Two predictions created a buzz in India at the end of 2016. One came in the form of a tweet from Kiren Rijiju, India’s Minister of State for Home Affairs, saying “India overtakes UK & becomes 5th largest GDP after USA, China, Japan & Germany.” The second prediction, made by some in India, was that the country would replace China as the world’s fastest-growing major economy in 2016.
However, neither of the two came true. As the International Monetary Fund (IMF) reports in its latest World Economic Outlook, the GDP growth rates of China, India Britain are estimated to be 6.7 percent, 6.6 percent 2 percent, respectively. By these figures, India will probably remain second to China in terms of GDP growth rate remain a smaller economy than Britain.
Demonetization Drags down India’s Economy
Several reasons lie behind India’s failure to meet its economic expectations. Following an announcement made by the Indian government on November 8, 2016, the 500 1,000 rupee notes, representing 86 percent of the country’s circulating currency, were removed as legal tender. The wide-ranging cash crisis resulting from this demonetization put a brake on India’s consumption, which relies heavily on cash. Thus, the IMF has downgraded the prospects of India’s economic growth in 2016 from 7.1percent to 6.6 percent.
In comparison, Brexit hasn’t taken as harsh a toll on the British economy as was expected. Since the fundamentals of Britain’s economy remain flexible, its strong GDP growth will support its currency grant Britain more bargaining chips in its negotiations with the European Union (EU). Therefore, the IMF has raised the prospect of Britain’s GDP growth rate in 2016 to 2 percent.
The dynamics of the global economic landscape have not drastically changed. In the past decade, India’s GDP has risen by 100.13 percent, from US$1.18 trillion in 2007 to US$2.37 trillion in 2016, narrowing the GDP gap between it Britain. In 2016, Britain’s economy is estimated to have reached US$2.9 trillion, China’s GDP US$11.9 trillion. As one of the two most populous countries in the world, India will need more time to catch up with China on an economic scale.
India’s Economy Has Entered a Positive Circle
印度的内需主导型经济具备抵御外部风险的能力。与中国不同，印度经济增长的主要动力不是投资和对外贸易，而是国内的私人消费。长期以来, 印度对政府公务人员、军人、国企员工、教师和科研人员等都实行比较高的工资制度，他们和私营企业主一起构成印度的中产阶层，成为印度国内消费的主要力量。而国内消费支出的稳定增长, 为印度企业创造了稳定的国内市场。
India’s economy, relying mainly on domestic demand, is resistant to external risks. China’s economy relies on investment global trade, while India’s is dependent on private consumption. India has adhered to a system of high salaries for civil servants, soldiers, employees of state-owned enterprises, teachers, researchers. As members of the middle class in India, those in these professions, along with owners of private companies, acfor most of the country’s purchasing power. The steady growth of domestic consumption has created a steady domestic market for Indian enterprises.
India’s powerful service industry strongly supports its economic growth. In terms of their total value added to the Indian economy, the service industry accounts for 52.98 percent, manufacturing only 30.01 percent, agriculture 17.01 percent.
India’s economic structure means its growth is independent of influences from the external market, because the internal market can offer enough fuel of its own. However, this also leads to India’s high dependence on energy imports, a long-term current acdeficit the fiscal deficit. Since 1992, China’s economy has enjoyed a long period of rapid growth, but India has witnessed five to six growth troughs, resulting in the high volatility of the South Asian power’s economy. In fact, before Prime Minister Modi took office in 2014, India’s current acdeficit to GDP was once as high as 4.8 percent, causing India’s economy to teeter on the brink of another trough.
India’s Future Economic Development Depends on the Effectiveness of Reform
India’s economic reforms in 2017 will include the implementation of demonetization the goods services tax act, but these two reforms alone cannot overcome the structural challenges to India’s economic growth.
Firstly, before Modi came to power, India’s discrimination against foreign investment had resulted in a serious shortage of funds in India’s economic development. Prime Minister Modi met with 25 prominent Chinese entrepreneurs when visiting China, then worked personally on easing regulations on national security investigations. Since then, the investment environment in India has improved. At present, India’s public infrastructure, including roads, railways, telecommunications, power stations many other areas, urgently needs to be upgraded in order to attract foreign investment domestic private investment. In the meantime, India also hopes to receive foreign investment in infrastructure construction.
Secondly, the overgrown wealth gap in India has blocked the country from reaping the gains of its demographic dividend. India has been investing its resources in higher education has cultivated a number of top-class specialists, but has simultaneously failed to provide sufficient investment in basic education, which has led to a still-widening wealth gap. Therefore, India, a country that produces a large number of engineers for Silicon Valley, is also home to the largest illiterate population in the world.
The relatively low quality of the majority of labor force in India the underdeveloped manufacturing industry impose restrictions on labor division specialization, prevent workers from improving their skills. In a country with a low labor output a congested demographic dividend, India needs not only an improvement in its policies, but also reforms in social cultural areas.
In recent years, the strong performance of India’s economy has been eye-catching. Modi has opened the door to foreign investment invited investors to see the country’s opportunities for themselves. India has the potential to become the next favorite to attract global investment, after China. But the chronic downsides of India’s economic structure, as well as its complex religious cultural problems, cast doubt on the feasibility of India’s economic take-off—a situation completely different from that of China 30 years ago.