Emerging Markets: The Indian economy is being rewired. The opportunity is immense.

Oct 13, 2022


Over the past three years India has endured more than its share of bad news and suffering. The pandemic has killed between 2.2m and 9.7m people. Lockdowns caused the economy to shrink temporarily by a quarter and triggered the largest internal migrations since partition in 1947, as city workers fled to their villages. Religious tensions have been simmering, stoked by the anti-Muslim chauvinism of the Bharatiya Janata Party (bjp), in power since 2014 under the strongman prime minister, Narendra Modi. Now a heatwave is baking the north of the country and the global oil- and food-price shock is battering the poor.

Yet as our Briefing explains, if you take a step back, a novel confluence of forces stands to transform India’s economy over the next decade, improving the lives of 1.4bn people and changing the balance of power in Asia. Technological leaps, the energy transition and geopolitical shifts are creating new opportunities—and new tools to fix intractable problems. The biggest threat to all this is India’s incendiary politics.

The Ups and Downs of a Versatile Economy

Since India’s emerging markets opened up in 1991, its economy has prompted both euphoria and despair. One minute it is the next China: a rising superpower bursting with enterprising geniuses. The next it is a demographic time-bomb unable to generate hope for its young people; or a Wild West where Vodafone and other naive multinationals are fleeced. Over the past decade emerging markets in India have outgrown most other big countries, yet this has been overshadowed by a sense of disappointment. It has not engineered the manufacturing surge that enriched East Asia nor built enough big companies to marshal capital for development. Its fragmented markets and informal firms create few good jobs.

As the country emerges from the pandemic, however, a new pattern of growth is visible. It is unlike anything you have seen before. An indigenous tech effort is key. As the cost of technology has dropped, India has rolled out a national “tech stack”: a set of state-sponsored digital services that link ordinary Indians with an electronic identity, payments and tax systems, and bank accounts. The rapid adoption of these platforms is forcing a vast, inefficient, informal cash economy into the 21st century. It has turbocharged the world’s third-largest startup scene after America’s and China’s.

Growing and Doubling in Technology

Alongside that, global trends are creating bigger business clusters. The it-services industry
has doubled in size in a decade, helped by the cloud and a worldwide shortage of software
workers. Where else can Western firms find half a million new engineers a year? There is a
renewable-energy investment spree: India ranks third for solar installations and is pioneering
green hydrogen. As firms everywhere reconfigure supply chains to lessen their reliance on
China, India’s attractions as a manufacturing location have risen, helped by a $26bn subsidy
scheme. Western governments are keen to forge defense and technology links. India has also
found a workaround to redistribute more to ordinary folk who vote but rarely see immediate
gains from economic reforms: a direct, real-time, digital welfare system that in 36 months has
paid $200bn to about 950m people.

These changes will not lead to a manufacturing boom as big as those in South Korea or China,
which created enough jobs to empty the fields of farmers. They do not solve deep problems
such as extreme weather or clogged courts. But they do help explain why India is forecast to
be the world’s fastest-growing big economy in 2022 and why it has a chance of holding on
to that title for years. Growth generates more wealth to invest in the country’s human capital,
particularly hospitals and schools.

The Deserving Credit

Who deserves the credit? Chance has played a big role: India did not create the Sino-American
split or the cloud, but benefits from both. So has the steady accumulation of piecemeal
reform over many governments. The digital-identity scheme and new national tax system
were dreamed up a decade or more ago.

Mr Modi’s government has also got a lot right. It has backed the tech stack and direct welfare,
and persevered with the painful task of shrinking the informal economy. It has found pragmatic
fixes. Central-government purchases of solar power have kick-started renewables. Financial
reforms have made it easier to float young firms and bankrupt bad ones. Mr Modi’s electoral
prowess provides economic continuity. Even the opposition expects him to be in power well
after the election in 2024.

The danger is that over the next decade this dominance hardens into autocracy. One risk is the
bjp’s abhorrent hostility towards Muslims, which it uses to rally its political base. Companies
tend to shrug this off, judging that Mr Modi can keep tensions under control and that capital
flight will be limited. Yet violence and deteriorating human rights could lead to stigma
that impairs India’s access to Western markets. The bjp’s desire for religious and linguistic
conformity in a huge, diverse country could be destabilizing. Were the party to impose Hindi
as the national language, secessionist pressures would grow in some wealthy states that pay
much of the taxes.

The quality of decision-making could also deteriorate. Prickly and vindictive, the government
has co-opted the bureaucracy to bully the press and the courts. A botched decision to
abolish bank notes in 2016 showed Mr Modi’s impulsive side. A strongman lacking checks
and balances can eventually endanger not just demo cracy, but also the economy: think
of President Recep Tayyip Erdogan in Turkey, whose bizarre views on inflation have caused
a currency crisis. And, given the bjp’s ambivalence towards foreign capital, the campaign
for national renewal risks regressing into protectionism. The party loves blank cheques from
Silicon Valley but is wary of foreign firms competing in India. Today’s targeted subsidies could
degenerate into autarky and cronyism—the tendencies that have long held India back.

Seizing the Moment

For India to grow at 7% or 8% for years to come would be momentous. It would lift huge
numbers of people out of poverty. It would generate a vast new market and manufacturing
base for global business, and it would change the global balance of power by creating a
bigger counterweight to China in Asia. Fate, inheritance and pragmatic decisions have created
a new opportunity in the next decade. It is India’s and Mr Modi’s to squander.

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