India's turning point: Economic momentum and bold reforms are powering the vision of Viksit Bharat

The Indian economy grew by 7% in financial year 2022-23 (FY23) and 8.2% in FY24, making it the fastest-growing large economy in a challenging global economic environment. Besides the current strengths, there are clear signs of important structural changes underway, all pointing to the likelihood of India becoming a developed nation by 2047.

Macroeconomic parameters are stable. There is clarity, consistency, and focus on long-term economic growth in the government’s policymaking. The government has also been fiscally prudent. Even when the economic impact of Covid-19 was felt acutely, the government stayed away from the temptation of a large-scale fiscal stimulus. Instead, it focussed on directing credit to boost capital spending. The fiscal deficit has declined to 5.6% in FY24, with the possibility of reaching 3% by FY28. Foreign exchange reserves of nearly $700 billion provide a cushion against external shocks.

There is a strong financial institutional framework to oversee current and future growth. The government’s fiscal prudence is complemented by a conservative central bank and an independent securities regulator. Balance sheets of banks are healthy, with net non-performing assets (NPAs) down to 0.6% and capital-to-risk weighted assets ratio of 16.8%. Indian corporates have de-leveraged, and the debt-to-equity ratio is at an all-time low of less than 0.9. Market capitalisation has crossed $5 trillion on the back of strong and consistent domestic inflows rather than foreign institutional investor (FII) inflows, which can be erratic. The Indian stock market is the fourth-largest after the US, China, and Japan. There was a record 272 IPOs in FY24, benefitting both businesses seeking capital and providing PE and VC funds investment opportunities as well as exits. A combination of strong balance sheets, buoyant markets, and business optimism positions India for a stronger future capex cycle.

The government has been consistently driving capex through direct and increased spending on infrastructure. It also has a continuing focus on manufacturing. It is widely recognised that for sustained long-term growth, the country’s workforce needs to transition from agriculture to manufacturing. The focus on skilling and job creation complements the manufacturing thrust and can lead to a multi-year growth cycle by driving both investments and consumption.

Significant private sector investments are underway in both traditional and non-traditional areas. For example, electronic manufacturing output has grown from $37 billion in FY16 to $105 billion in FY23. In FY15, 210 million mobile phones were imported, while only 3 million units were imported in FY24, and close to 50 million handsets were exported. Similarly, the traditional toy industry saw imports decreasing by 52% and exports increasing by 239% between FY15 and FY23. Investments are also underway for the manufacture of semiconductors and drones, giving confidence that the technology gap between India and the West will be a thing of the past.

Among other growth drivers, service exports continue to do well. At $341 billion in FY24, it accounted for 9% of the GDP. Global capability centres (GCCs), currently estimated to be around 1,600, drive growth and ensure that India has access to high-quality technical power on a par with the global best.

Besides bridging the technology gap, a successful energy transition is imperative for resilient and sustainable growth. Successful execution will ensure the availability of competitively priced and higher energy production, more sustainable pathways, and energy independence through reduced dependence on fossil fuel imports. The policy focus on solar power, green hydrogen, biofuels, and nuclear energy ensures that all targets set by the government will be met.

Similarly, a transition to electric vehicles (EVs) can ensure that India is more resilient and there is technological parity with the world, which was not the case with internal combustion engines. Early signs of our energy transition journey so far are encouraging—with over 140 GW we have the fourth largest renewable energy generation capacity globally, and 0.95 million two-wheeler EVs were sold in FY24. The policy framework has been more focussed on the supply side (solar panels, EVs, and batteries) so far. Some more financial and policy support on the demand side can lead to faster adoption.

Private capex in manufacturing can be accelerated by addressing “ease of doing business” issues and the inverted duty structure in many sectors, making factors of production like land and labour more competitive. It is estimated that India has a staggering 1,536 laws, 69,233 compliances, and 6,618 filings that a business must navigate. In contrast, countries with a federal structure such as the US and Canada have less than half our compliance requirements.

Factors of production like land and labour are state government subjects. Many next-generation reforms are needed at the level of states. Strengthening local governments to facilitate more effective urbanisation models along with power sector reforms and better quality of school education are other examples of important areas that state governments need to look at. The Union government and the states should work together to implement these reforms.

Lastly, the advent of AI represents both an economic opportunity and a potential threat to current ways of working. It is widely accepted that it will create new jobs and drive efficiency while making some of the existing jobs redundant. Like all technologies, its impact will vary between businesses, communities, and countries. AI, as a technology, is evolving rapidly and it needs the close attention of policymakers.

India is at an inflexion point. The current momentum along with structural changes such as bridging the technological gap, the role of local capital, energy transition, and better infrastructure bode well for our growth prospects. By nourishing the current strengths and recognising and effectively addressing the challenges, India could be at the cusp of sustained long-term growth to a “Viksit Bharat” by 2047.

The author is the Chairman of the India region of EY. Views are personal