The world’s fifth largest economy is growing at 5.4 per cent a year and people here in India’s capital city are worried that something has gone wrong because the Reserve Bank of India’s forecast was 7 per cent.
It is an extraordinary testimony to the scale of the country’s achievement: that the world’s most populous country is also its fastest-growing large economy, even when it hits a bump on the road.
India’s economic take-off is a story with profound implications for its 1.44 billion people, but also for its trading partners, especially the UK.
Until you come here, you don’t realise the scale of the transformation over a generation from a relatively slow-growth economy, held back by regulation and corruption, to one that is now blowing the lights out.
It is hard to see any set of circumstances whereby it won’t become the world’s third-largest, after the US and China, by 2030.
That path to number three is the theme of a conference I am attending, so the idea that this will be India’s destiny is a hot subject right now.
Achievement: India’s economic take-off is a story with profound implications for its 1.44 billion people
What could hold India back, and why is its success crucial to us?
It is usually easier to see negatives than positives, and there are plenty of those. They include inflation – 6.2 per cent in October and way above the Reserve Bank of India’s target of 4 per cent.
The governor of the RBI was not reappointed last week. There are concerns about corruption, about governance, about pollution, about climate change (excessive heat was one of the most Googled searches this year), about the general level of education, and about how the surge of wealth is failing to trickle down to the still-huge ranks of the poor.
It is projected that the Indian middle class, estimated at 450 million, will be more than 700 million by 2030. That’s a huge achievement, but it still leaves India way behind China in lifting its people out of poverty.
One of the big issues being discussed here is how India becomes a fully-developed economy by 2047, the centenary of its Independence. That will be a stretch.
Still, any country that clocks up growth averaging between 6 and 7 per cent a year is going to race ahead of us laggards in the developed world. The Indian economy swept past the UK in 2022, and Morgan Stanley thinks that it will pass Japan and Germany in 2027.
The world’s third largest economy will also be the world’s third largest market.
There lies the opportunity. There are three areas in which we can mutually benefit. First, and most obviously, there is trade. India is only our 11th largest trading partner. While both exports and imports have risen steadily, India accounts for only 2.4 per cent of our trade.
That is out of kilter with the size of the two economies. The push to try to agree a free trade agreement stalled last week, but talks resume in January.
The point here is that both the UK and India tend towards trade in services rather than goods.
We have a large surplus on trade in services, which partly covers our deficit on goods.
India has about 2 per cent of the global export market in goods, against 4 per cent of the market in services. If Donald Trump’s tariffs lead to wider disruption, it is in our mutual self-interest to club together to push for easing restrictions on trade in services.
Next, there is investment. We have high-profile investments, such as Tata group’s Jaguar Land Rover, but the total stock of foreign direct investment in each country remains small.
India accounts for just over 1 per cent of our overseas investments, and only 0.5 per cent of foreign investments in the UK. We need to look at why these numbers are so low and what can be done to boost them.
And finally there are people. There are an estimated 1.9 million people of Indian extraction living in the UK, the largest single ethnic minority group. That is a huge potential asset. The challenge for both countries is to think creatively as to how to turn that asset into something that benefits us all.
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