India’s economic success in recent years has helped to ensure that South Asia is the fastest-growing region in the world – but it faces significant challenges alongside its opportunities for further growth.
Ahead of the India Economic Summit 2017, taking place in New Delhi from 4-6 October, here are eight things you need to know to understand the current state of India’s economy.
Economic and population growth
India is the world’s seventh-largest economy, sitting between France and Italy. Its GDP growth recently dipped to 5.7%; still, India is growing faster than any other large economy except for China. By 2050, India’s economy is projected to be the world’s second-largest, behind only China.
India is home to 1.34 billion people – 18% of the world’s population. It will have overtaken China as the world’s most populous country by 2024. It has the world’s largest youth population, but isn’t yet fully capturing this potential demographic dividend – over 30% of India’s youth are NEETs (not in employment, education or training), according to the OECD.
India’s 29 states are now a common market
Opportunities for corruption have long been created by the confusing patchwork of taxes across India’s 29 states, which also cause delays as goods cross state borders. In July, the system changed: a new goods and services tax means the 29 states are now a common market.
The new system is expected to boost efficiency, growth, and India’s tax take. Despite some technical glitches with the new online tax collection system, early signs appear promising.
Demonetization had mixed success
Last year, Prime Minister Modi unexpectedly declared that India’s highest-denomination banknotes – accounting for 86% of cash – would no longer be legal tender. Instead they had to be deposited in banks. The aim was to retrospectively punish tax evaders, as those with a stash of ‘black money’ would face awkward questions. Unexpectedly, however, almost all banknotes were deposited.
Disruption caused by the policy may have dampened GDP growth in the short-term, but it could also prove to have long-term benefits. It increased the number of digital transactions being conducted within India’s economy, which are easier to track and to tax: since April, over twice as many Indians have filed tax returns than in the same period last year.
Growth needs to be more inclusive
Broadening its tax base should enable India to make much-needed progress in increasing the inclusivity of its economic growth. India ranked a disappointing 60th among the 79 developing economies assessed in the World Economic Forum’s latest Inclusive Development Index.
This is reflected in growing inequality: India’s richest 1% own 53% of its wealth, up from 36.8% in 2000. For comparison, the richest 1% in the United States own 37.3% of its wealth.
The rise in inequality is compromising the pace at which India is lifting people out of extreme poverty. About one-third of the world’s population living on under US$1.90 live in India – some 224 million people. Oxfam calculates that if India were merely to stop inequality from growing further, it could lift 90 million more people out of extreme poverty by 2019.
India needs to get more women working
India has made modest progress in closing its gender gap over the last decade, rising from 98th to 87th in the World Economic Forum’s Gender Gap Report, which aggregates a range of indicators from health and education to economic and political participation.
However, it ranks a lowly 135th out of 144 on women’s labour force participation, just behind Yemen. India’s economy would have much to gain from getting more women into the workforce.