As the fastest growing large economy in the world and with a population of around 1.4 billion, India’s GDP is currently $3.2 trillion – making it the world’s fifth largest economy. While India’s economic growth is expected to slow to six percent this year, most economists predict growth will remain at that level for the next two decades due to shifting global supply chains, favorable demographics, and rapid industrialization positioning India to potentially become one of the new “factories of the world.” India is expected to become the world’s third largest economy, surpassing Japan and Germany, within the next decade or perhaps even earlier. Prime Minister Modi has set a goal of India becoming a developed country by 2047, the 100th anniversary of Indian independence. While many experts are skeptical that this is possible, virtually all agree it will make substantial progress towards the goal. Whether India realizes this potential will depend primarily on sound macroeconomic and regulatory policy choices, empowering its women, and upskilling its talent.
India instituted structural economic reforms in recent years that will improve the business environment, including for U.S. exporters and investors. These reforms include liberalizing foreign investment restrictions, modernizing bankruptcy and labor laws, ending retroactive taxation, and replacing a patchwork of state border taxes with a national Goods and Services Tax. However, continued protectionist measures restrict expansion in bilateral trade and make it more challenging for Indian producers to join global supply chains. Protectionist measures include the highest tariffs of any major economy, increased encouragement of manufacturing localization to promote “self-reliance,” and the use of India-specific standards and regulations that effectively exclude foreign goods and services.
Achieving India’s macroeconomic targets will require consistent, affordable energy. Despite significant advances in solar energy capacity, India still relies on coal for 70 percent of its power generation. Global energy price volatility resulting from the Russian war on Ukraine has driven the Indian government to prioritize energy security in its decision-making, since energy supply is key to maintaining the momentum of India’s fast-growing economy. India imports over 85 percent of its oil, and it is highly vulnerable to changes in global energy prices. India has declined to join the international price cap mechanism on Russian oil, arguing the need to secure sufficient energy supplies to prevent shortages and maintain current retail prices of refined petroleum products, though the price it pays nonetheless remains below the cap. Capitalizing on market discounts driven by lower demand for Russian crude, imports of oil from Russia increased dramatically from less than two percent of India’s total imports to over 20 percent over the course of 2022, introducing significant questions about growing dependency on unreliable and politically motivated energy suppliers.
Prime Minister Modi began his ninth year in office with strong political standing. Public opinion polling consistently shows Modi’s approval rating above 60 percent. There are indications that Modi will likely win a third term in India’s 2024 general election. Domestically, Modi is focused on the need to boost India’s economy following COVID-19 disruptions. Job growth is a key focus, as more than a million new people enter the job market each month. Many economists warn excessive focus on technology industry driven growth could potentially lead to “jobless growth,” where the number of new jobs created are not enough to meet the surge in the labor force, resulting in under-utilization of India’s favorable demographic dividend. Trade agreements are one way for Modi to add jobs and increase economic opportunity. Modi is also trying to demonstrate India’s growing global economic leadership, including through hosting the G20 and several ambitious measures Modi announced at COP26 and reiterated at COP27, including India’s plans to reach net-zero emissions by 2070 and cut its carbon-dioxide emissions by one billion tons by 2030. India has made significant progress in reducing emissions intensity and increasing renewable energy power generation capacity, well ahead of the 2030 deadline. However, India will require significant financial/technological support to reach Modi’s aggressive target to install 500 gigawatts of non-fossil fuel power by 2030.
Country Links
Financial Intelligence Unit-India (FIU-IND )
Securities and Exchange Board of India (SEBI)
Insurance Regulatory and Development Authority of India (IRDAI)
