In the early 18th century, India and China were the world’s two largest economies. However, India’s industrialization was stunted by British colonization, and at the time of independence in 1947, India only accounted for 3% of global GDP. In 1991, when India embarked on its liberalization journey, that figure had fallen to 1.1% (at market exchange rates), but today, India contributes 3.6% of world GDP. If India can maintain its growth rate of 6% or more, it could account for 10% or more of the global economy by the time of its modern nationhood’s 100th anniversary. However, sustaining such growth for another 30 years will require a broader consensus and a new compact between central and state governments and cities. India’s liberalization efforts, which have primarily relied on central government initiatives, can be deepened further. Trade liberalization is a key aspect, and despite Prime Minister Modi’s initial skepticism, India has recently signed trade deals with Australia, the UAE, and several European nations. Expanding trade opportunities with major markets like the US, the EU, and Asia will further boost India’s growth. Additionally, India needs to enhance its tax base, as its tax-to-GDP ratio of 18% is relatively low. Only 0.3% of Indians pay 76% of income tax, indicating a need for base expansion. A more robust tax system can generate revenue for much-needed areas such as research and development (R&D). India’s R&D spending of 0.7% of GDP lags behind China’s 2.4% and OECD countries’ 2.7%. Increased R&D investment can help retain top researchers and foster innovation. Cutting bureaucracy and reducing red tape, particularly in international collaboration, will further enhance India’s innovation ecosystem. Fiscal reforms, such as divestment from state-owned entities and reducing agricultural subsidies, can also free up resources for other priorities. However, agricultural subsidy reduction remains a political minefield, and finding a balance between protecting farmers and promoting fiscal responsibility is crucial. Building a consensus among diverse stakeholders, including state governments and opposition parties, is essential for effective reforms. India’s constitutional division of power between the center and states creates governance challenges, and reforms often require cooperation from multiple levels of government. For instance, labor reforms initiated at the national level may face resistance at state and local levels. Similarly, improving education requires collaboration between central, state, and local authorities, as schools are primarily managed at the state and local levels. India needs to address capacity issues at the local level, as only 15% of government employees work at that level. Strengthening local governance will enhance public service delivery, reduce governance mismatch in cities, and support economic growth. A national conversation is necessary to build a consensus for reforms that may involve trade-offs and address concerns of different groups. Prime Minister Modi has expanded his party’s support base among lower-class groups, but bridging the urban-rural and regional divides remains a challenge. Inclusivity and addressing grievances of marginalized communities, such as Muslims and other minorities, are essential for social cohesion and sustainable growth. India’s journey to regain its economic dominance is arduous but achievable. By addressing challenges, deepening liberalization, enhancing governance, and building a broad consensus, India can unlock its potential and become a major contributor to global economic growth.
India’s Path to Economic Dominance: Challenges and Opportunities
