India’s Strong Economic Growth Hinges on Policy Continuity

Optimism in India’s economic growth remains strong, but policy continuity will be crucial for sustained high growth over the next five years, according to Rob Subbaraman, Chief Economist and Head of Global Markets Research Asia ex-Japan at Nomura. The Modi administration has done an excellent job since coming into power in 2014 with re-election expected this time around as well. In fact, India’s economy is projected to expand by an average of 7% annually from now through the next five years if current policies continue unchanged, a projection that far surpasses Nomura’s forecast for China (3.9%) and other regional economies such as Singapore (2.5%) and South Korea (1.8%). The rapid growth is being driven by increased investment in India which has not been seen at this scale before, with foreign direct investments also playing a role. However, Nomura’s Chief Economist for India and Asia ex-Japan Sonal Varma warns that while the current economic recovery is strong, it remains uneven, and there are risks from global spillovers which must be addressed to boost employment levels in order to strengthen foundations further. The Indian government has set ambitious goals of becoming a major manufacturing hub with investments into this sector expected to fuel future growth; however, India’s share of overall exports still stands at around 2%, and it will take some time for the country to catch up with other nations in Asia regarding export volumes. Despite these challenges, Subbaraman is confident that we are yet to see the full impact from manufacturing initiatives over the next three to five years due to India’s relatively early stages of growth in this sector. Additionally, financial services have also played a more prominent role in boosting economic activity recently, as this sector accounts for around 7% of GDP – just before the pandemic hit, Indian banks underwent significant clean-up efforts which improved bank supervision and requirements among lenders to levels not seen previously.