Deregulation, combined with the increased adoption of AI and a trade policy focused on greater market access, could be transformative for India in achieving a higher economic growth trajectory for an extended period, said Franziska Ohnsorge, chief economist for the South Asia Region, World Bank. Access to 50% of the world’s GDP through trade agreements would also boost FDI inflows to India, Franziska told Prasanta Sahu. Edited excerpts.
Q: Do you share the optimism of the Indian government that the GST reforms, income tax relief, and monetary easing will boost consumption and trigger a virtuous cycle of investment?
The government has had a series of reform efforts. The laws to reform the labour market were also passed several years ago, and there is now a renewed urgency in actually getting it implemented on the ground. The government’s really trying to unlock growth, and that is one of the reasons why India remains the fastest-growing in large emerging markets.
We expect a slowdown from 6.5% growth in 2025-26 to 6.3% in the next fiscal year. It might be a slowdown for India’s terms, but by international standards, this is still robust growth. Investment growth has slowed from pre-pandemic rates in India, but it is still a higher private investment growth rate than the average of emerging market and developing economies. There are, however, pockets of weakness, like foreign direct investment (FDI). The total private investments may be slowing, but is still higher than elsewhere.
Q: Do you think India’s growth capacity, which is its growth potential, has weakened, and why?
I think if anything, the country is well placed to benefit in the current environment more than anyone else for two reasons. The government has really laid the foundations to benefit from AI. India’s government’s AI readiness index is well above the emerging market average and is almost close to the advanced economy average. The country is ready for AI in another sense too. There is a smaller share of jobs in India exposed to AI than in other emerging markets and developing countries. So, India is well placed to benefit from this technology shock, this global productivity shock.
India’s tariffs are above (global) average, but where they really hit productive capacity is in intermediate goods. On average, tariffs on intermediate goods are more than double those of other emerging markets and developing economies, and that does dampen competitiveness. So, if you can have tariff cuts, ideally in the context of bigger trade agreements, that could transform manufacturing. If you look at countries like Mexico or Vietnam, they have trade agreements with countries that account for about 50% of global GDP. So, half of global GDP is accessible to them on an easy basis through these agreements. The comparable number for India until the UK agreement was 12% of global GDP.
So if India has an agreement with the EU, Australia, Canada and maybe the US as well, then India would also gain access to 50% of global GDP that could transform Indian manufacturing.
Q: What are the other things that India should do on a priority basis to take economic growth to a higher trajectory?
I genuinely think the combination of AI and trade policy could be transformative. They will be even better if they come with deregulation. Trade policy is an effort that could help people move around from jobs (in industries) that are shrinking to jobs that are growing. Things are changing asymmetrically around the economy. So, any policy that can reduce the cost of switching jobs will supercharge the gains from these two big trends – AI and trade. That is exactly what the Deregulation Mission Commission can do.
Q: Do you think that Trump’s tariff policies are going to impact the Indian economy if it is not sorted out by November?
The tariffs that have now materialised for India are double the level what we had anticipated in April. So, this is one of the reasons that we have reduced the growth forecast for India for the next fiscal year. But, India’s exports to the US are only 2% of GDP, so it is fairly insulated from all external shocks.
Q: How could the capital flows to India in terms of FDI in the near and medium terms?
Net FDI flows relative to GDP for India have been in the bottom quartile of emerging markets and developing economies. FDI typically comes into tradable sectors. So if it’s very difficult to trade and there are lots of obstacles to trade, it’s almost natural that FDI would be weak. So, it’s for that reason that we expect the trade reform also to have benefits for FDI inflows.