India’s Five Big Challenges

As the world’s third largest economy (in PPP terms) and the “I” in BRIC, India ranks amongst the world’s most important consumer markets. Currently in the process of electing a new government, India’s new leaders face five crucial challenges, which must be overcome to ramp up growth in the medium and long term.

1. Attacking Poverty and Rising Inequality

In 2010 more than two thirds of the population were living on less than $2 per day. The average income of a decile 1 household (the lowest earning 10% of households) at US$1,132 in 2013 was the 9th lowest of the 85 countries for which we have data. Since 2008, the economy has expanded by 38% in real terms but the disposable incomes of these households have actually fallen – by 2.6%. Linked to this is rising inequality – during the same time period the disposable incomes of decile 10 households increased by 9.4% in real terms. The gini index has increased to 0.406 since 2008, an increase which is the 9th largest of the 85 countries for which we have data.

Real Growth in Average Disposable Incomes of Decile 1 and Decile 10 Households in India: 2008-2013

Source: Euromonitor International from national statistics

2. Boosting the Business Environment

The business environment is weak. India ranks 134th out of 189 economies in the World Bank’s Ease of Doing Business 2014 report. India fares particularly badly in starting a business (179th), dealing with construction permits (182nd) and enforcing contracts (186th).  Excessive bureaucracy is a real challenge – in terms of enforcing contracts, the World Bank has found that it takes 1,420 days to resolve a dispute, compared to 406 in China. Corruption is also a key concern, India ranks 94th out of 175 countries in Transparency International’s Corruption Perceptions Index. This weak business environment contributes to India’s low levels of Foreign Direct Investment – which in 2012 were the lowest of all the BRIC economies.

Doing Business in India: 2014

Source: Euromonitor International from World Bank Doing Business Report

Note: Data refer to a ranking of 189 countries

3. Modernising the Agricultural Sector

India’s growth is tightly tied to its agricultural sector, which employs 1-in-2 of the employed population but accounts for just 16.7% of Gross Value Added. This imbalance is due to low productivity: much of the sector is characterised by small, subsistence farming. A weak food supply chain adds to the problems of the agricultural sector and improvements in the sector have to be mirrored by improvements in the food supply chain.

Post-harvest food losses are a key concern in India, for instance a study cited in the Institute of Mechanical Engineers “Global Food: Waste not, Want not” report claims that in India at least 40% of all fruit and vegetables is lost between grower and consumer due to a lack of refrigerated transport, poor roads, inclement weather and corruption.

Gross Value Added and Employment in Agriculture in BRIC: 2013

Source: Euromonitor International from ILO/Eurostat/national statistics

Note:  Data refer to Agriculture, Hunting, Forestry and Fishing

4. Inadequate Infrastructure

The parlous state of India’s infrastructure is well-known and extends well beyond the agricultural sector. In per capita terms, India produces less electricity than the other BRIC markets by a long margin.

Electricity Production in BRIC: 2013

Source: Euromonitor International from International Energy Association (IEA)

India ranks 60th out of 148 countries in the World Economic Forum’s 2013-14 Global Competitiveness Index and in the same report “inadequate supply of infrastructure”  was rated as the most problematic factor for doing business in the country. Transport infrastructure has played a part in the manifestos of both major parties (Congress and Bharatiya Janata Party (BJP)) in the current election campaign.

5. Persistent Inflation

Inflation has been a persistent problem – in three of the past five years it has been in double digits, and although decelerating, it still remains higher than regional and BRIC peers.

Inflation in Selected Emerging Markets: 2013-2014

Source: Euromonitor International from national statistics/OECD/UN/ IMF

Note:  Data for 2014 are forecast

With the Fed taper, more attention has been focused on the macroeconomic fundamentals of emerging markets; so inflation, which constrains the government’s ability to enact policy reform, is a key concern in this regard. Added to which inflation also impacts the poor disproportionately – particularly food price inflation.

Can These Challenges be Overcome?

In theory yes – the slowdown in real GDP growth has been a wake-up call for the political classes. The government’s success in bringing down the current account deficit bears witness to this. However, these challenges are enduring and overcoming them will require a government with a strong mandate.