The Indian subcontinent is about to become the fifth largest economy in the world and could rise to first place in 2050. But there are gigantic challenges ahead.
In 2018, by means of a growth rate which is forecast at 7.4%, India will become the fifth largest economy in the world, ahead of France and the UK, despite a major hiccough at the beginning of 2017 caused by demonetization which was begun in 2016 and which took 85% of the banknotes out of circulation in order to crush the black economy and endemic corruption. Whilst the principle was excellent, the operation created havoc because it was ill-prepared. It caused growth to fall to 5.7% and 1.5 million jobs to be lost.
Nevertheless, the Indian economy has quickly regained its rate of progression of more than 7% per annum since 2014, which makes it the most dynamic country among the G20. Better still, its development is well-balanced, with diversification in service industries, especially within centers of excellence in the digital sector. Officially, unemployment is no more than 3.5% of the working population. Annual inflation has plummeted from 10% to 2.4%. The current account deficit is being maintained at 2% of GDP. The public deficit has been reduced to 3.5%, as opposed to 4.9% in 2010, and the debt is stable at 69.5% of GDP.
These remarkable results show the benefit felt from the sharp drop in the price of energy and raw materials, as well as the abundance of liquidity. Furthermore, India has a high potential because of the distance it can catch up, for annual per capita income is 1,900 dollars compared to 8,200 dollars in China. But the main growth accelerator derives from the reforms undertaken by Narenda Modi.
Elected in 2014 to revive development and reduce poverty, Narenda Modi initially came up against opposition from the Upper Chamber and the bureaucracy, but then went on to give India some unprecedented shock therapy. It was a shock to production, with the “Make in India” campaign, designed to energize industry and employment. It was a monetary shock with the conversion of liquidity into bank accounts. It was a fiscal shock with the creation on 1st July 2017 of a single national tax on goods and services that replaced the myriad of local withholding taxes imposed by the country’s 29 States. It was a shock to accountancy too, when, in 2018, the tax year began on 1st January instead of 1st April – a tradition inherited from the days when it was a British colony. It was a financial shock with the recapitalization of state-owned banks to the tune of 32 billion dollars over two years to boost lending facilities to businesses. It was a regulatory shock, with liberalization coming to the financial, audiovisual and defense sectors and the opening of infrastructures to foreign investors.
With this momentum, India, which accounted for a quarter of world production in the early 18th century, could rank number three in global economic power by 2032, and even make first place by 2050, when the subcontinent will have a population of 1.7 billion. But gigantic challenges are ahead and, in order to face them, the country must undergo a massive transformation for it has some spectacular flaws. Infant mortality remains extremely high, at 42‰. Alongside the decrease in poverty has come an explosion in inequality, for 56% of income is in the hands of the wealthiest 10%, compared to 30% in 1980. The educational system is one of the least successful in the world. Banks’ balance sheets are being crippled by a 12% level of dubious loans and they need 90 billion dollars’ worth of recapitalization. The lack of infrastructures, corruption and poor international perspectives are a hindrance to development.
Narendra Modi has a strong record and solid party support from the BJP which controls 78% of India, so he is heading into the 2019 elections in a position of strength. However, political and geopolitical risks are increasing sharply. Narendra Modi is undoubtedly the right man where growth is concerned, but he also represents the radicalization of Hindu nationalism versus the Moslem minority – 14% of the population. India therefore finds itself held in a vise: between the rise of Islam and the rise of China, which is pursuing a methodical strategy of encirclement by land and sea through the new silk roads, and notably by the planned economic corridor with Pakistan. Between June and September 2017, tension between the two giants mounted to a dangerous point with an armed standoff on the Doklam plateau.
Four lessons can be learned from India’s emergence:
- The world’s tilt toward Asia is accelerating, for Asia is now the home of three of the five leading global economies.
- Within the framework of globalization, nations are now being ranked according to their ability to reform – and this is where Xi Jinping’s China holds the advantage.
- India will play a key role in the over-riding issue facing us in the 21st century: the confrontation between democracy and démocrature (a combination of democracy and dictatorship).
- Faced by India and China, European nations have no choice but to strengthen their integration and make the European Union into an autonomous strategic player, including in the field of security.
(Column published in Le Point, 11th January 2017)