The Pulse

Setting India’s Economy Straight: Partners and Policies

Recent Features

The Pulse

Setting India’s Economy Straight: Partners and Policies

How Narendra Modi’s economic initiatives are putting India back on the right track.

Setting India’s Economy Straight: Partners and Policies
Credit: Wikimedia Commons

The greatest factor holding India back from truly achieving great power status is its failure to get its economy right, the result of decades of flawed economic policy. Economic growth is important not only because of its role in raising the welfare of people, but because it broadens the ability of a country to educate and feed its people, improve public health, and strengthen its armed forces. India must pursue all of these objectives if it is to join the ranks of the world’s great powers.

India’s economic growth has been hampered by state policies, planning commissions, and inefficiencies. Additionally, India has concentrated on sustaining economic growth through the service sector, even though this sector is likely saturated and cannot solely provide the means for uplifting hundreds of millions of rural Indians out of poverty. This can be achieved only with the creation of new jobs in manufacturing and the modernization of agriculture, both of which are sectors that are not fully productive. For example, India’s tea industry, the second largest in the world, and one that produces special varieties that are as highly valued as wines from France, is antiquated. The industry suffers from a long supply chain, an overreliance on manual labor and handwritten bookkeeping, and almost nonexistent marketing. India has many industries like the tea industry in which an advantage or potential has not yet been fully exploited.

Fortunately, several of the decisions and policies of the business friendly government of Narendra Modi seem set to improve India’s economic prospects, especially in the vital manufacturing sector. Modi has often expressed his belief that India could benefit from adopting aspects of the East Asian economic model, in which foreign direct investment (FDI) and industry would play a greater role.

Firstly, India has recently announced its intention to allow FDI in its defense sector. If this decision goes through, it would greatly improve the capabilities of India’s defense industry, which lags in in defense research, production and technology. India could especially make use of the transfer of technology, which would save it the time and effort of reinventing the wheel whenever it pursues a new indigenous military project.

Secondly, India is courting FDI and investment from countries that have had recent experience in developing manufacturing, especially China and Japan. India could use the infusion of capital and know-how to improve its industry and infrastructure. Despite continuing territorial tensions between India and China, India inked an agreement with China this Monday that would allow China to set up industrial parks in India. China is expected to set up four parks in different Indian states and may open up its own economy to Indian pharmaceuticals and information technology (IT). Chinese expertise and investment is expected to provide a major boost for Indian manufacturing.

Japan is already a major investor in India and is considered an extremely vital partner. For example, it has funded half the cost of an industrial corridor being developed between Delhi and Mumbai and was a major investor in the Delhi metro. Japanese assistance will be especially important in the Modi government’s plan to overhaul India’s railroads and construct bullet trains. India’s secretary from the Department of Industrial Policy and Promotion, Amitabh Kant, even went so far to say that in the next five years, India would “need 10,000 Japanese companies,” adding that India “will handhold them.”

Finally, in what could be a radical break from the past, the Modi government may abandon India’s Planning Commission altogether, a vestige from over half a century ago that attempted to mimic the Soviet command economy. A government backed report from last week suggested replacing the Commission with a think tank because it “defied attempts to reform it to bring it in line with the needs of a modern economy.” Modi has previously criticized the Commission for hobbling states with one-size-fits-all policies instead of allowing states to spend more funds as they saw fit. Modi has long been known to favor economic decentralization and the empowerment of states.

India’s economic empowerment needs both investment to improve its efficiency in key sectors and favorable markets. It is in light of this view that the Council of Foreign Relations (CFR)’s Senior Fellow for India, Pakistan, and South Asia Alyssa Ayers’ recent memorandum should be taken seriously by the United States if it is interested in India’s development. Ayers has argued that the Bharatiya Janata Party (BJP)’s new focus on trade be championed by the United States, especially by promoting India’s membership in the Asia-Pacific Economic Cooperation (APEC) forum, which India applied to almost two decades ago. Additionally, India would eventually be included in the Trans-Pacific Partnership (TPP). This would open new markets to India, strengthen U.S.-India trade, and deepen India’s rather minimal economic integration with the rest of Asia. India should also consider increased engagement with the economies of other regional trade organizations, including the South Asian Association for Regional Cooperation (SAARC) and the Association of Southeast Asian Nations (ASEAN).

The economic steps that India has been taking since Narendra Modi came to power provide hope that India’s economic performance will begin to improve. In beginning to correct some of the deeply rooted policies and structural practices of his predecessors, Modi may have laid the groundwork of positive economic growth for decades to come, though there is little doubt that the process will be slower than it ought to be due to the nature of India’s political system.