Commentary |
29 January 2021

Domestic reform key to India’s rise

The geoeconomic benefits of working towards more robust growth, both now and in the future, are multiple. Originally published by the Observer Research Foundation.

Alyssa Leng
Alyssa Leng

The year 2020 proved tumultuous for India, as it did for most countries. COVID-19 precipitated significant domestic challenges on all fronts, with India shouldering one of the world’s highest caseloads and staring down the barrel of its first recession in decades. Externally, tensions boiled over along its border with China, while the international environment at large became more fraught.

But even before the pandemic, economic challenges had begun to emerge. Financial stability issues persisted in the shadow-banking sector and reform momentum slowed following the shock of demonetisation. The process of Prime Minister Narendra Modi’s political consolidation continued in the meantime, including clamping down on Kashmir. All this while the Indo-Pacific came into fashion as a geographical and geopolitical concept, with attention and interest shifting towards India’s neck of the woods as a result. Especially in the context of a rising China, many are betting on India’s economic rise and its integration into regional security arrangements, most notably the Quadrilateral Security Dialogue with the US, Japan and Australia.

The confluence of all these factors puts India at an increasingly critical juncture. For its own economic development, as well as to remain relevant and competitive in a dynamic geopolitical landscape, India must get the COVID-19 pandemic under control and should prioritise structural economic reforms to unlock future growth. Doing so will improve domestic living standards and give it more economic power abroad, providing India with more policy space to choose how it engages with the world. Focusing on domestic economic development will also be necessary for cities like Mumbai to function as significant regional hubs.

Containing the coronavirus should be an immediate priority to limit the pandemic’s economic damage and to facilitate a quicker economic recovery. The Indian economy contracted significantly in the first and second quarters of 2020, though there are signs that the worst may have passed. But for economic activity to resume meaningfully, the spread of COVID-19 must be slowed, especially given the government’s limited fiscal space to lead the recovery process. Mitigating the degree of permanent economic damage from the pandemic and enabling recovery will be crucial for people’s livelihoods as well as India’s economic heft internationally, both now and going forward.

In the longer term, India must change gears economically if it hopes to sustain rapid growth in the coming years. So far, India has urbanised and industrialised slower compared to the East Asian miracle economies, even at similar levels of economic development. The single hit of big-bang reforms in 1991 contrast to the multiple rounds of significant policy changes that successful developing economies have undertaken, and substantial room for improvement remains in its infrastructure and institutions. These foundations are necessary not just for broader economic development, but also for cities like Mumbai to develop as substantial regional hubs. Despite demographics being on its side, structural reforms are crucial for India to grow faster going forward.

The geoeconomic benefits of working towards more robust growth, both now and in the future, are multiple. Though the Indian economy is already relatively large, it remains less than half the size of China in PPP terms, and about a fifth of China’s size at market exchange rates as of 2019. Faster economic growth would help India catch up to China in terms of both size and sophistication, as well as boosting India’s economic power more broadly. Size in turn would accord other rewards. The sense of gravity felt by neighbouring states in the region may pull more towards India as it grows, increasing the degree of its economic influence through avenues like trade, regardless of its attitude towards deals like the Regional Comprehensive Economic Partnership (RCEP). It may also help develop hubs like Mumbai further and elevate them in the region as sources and destinations of investment. All this would afford India more choices in how it wishes to utilise its power.

There are longer term geopolitical reasons to lay the foundations of good growth now too. As Chinese growth slows gradually over the coming decades, in line with its ageing population and approach to the technological frontier, scope exists for India to be the next economic powerhouse and great power in the region. Such status will not accrue by default and will depend substantially on the foreign policy choices made in coming years. But much of the foundation for such choices — including economic size, and the scope to fund other elements of power including military and diplomatic capabilities — will rely greatly on the state of the Indian economy.

If those are the geopolitical carrots incentivising faster growth, what is the stick? Unless India works on its economic foundations, its pull relative to China’s weight is likely to remain limited, and its economic influence in its backyard will diminish as a result. China is already the largest trade partner of Bangladesh, Pakistan and Nepal and the largest foreign investor in the latter two countries. It also continues to exert significant levels of both economic coercion and persuasion in the Indo-Pacific at large. The longer it takes for India to undertake substantial reform and improve its growth performance, the more geoeconomic advantages it cedes, and the opportunity for hubs like Mumbai to remain competitive in the broader Indo-Pacific may be lost.

India faces challenging domestic circumstances as well volatility abroad in the Indo-Pacific. To ensure that development continues and living standards rise, as well as to shore up its geopolitical position in the region, domestic economic performance and reform should be India’s top priority. In the long run, the ability of cities like Mumbai to develop into regional hubs will also hinge on the implementation of deep structural reforms.

At the periphery, complementary measures could also be taken — re-entering into negotiations with RCEP is one prominent example. But getting the domestic fundamentals right will yield the most in terms of economic outcomes and power, both now and in the future. In a region where much will be fluid and contested for the foreseeable future, it is therefore well worth India doing all it can to get its house in order.