New India’s Economic Growth: The Good, The Bad, The Ugly

India in recent years has been one of the world’s fastest-growing economies and has been able to achieve an almost 7% growth rate for the last 10 years. There are very few countries in the world that have maintained such a steady growth rate over such a long period of time. Except for China no other large economy till very recently could boast such high growth rates.

It was only in the last few years that India’s economic growth slowed down dramatically to an abysmal rate of less than 4% in the last quarter of the financial year 2019-2020. At the end of this quarter that the government announced a nationwide lockdown to combat the Covid-19 pandemic. This means that most of the economic losses due to which such a bad rate is projected are not necessarily linked to the lockdown but rather to the problems in the economy itself.

India's Real GDP Growth
India’s Real GDP Growth

Today India is experiencing a recession wherein economic performance due to the Covid-19 pandemic and lockdown has been severely affected. Due to the lack of economic activity, the growth plummeted but so has the quality of life of many who might have paid the human or the financial cost of this crisis.

And yet India is today the world’s fifth-largest economy by Nominal GDP behind the US, China, Japan, and Germany and third-largest by GDP PPP behind China and the USA. This is due to India’s high rates of growth experienced by India during the 21st century and the liberalized economy created due to the 1991 economic crisis and eventual reforms.

Since independence and until that point India was following a socialist form of economic system wherein restrictions would be imposed upon the market, disallowing it to trade within itself as well as other markets severely inhibiting economic growth. It was because of these reforms that India saw a sudden boom in economic activity as well as the growth rate.

Fundamentals of India’s Economic Growth

Most of India’s growth since the reforms has been based mainly upon services, such as providing outsourcing for tech companies or by contributing to the IT and tech industries. Unlike China, India even today is not a significant manufacturer and continues to lag behind in the manufacturing sector due to various reasons, acquisitions of land, labour, capital being among other reasons.

India being a destination for international tech and IT companies is because of the fact that India has a large number of engineers, especially software, so it is easier for companies to set up and function, not to mention that fact that Indians can speak English, albeit to varying degrees of proficiency, something which most Chinese, or any other country with a low cost of labour, cannot.

Due to this lower cost of Labour in India as well as the fact that India is a democracy and is believed to have the potential to continue growing at a good rate even in the future means that companies are unafraid to make investments in India.

India Is also one of the youngest nations in the world in terms of the average age of the population, which is 26 years, compared to China’s 37 years and 38 in the US. This means that there is a greater percentage of the working-age population in India than that of the non-working age or the retired population. This means that there are more people who can work and potentially contribute to the economy than those who cannot.

China’s Influence on India’s Economic Growth

Today China is becoming a less and less viable destination for businesses because of not only the fact that its economic growth has been slowing in the past few years but also because of certain political decisions that it has taken with respect to some of its internal matters.

The recent heavy-handed clampdown on pro-democracy protests in Hong Kong and the subsequent prosecution of many students and other protest leaders. In recent weeks China has convicted many of the protesters and has sentenced them to imprisonment as well. Such acts especially in Hong Kong bring a bad reputation towards China which is not conducive for business in today’s world.

There is also the mistreatment and alleged detention and imprisonment of Uighur Muslims in the Xinjiang autonomous region. The Chinese believe that many of these people have extremist links and areas such as assent to re-education centres to be ‘de-radicalized‘. This has been condemned by many countries including the UN as a human rights abuse. There are also reports that many of these people are employed as slave labourers which have caused concerns among many companies producing in China.

All of these issues combined with a communist authoritarian state and an aggressive posture in the South China sea, for many businesses the Covid-19 pandemic was the final straw to leave. Such problems don’t exist in India, being a liberal and transparent democracy, as well as close to the western powers, India is politically a much more suitable venue for all businesses.

The Bottom Line

It is to be seen how well India Is able to handle growth after the pandemic, many believe that India’s economy will continue to grow at a good rate once it recovers from the pandemic. India has inherent advantages like a young population, a growing middle class, and a cheap labour force as well as the industry to spur growth.

At this moment it is unlikely that India may come close to China in terms of being able to grow at such a rapid pace, as well as rivalling its economy, but India still has the potential to achieve even double-digit rates of GDP growth year on year, something which would be necessary to compensate for the lost chances for economic growth during the pandemic times.

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Shashank Sekuri
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