India: three steps to transformation

Massive investment and extensive reforms turbocharge the economy.

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India is heading for a Federal election in April, with roughly 900 million adults eligible to vote in what will be the largest election in world history. By most accounts, the ultra-nationalist and popular Prime Minister, Narendra Modi, is set to return to office.

On the whole, our assessment of Modi’s economic policies, since he was first elected to office in 2014, is positive. He is a reformist and India appears to be on the cusp of an investment boom.

Modi has had three clear objectives for his government: to boost manufacturing, to formalise the economy through a move towards digital infrastructure, and to improve the ease of doing business.

Manufacturing boost

So far, this has been a letdown. Foreign manufacturers need to see India's infrastructure develop, with lower logistics costs, before relocating there.

Additionally, cross-border tariffs are high and tend to favour domestic manufacturers, perhaps unjustifiably, against their global peers. This muddled approach to policy implementation has resulted in the manufacturing share of GDP falling from 18% under the previous government to 16% under Modi.

Nevertheless, as infrastructure spending gains momentum and influential economists such as Raghuram Rajan, a former Governor of the Reserve Bank of India, make a compelling argument for revisiting tariff schemes, I believe that change is on the horizon.

Modi’s ‘Make in India’ plan wants to expand manufacturing to 25% of GDP over the medium term and the government is committing significant funds to help foreign companies relocate.