India: the new tiger?

India requires a series of major structural reforms to realise its

economic potential. If these are achieved then India could follow

in China’s footsteps as the most dynamic emerging market

economy. However, if India fails to reform its restrictive policies,

the economic pressures, such as rising unemployment and social

unrest, would be extremely damaging.

India faces a fork in the road, with important implication for the country and the region. After sweeping to power last year, there are great expectations that India’s Prime Minister Narendra Modi will deliver on badly needed reforms. He campaigned on a promise to bring a Gujarat-style of government to New Delhi, one where government works as a facilitator for business rather than a barricade. As the first prime minister to hail from the ranks of state government, Modi brings a unique perspective to governance and is attempting to upset the status quo. The pace of reforms may have disappointed those hoping for a rapid transformation, but the decisions taken so far have still been important: easier regulation, streamlined approval processes and

improving the functioning of the executive government.

This is helping to clear the supply and governance bottlenecks that

have been holding back growth. Although the new government has   made a good start, much deeper structural reforms will be necessary if  India is to raise its potential growth significantly and become a middle-income country over the coming decades. Indeed, there is the opportunity for India to overtake China as the fastest growing large emerging market. Modi will need to shift his focus though from improving bureaucracy to changing India’s growth model fundamentally. Due to the rapid growth in the country’s working age population, India will need to create an additional 10 million jobs per year to absorb the growing labour force. Since the economy began to liberalise in 1991,India has been excessively reliant on services-led growth. Manufacturing will now have to take up more of the slack.

Modi’s campaign slogan, “Make in India”, will therefore need to be made a reality. In this Global Perspective, we set out the challenges in more detail, including the precise reforms that are necessary to turn India into Asia’s new tiger. The downsides if the government raises hopes but fails to press ahead are palpable, not only the threat of weaker growth and

greater social unrest but also a turnaround in already high investor expectations about the prospects for Indian assets.

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