India needs to sustain the reform momentum and address areas that can further boost its competitiveness. It is still some 40 points away from the ‘competitiveness frontier’ represented by the 100 mark. Despite unfavorable global economic conditions, policy-makers in India must continue to put a premium on prudent macroeconomic management, including maintaining fiscal and monetary discipline. Furthermore, policies that have helped improve its competitiveness must be maintained. This includes reforms that will help inject further dynamism into the administrative apparatus.

Despite a vibrant innovation and entrepreneurship ecosystem, India's private sector is still burdened by heavy administrative procedures. The time and cost required to start a business remains high, at nearly 29.8 days and 15% of GNI per capita, leading to a score of 70.6 and 92.6 respectively. In New Zealand, which leads the indicator on the time required to start a business, it takes just half a day.

India took a bold and innovative step in creating Invest India, a one stop shop to promote foreign direct investment, which has helped streamline some administrative enablers. However, as the 2018 Global Competition Review shows, other countries are following suit and easing the regulatory framework for domestic investors.

India must continue to invest in its human capital. As demonstrated in the GCR, investing in people is good for both social and economic outcomes. Investments in health, education and skills are among the major drivers of productivity across the globe. India is home to a fifth of the world's youth. Half of its population of 1.3 billion is below the age of 25, and a quarter is below the age of 14. There is no doubt that India’s young population is its most valuable asset. But the demographic dividend could turn into a liability if India’s population does not get healthier and its youth is not equipped with the skills that the economy will require five or ten years from now.

The launch of Ayushman Bharat, the world’s largest universal healthcare scheme, will no doubt reflect an improvement in India’s health outcomes in the coming years. Similarly, the recent report by the World Economic Forum and Observer Research Foundation shows that India’s youth are interested in pursuing higher education and skills development, and are looking to the private sector to help bridge the skills gap.

Global economic conditions are predicted to tighten. On the domestic front, India faces a general election. Nevertheless, reforms to improve the overall investment climate must be maintained. Improving competitiveness will help to spur stronger growth prospects and promote higher and sustained levels of income in the future.