With the new year around the corner, it is useful to think ahead and ask: what is going to be the big economic issue in India in 2025? There is little doubt that it is going to be the growth slowdown. For a rich country like the US with an annual per capita GDP of $86,000, slowing growth does not hurt a lot. But for a poor country like India, with a per capita GDP of only $2,700, slowdowns are painful and worrisome. To become an advanced country, India will need to grow rapidly for a long period of time. And this is not easy. Only a handful of countries have made it into the elite club. In order to have a good shot at it, India will need a coherent and well-defined growth strategy.
The recently released GDP growth figures have triggered much discussion over whether the slowdown is merely a temporary blip or a warning of a more serious trend. Official statistics show that growth has declined in four out of the last five quarters. In the middle of 2023, the economy was growing at a healthy rate of more than 8 percent. But by the September 2024 quarter, growth had fallen to less than 5½ percent. Official data is plagued by measurement issues, but this slide does seem to reflect reality because it is confirmed by several high frequency indicators. Clearly, there is a growth problem in the Indian economy.
There are also no evident drivers that could reignite the engine of high growth. Consumption demand has been subdued, especially in urban India. Partly as a consequence, private investment has been weak, even though corporate balance sheets are healthy. After all, what is the point of building more factories when existing ones still have plenty of unused capacity? While government investment has been growing rapidly over the past few years, propping up demand, it is soon going to run into fiscal constraints.
So, is India doomed to slow growth? Fortunately the answer is no. There is one major opportunity out there waiting to be seized. Consider some basic data. India’s GDP is roughly $4 trillion while global GDP is a little more than $100 trillion. That means that India’s share of the global economy is around 4 percent. But its share in global goods exports is much smaller, less than 2 percent.
This mismatch suggests a thought experiment. Assume that India decides to bring its export share in sync with its share in the global economy. This would take some time but it seems reasonable to target pushing up India’s export share by 1 percentage point over the next five years. If this could be achieved, it would do wonders for growth.
To see why, let’s pursue the thought experiment further. Assume conservatively that the global market grows merely at the rate of inflation. In that case, an increase in market share from 2 percent to 3 percent would mean a 50 percent increase in India’s export volumes. Translated into annual growth rates, this would imply a 9 percent real increase in goods exports per year. Since goods exports constitute around 13 percent of GDP, this means that the export drive would add more than 1 percentage point to growth every year!
The best part is that such an opportunity is in fact knocking on our door. Many multinational companies are wanting to move out of China. And the only other country with a large population base and strong growth prospects is India. In other words, there is now an historic opening to attract foreign direct investment (FDI) in manufacturing, which all across Asia has been the key to increasing countries’ global export market share. The government, to its credit, has been trying to seize this opportunity by rolling out the well-funded Production Linked Incentives (PLI) subsidy scheme.
So far, however, the results have been disappointing. Last fiscal year, inward FDI was only $66 billion—exactly the same as it was back in 2019-20. Only about one-fifth of this total was in manufacturing. Partly as a result, from March 2022 to September 2024, average year-on-year growth in goods exports was just 4½ percent. In other words, we have not succeeded in taking advantage of the massive opportunity that still exists.
What therefore needs to be done? India needs to adopt a well-defined export-led growth strategy, the critical component of which would be minimising risk and policy uncertainty. To give an important example, the country needs a consistent and coherent trade policy that does not involve frequent changes in import tariffs or worse still, import or export bans. It also needs a re-liberalisation of the foreign trade regime, which has become increasingly protectionist and an exchange rate that responds to market forces as opposed to being very actively managed by the central bank in a way that erodes the competitiveness of Indian exports. And it needs a level playing field for all firms.
More generally, policy needs to be much more transparent and predictable, without sudden flip-flops. If we can create such an environment in India, not only would foreign firms feel confident to set up shop here and export from here, but this could provide a fillip to domestic investment as well. All firms look for the same thing when they contemplate a major investment that might last 10-20 years: they want an assurance of macroeconomic stability and policy certainty.
India is facing a historic opportunity to achieve rapid growth by increasing FDI and raising its share of global good exports. What is urgently needed for this growth strategy to work is predictability and certainty on the policy front, as well as a reorientation towards a free-trade mindset. It could be a costly mistake to let this opportunity pass, especially if India aspires to become a developed economy by 2047.
