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India displaces the UK as world's 5th largest economy. Has it's time come?

Notice how since 2000, the economic share of the world's economy enjoyed by Japan, Germany, France and the UK has fallen while China is taking off. India's turn may be now(see chart below).


As India Shakes Off Shackles, It Emerges as Global Economic Power

New infrastructure, regulatory reforms and digitization buttress its strength


India is expected to formally displace China as the world’s most populous country.


Greg Ip, WSJ

Updated Feb. 23, 2023 10:10 am ET



NEW DELHI—For what seems like forever, India was a story of unfulfilled potential: abundant labor and entrepreneurial energy hobbled by lousy infrastructure, a meddlesome state, stifling regulation and a deep ambivalence about engagement with the broader world.


It might be time to retire that story. In fact, 2023 could be the year India finally emerges as a global economic heavyweight. For that, thank the cumulative effect of solid economic growth, microeconomic reform and a changed geopolitical environment that has the West more eager than ever to draw India into its orbit. Just this week, nine Democratic senators and Treasury Secretary Janet Yellen traveled to India, the latter for a summit of the Group of 20 economies, which India is hosting this year. Commerce Secretary Gina Raimondo and Secretary of State Antony Blinken are close behind.


The bullish case on India always starts with demographics. This year, it is expected to officially surpass China as the world’s most populous country, and one that is much younger than China and most of the West.


The economic clout that comes with population has been muted in India’s case because it is so poor—but it is steadily getting less poor. The International Monetary Fund says India’s annual economic growth will average 6.5% this year and next, the fastest among 30 major economies, resuming a two-decade trend of solid growth. Last year, India displaced the U.K. as the world’s fifth-largest economy in current dollar terms and could tie Germany for fourth place by 2025.


So the macroeconomic picture is impressive. Sustaining it, though, requires microeconomic reforms that build up the economy’s supply side. “This is the time when infrastructure starts becoming a constraint,” Ashwini Vaishnaw, India’s minister for railways, communications, electronics and information technology, said in an interview. “If you solve the infrastructure issues at this point of time, then the country can grow at this pace for many more years.”


This is where India has made some impressive strides. In recent years, numerous new expressways have been built or are under construction. From 2014 to 2019, national highway kilometers expanded by 45%. Since Prime Minister Narendra Modi took office in 2014, the number of airports has doubled and the total of rural roads has increased 85%. Electricity plant capacity has risen 66% and blackouts have become much less frequent.


I got a peek at this transformation from the cab of a locomotive on a rail line north of Ahmedabad, the main commercial center of Gujarat state. Rail’s share of Indian freight has been shrinking because track capacity is limited and must be shared with passenger trains. Freight trains thus plod along at an average of 25 to 30 kilometers per hour with no fixed timetable. But the locomotive I rode was pulling 45 cars at 80 kilometers per hour on a “dedicated freight corridor” with no other traffic in sight. Once complete, this high-capacity electrified railway will carry double-stacked containers on trains up to 1.5 kilometers long from north of New Delhi to Mumbai in half the time of regular lines, while connecting to container ports. A separate eastern corridor will extend to Kolkata.


Infrastructure, both physical and digital, has also improved the lives of ordinary Indians. In the past three years, the government says, the number of homes with piped water has roughly tripled, to 108 million. An India-born colleague of mine returned to his ancestral village in Bihar, India’s poorest state, in 2021 for the first time in eight or nine years, and was flabbergasted at how many homes now had tap water, electricity and appliances such as color televisions and washing machines, and at the paved approach roads and small restaurants accepting digital payments.


Not all of this is thanks to Mr. Modi. Some of the build-out, such as the freight corridors, began under previous governments. India’s vibrant startup scene, which now includes more than 100 unicorns—new businesses valued at more than $1 billion—also took root before him.


But Mr. Modi has given priority to improving India’s notoriously burdensome and inefficient business environment with a new bankruptcy law to speed up the resolution of insolvent companies and a goods and services tax that has boosted the number of taxpayers and simplified collections. And the “India stack,” as the government calls the digitization of public services, has made it possible to carry out countless tasks online, such as tax appeals and Covid vaccine appointments. Thousands of minor technical and procedural defaults have been, or are being, decriminalized, a longstanding demand of business. One area where India has slid backward is on trade: Tariffs have risen as part of Mr. Modi’s “Make in India” plan. But India has pursued free trade deals—pacts with the United Arab Emirates and Australia are now in force and talks with the U.K. are well advanced.


Given all those structural improvements, it is surprising growth isn’t even stronger. Anantha Nageswaran, Mr. Modi’s chief economic adviser, says that while other countries’ growth was helped by taking on more leverage in the past decade, India was dealing with its banks’ bad debts. That process of deleveraging, followed by the pandemic and commodity-price shock “delayed the full impact of structural reforms,” Mr. Nageswaran said. Once geopolitical and economic stability return, “you can see the lagged effects of these reforms,” he said.


But the lack of a stronger response to reform might also signal how much more work India has to do. The pandemic set back education for children, many young Indians aren’t finding jobs, and inflation and budget deficits are still high. It remains a hard place to do business; infrastructure still takes too long to build, held up by such factors as land acquisition. The controversy engulfing the Adani Group, accused of fraud by a U.S. investor, which the company denies, highlights how much of Indian business is controlled by family conglomerates close to ruling politicians.


Then there is Mr. Modi himself. His ability to enact several consequential reforms reflects the political stability that comes from controlling majorities in Parliament, in contrast to the coalitions that prevailed in prior decades. But his critics worry those same majorities have revealed autocratic tendencies in Mr. Modi and his Hindu nationalist Bharatiya Janata Party. They say his government uses allegations of financial misconduct to target critics, including nonprofits, journalists and politicians. Last week, the tax authorities raided the BBC’s offices in India after it aired a documentary critical of how Muslims have been treated during his time as prime minister and as chief minister of Gujarat. (A BJP spokesman said of the BBC: “If they haven’t done anything wrong, then why are they scared?”)


Business leaders who otherwise applaud Mr. Modi’s policies fear similar retaliation if they say anything critical. “When you put a coercive, fear-driven ecosystem in place where everybody and their grandmother is being raided by the law enforcement instrumentalities of the government, people generally don’t want to work and invest in that environment,” said Manish Tewari, a member of the opposition Indian National Congress party.


Mr. Blinken has in the past raised concern about India’s human rights record under Mr. Modi. Yet the Biden administration has clearly concluded that while India might be a flawed democracy, those flaws don’t diminish the appeal of having such a large and influential economic power in its corner as the geopolitical contest with two true autocracies, China and Russia, heats up.


Write to Greg Ip at greg.ip@wsj.com

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