A Growing India Is Good for the U.S. New trade and investment opportunities will help both countries become less dependent on China. By David Malpass
When India’s Prime Minister Narendra Modi visits the U.S. this week, Americans should pay careful attention to his vision for 8% growth. Both countries would benefit greatly from faster growth.
India has entered the 25-year period leading to the 100th anniversary of its independence with a growth plan. Called Amrit Kaal, which roughly translates to “Golden Era,” it is Mr. Modi’s rallying cry and blueprint for India to reach 8% growth and a much higher median income. Faster growth in India would help the U.S. by allowing new opportunities for trade and investment, less dependence on China, and better balance for the bipolar world economy.
Eight percent sounds out of reach in a world of weak growth, but India has grown by 6% or more in recent years and is building from a relatively low base ($2,200 per capita). When offered sound policies and the tolerance inherent in rules-based government, people from anywhere in the world can achieve fast compound growth rates. China’s economy grew 10% a year throughout its 1993-2012 era of currency stability, market and price liberalization, and tolerance for growing businesses.
India has shown that it can hold down external indebtedness and that the rupee can be relatively stable. It should build on that. Key reforms would shrink spending and bureaucracy and allow increased investment and jobs in medium-size companies. India’s job creation is shaped like a barbell, with startups and small businesses on one side facing daunting barriers to expansion from overgrown government, regulation and high taxes. On the other side are the government and a few big companies as massive employers. While Mr. Modi’s budget calls for more government investment, it is critical that investment shift to the private sector, particularly so small businesses can grow. Reforms offer big potential upside in three particular areas.
• Capital markets. India’s financial industry is dominated by big banks. More needs to be done to increase credit to smaller businesses that are growing. This is vital for competitiveness, and India needs to speed this transition. A related problem is the great number of publicly listed companies that aren’t competitive. They went public too soon and can’t secure adequate bank financing or delist under current regulatory policies. This blocks consolidation, which allows companies to restructure to improve efficiency and productivity.
• Civil service. State-owned enterprises and government jobs play too big a role in the economy. Civil-service reforms are important for freeing private growth. The government must make it easier for businesses to obtain permits and licenses while reducing corruption. Reforms would create a more level playing field for business growth. Mr. Modi has taken steps to reduce bureaucracy, but training more than three million central government employees is a tall order.
• Land and labor reform. Land acquisition remains a barrier to new and expanding businesses and the transformation of agriculture. Most agricultural land transfers are through inheritance. Land acquisition remains time-consuming and prone to delays from litigation. Direct transactions between landowners and businesses are also constrained by the limited availability of reliable records and by opaque land-use regulations. As a result, the market for buying and selling land is vanishingly small. States restrict land leasing even though this would help allocate land more efficiently.
Getting more women into the workforce will also be crucial. The female labor-force participation rate in India is low compared with other middle-income countries. Flexible working arrangements, increased access to financing, and better infrastructure to improve safety and reduce transit time could help.
India is a rising power. Mr. Modi’s visit to the U.S. is an opportunity for the two countries to improve growth prospects as India sets its sights on 8%.
Mr. Malpass served as president of the World Bank, 2019-23, and undersecretary of the U.S. Treasury, 2017-19.
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