As the world grapples with a global economic slowdown, many ask what’s keeping India’s economy shielded from the headwinds. The answer is a combination of factors, including aggressive investment in infrastructure and an increasingly friendly environment for investors from across the globe to invest in India.
While India is not immune to the global economic slowdown, it will be better positioned than most emerging markets. According to the latest India Development Update, a flagship publication from the World Bank, while the deteriorating external environment will weigh on growth, India is relatively insulated from global spillovers, owing to its large domestic market and a more flexible exchange rate.
This will be particularly true if India can boost its competitiveness by incentivizing the services sector to create jobs. While the government continues to focus on boosting manufacturing and sunrise sectors, it should also emphasize promoting services such as retail, trade, and IT, where India has competitive advantages. In this regard, the government should also ensure greater synergy between its policy efforts and business environment to foster more vital productivity and inclusive growth.
The government is on the right track in reducing poverty and transforming India into a global powerhouse. Its efforts to reduce absolute poverty have been successful, with 90 million people lifted out of extreme poverty between 2011 and 2015. This remarkable progress is mainly due to India’s economic growth, which has enabled it to increase household incomes, build infrastructure, and strengthen social protection systems.
But several challenges lie ahead for India to achieve its aspirations. Promoting investment in infrastructure and ensuring that projects are completed on time will be critical for India to maintain its growth momentum, even in the face of a slowing global economy. Similarly, it is essential to continue to improve financial inclusion and digital connectivity beyond tier-1 cities.
Moreover, the government must ensure that the informal sector is included in its policy agenda to promote a more inclusive economy. As India’s largest employer, the informal sector should be an essential part of the formal employment system through targeted social security schemes and increased support for labor-intensive activities such as agriculture and artisanal industries.
While it is challenging to predict India’s growth prospects, it is clear that the government is doing its best to navigate the current challenging environment. The central bank governor’s recent pronouncement that it would not be surprising if India surpasses 7 percent this year attests to his and the government’s confidence in the economy. This optimism is backed by solid data points such as robust private-sector credit growth, a stable rupee, and continued strength in capital expenditure. The only risk to this outlook is a sharper-than-expected slowdown in the global economy, which could lead to a weaker Indian currency and lower global commodity prices, which will hurt exports.