July 31, 2017    3 minute read

Narendra Modi’s Reforms: The Modernisation of the Indian Economy

Accelerating Growth    July 31, 2017    3 minute read

Narendra Modi’s Reforms: The Modernisation of the Indian Economy

With the release of the International Monetary Fund’s (IMF) latest World Economic Outlook Update, India’s growth is forecast to increase to 7.7% in 2018-2019, from 7.2% for 2017-2018.

These figures reveal that India is projected to grow faster than China, signalling a growing confidence in the Indian economy and the economic reforms spearheaded by Prime Minister Narendra Modi. China’s growth, on the other hand, is expected to remain at 6.7% in 2017 and to marginally decline to 6.4% for 2018.

Comparison with China

While the growth of both countries has been fuelled by an increase in investment; it is only in the last number of years that India’s growth has begun to exceed that of China and it raises the question of why this has been the case.

Compared to the Chinese that started opening up the country to foreign investors through a number of systemic reforms as early as 1978; India’s major breakthrough only came after introducing a series of policies in the early 1990s that intended to deregulate the market, allow greater foreign direct investment and reduce import tariffs and taxes.

Dale Jorgenson, the Samuel W. Morris University Professor at Harvard University, posits that India’s favourable demography has been central to increased productivity in the country, thus helping India overtake China as the fastest growing economy in the world.

Demonetisation

After his inauguration in 2014, Prime Minister Modi has been at the centre of implementing reforms in an effort to boost the country’s economic growth even further. One of the more controversial reforms attributed to his economic agenda has been the demonetization of old 500 and 1000 Rupee notes.

Although demonetization was intended to tackle the country’s shadow economy; some critics argue that the process of doing so was far from perfect given that the notes taken out of circulation accounted for nearly 86 percent of the total currency in circulation in India.

The reform has yet to achieve the desired results since corruption is still widespread; however Nandan Nilekani, former chairman of the Unique Identification Authority of India (UIDAI), believes that demonetisation will ultimately lead to an increase in the digitisation of financial services in India.

GST Bill

A similarly ambitious reform has been the Goods and Services Tax (GST) which came into effect on 1st July. Previously, tax rates on goods were set by individual states, while services were taxed by the central government.

Although the GST has been in the making for well over a decade, it aims to harmonise India’s complex tax structure and redistribute taxation evenly among individual states and, between the manufacturing and services industries.

Conclusion

In spite of the positive intentions behind Prime Minister Modi’s reforms, India continues to face many challenges that are capable of hindering the country’s economic potential in the long run. One such challenge is the low rate of capital formation which is heavily influenced by the vast inequality that exists within the country.

Given that approximately one in every five Indians lives below the poverty line, the capacity to save is low and thus the amount of capital generated is also relatively low. Sustaining India’s future economic growth will certainly be a challenge; however ensuring the implementation of sound economic policymaking will be of utmost importance in helping India consolidate its position as the fastest growing economy in the world.

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