By Nirvikar Singh
The latest growth figure for India, clocking in at 8.2% despite an uncertain global economic situation, bodes well for the country’s medium-term economic outlook. Combined with unusually low inflation, the numbers suggest something close to a Goldilocks economy—not too hot, not too cold, but (close to) “just right”. Of course, there are many things that need continued attention, such as domestic inequality, global competitiveness, and shortfalls in human capital, but these are longstanding issues, and India’s current economic performance gives the government breathing room to tackle them more assertively.
India’s recent growth has been relatively broad-based and balanced, although disparities in human capital continue to favour those at the upper end of the income distribution. Changes in the goods and services tax have begun a process of simplifying consumption taxes that will continue to help smaller firms and less well-off households. The changes in labour laws reduce frictions in the labour market. Though some of this flexibility comes at the expense of workers in a relatively small subset of Indian firms, increased protections for gig workers, and portability of benefits to go with that change, it will give other workers more of a cushion. Financing mechanisms for smaller firms has been improving gradually, and the financialisation of household savings has also been creeping forward. In many respects, India is starting to look like a “modern” economy, in ways that building steel plants and rocket ships did not reflect.
Navigating trade headwinds and currency shifts
Some of India’s better-than-expected performance is likely the result of exports being accelerated to avoid higher US tariffs, which have since kicked in. But export performance was weak despite this acceleration, and if the experience of most other countries is anything to go by, India should be able to negotiate a “deal” that makes the US President and his trade advisers happy, bringing down tariff rates to manageable levels. The rupee has also depreciated significantly against the dollar in the last few weeks, which will ultimately help competitiveness. This depreciation has not been driven by higher relative inflation in India, which suggests it will boost competitiveness once tariffs are at more reasonable levels.
Low inflation in India has meant that nominal GDP growth has been below expectations, and while some analysts have expressed concern that this will make it harder for the central government to meet targets for reduction of its fiscal deficit, it is also possible that a robust economy with confident consumers and optimistic investors will provide buoyancy to tax revenues. Indeed, any argument that treats low inflation as a cause for concern seems to have its logic backwards. If anything, there ought to be more room for the Reserve Bank of India to keep cutting interest rates without stoking inflation or adding to the government’s cost of servicing its debt.
A signal to global investors
The resilience of India’s economic growth ought to send a positive signal to foreign investors as well, and the current situation seems to be “just right” in that respect as well. Encouraging foreign direct investment across the board seems to be a win-win strategy for India and many advanced economies. The Trump administration, while settling into an inferior but not disastrous equilibrium in the case of tariffs on goods, is still doing many things to undermine trade in highly skilled services and the innovativeness of its universities. As a country with a large proportion of its higher education in English, India ought to be well placed to ramp up quickly in areas such as science, technology, engineering, and mathematics (STEM) graduate degrees, by attracting foreign universities and faculty. Creating local pools of educated workers across the country even when artificial intelligence (AI) is eroding demand for entry-level white-collar jobs seems to be a good strategy for India. This will pay off in the longer run, since firms in advanced economies may degrade their own learning-by-doing mechanisms and experience ladders—AI that replaces entry-level employees may not be able to do more complex jobs for a long time to come. Increasing the supply of such workers in India will reduce their wage premium, and make them more affordable for domestic firms, especially with restrictions on emigration.
After eating the porridge that was “just right”, Goldilocks went to sleep in the bed that was “just right”, and narrowly escaped being devoured when the three bears returned. India’s Goldilocks economy is not a time for complacency or rest. An 8% growth rate maintained over the next two decades will be transformative for India. But any number of policies still need to be enacted or modified to achieve the transformation.
Over the last two or three decades, the US became a place where Indians could go to demonstrate that the only thing holding back India was its own policies—they flourished in an environment where their talents could be honed and put to the best uses possible. In US universities, people of Indian origin have been part of that system of building capabilities for whoever could make it to those institutions. That system is being eroded by the Trump administration, giving India a chance to build its own capabilities at home, and, thereby, the capabilities of more of its own citizens. China has done this already, showing the way for India.
The author is Professor of Economics, University of California, Santa Cruz.