Why is monetary control good for India?

In the last three years, the Indian economy has had to deal with the covid pandemic, lockdown, war in Ukraine, geopolitical stresses and strains, rising commodity prices, global supply crisis, hyperinflation and monetary tightening of economies around the world. A slowdown in trade and financial outflows, and it not only overcame these crises, but emerged stronger. This is a major reason to be optimistic about India – if we can get through this test, shouldn’t we do even better now that normalcy is on the horizon?

Many economies, including those in our neighborhood, have wilted under the pressure. China’s growth, once the envy of the world, is staggering. Export-dependent East Asian countries have been affected by the slowdown in global trade. Developed countries are experiencing rising inflation. Nevertheless, India has regained the tag of 'world’s fastest growing major economy’. Unlike many other economies, this was achieved with relatively low levels of government debt and low corporate and household debt.

It’s likely to get even better. Banks have cleaned up their bad loans and their balance sheets are in better shape, allowing them to lend. Companies have also deleveraged and their debt-equity ratios are now comfortable so that they can borrow for capital expenditure and expansion. Gross fixed capital formation as a proportion of GDP in the January-March 2023 quarter rose to a more than a decade high. All the conditions are there for an investment boom, adding another engine to drive the economy.

But it is not a cyclical turn that makes India amenable to monetary control. Decades ago, economist Paul Rosenstein-Roden, one of the pioneers of growth theory, said, “Starting a country on self-sustaining growth is like getting an airplane off the ground. There is a critical ground speed that must be overcome before the craft becomes airborne.

The Indian economy has reached that critical momentum and is ready to take off. India is now the world’s third largest automobile market, fourth largest in solar power generation, second largest mobile phone producer, second largest steel producer, third largest pharmaceutical producer by volume, and it continues to lead. The world in ICT services exports. The list could go on and on. As with foreign direct and portfolio investment, the world’s venture capital firms are beating a path to our door. By 2027, according to IMF projections, India will be the world’s third largest economy, after the US and China.

The latest cover of The Economist, 'Why India Matters’ marks India’s arrival on the world stage.

Admittedly, one reason for India’s growth is the West’s displeasure with China. As it favored Japan and Taiwan and South Korea during the Cold War, and China in the nineties and aughts, the geopolitical winds now favor India. The West is attracted to India not only for its economic promise but also for its military influence at the forefront of a geopolitical divide. Businesses are also rapidly restructuring their supply chains to differentiate them from China. India has already benefited from this trend.

But if the geopolitical winds are in India’s sails, the Indian government has worked hard to seize the opportunity. There are many reforms initiated by the government. Some of them include the introduction of GST, bankruptcy law, reduction of corporate taxes, moves to formalize the economy, efforts to reform labor laws, allowing contract labor in all industries and a laser-like focus on building infrastructure. A production-linked stimulus program has boosted production in India, helped by import tariffs. Inflation targeting and the introduction of an independent monetary policy committee have helped keep inflation under control, as have government policies. Privatization is a work in progress and will increase efficiency in the economy. The foundation has been laid for a major push in foreign and domestic investment. „If you build it they will come” is the saying.

India is blessed with a strong footprint in science and technology. Covid-19 showcased India’s strength in developing vaccines. India is a global leader in digital payments and we are offering our expertise to other countries. Not to mention our achievements in space technology.

Then, the biggest tailwind of all is in our favor—population. While most of the world is turning old and grey, India remains youthful. India’s dependency ratio, which measures non-working-age dependents as a proportion of the total population, will rise from 47.5 percent in 2022 to 49.3 percent in 2050. In contrast, in 2050, the ratio will be higher. 71.1 percent for China, 64.6 percent for America, and 94.7 percent for Japan. A low dependency ratio in India can allocate more resources to development.

Not surprisingly, the Reserve Bank of India’s Bulletin of the Economic Status report, written by central bank researchers, said: „India is poised to maintain a growth gap vis-a-vis the rest of the world. Many underlying factors.” Those factors include a demographic dividend, an expansion of the stock of capital due to the formalization of the economy and digital financial inclusion, the financing of savings due to increased retail participation in the capital markets, and a sound banking system with strong balance sheets. The report concludes: “India’s time has come. We must seize this initiative with both hands.

To be sure, there is still a lot of hard work to be done. For example, structural reforms in the power sector and timely delivery of justice are essential. We must cut red tape and fight corruption. Development is by no means a painless process, and there will be struggles over sharing its benefits and bearing its costs, struggles that need to be politically managed. This is where India’s vibrant democracy lends its hand as it helps mitigate these tensions.

The demographic dividend can only be cashed in if the millions joining the labor force find decent jobs. It is imperative to raise productivity by engaging people in more productive work from handkerchief-sized farms. The formal sector needs to expand significantly. But growth can cure many ills, and we now have a once-in-a-generation opportunity to take a higher growth trajectory.

Perhaps, most importantly, hope is in the air and spirits are high. There is a spring in the step, a new hope in India. To take an example, the recent record orders for commercial aircraft by IndiGo and Air India are a huge vote of confidence in the long-term prospects of the country’s aviation sector and economy.

The nation has found its voice, its purpose and its progress. It has nothing to do with jingoism or success. This means that the one-sixth of humanity that calls India home looks forward to rapidly improving its standard of living and taking its rightful place in the world. That is why monetary control is perfect for India.