Strengthening India’s Growth Multiple in the Global Slowdown


Bullet Points Image September 2019


India, the world’s fastest growing major economy, has been one of the few bright spots in an increasingly volatile world that has seen global risk rising.  A comprehensive reforms programme implemented by the Modi government helped economic growth accelerate to c.7% even as global growth has slowed, sharply increasingly India’s ‘Growth Multiple’ (defined as Indian GDP growth as a multiple of global GDP growth).  With global political and economic uncertainty set to increase for the foreseeable future, India has a unique opportunity to further cement its position as pillar of growth and stability globally.  India’s finance minister, in her maiden budget speech predicted India as a US$5tn economy by 2024, which will require an average GDP growth rate of 8% over the next five years to achieve.  The Sign of the Times in February 2019 laid out the case for a US$5 trillion economy and its key drivers and in April further laid out the structure of India’s trajectory into a new phase of this growth.  While India’s ability to sustainably grow at this rate is largely driven by a series of country specific macro-drivers independent of government policy, India of course is not immune to the global slowdown underway.  The recent slowdown in growth over the last few quarters – GDP growth for Q2 2019 was c.5%, the slowest in six years – is at least partially attributable to on-going global macro-economic volatility.  Against this backdrop, for India to defend or even increase its Growth Multiple over the rest of the world it will need to accelerate and deepen its current reform program (alongside tactical monetary and fiscal policy actions to manage global volatility and risk).  If India can deliver on this, it has the potential to leapfrog most large western economies over the next decade, in a similar fashion as China did following the Global Financial Crisis.  In addition, not to be underestimated, the government will need to avoid the traps that derail growth, such as wars and conflicts.  The Modi government will need to steer a careful course through a looming global crisis and its own challenges, leveraging the positive drivers of its democracy, demographics and development. 


The Next Phase: The US$5 trillion Economy

As highlighted in a series of previous Signs of the Times[1] India’s combination of a scaled economy and accelerating growth has led to a compression in the time required for India to add each successive US$1tn of to its GDP and, at current growth rates of 7.5-8.0%, this will result in India’s economy crossing US$5tn by 2024 and US$8tn by 2028.  India’s rapid growth is being propelled forward by a series of fundamental economic drivers[2] which are independent of both global macro and Indian domestic policy, helping to potentially protect its growth from the broader global slowdown, including (i) its favourable demographics and large, educated workforce; (ii) large-scale urbanisation and the shift from agriculture to services and industry; (iii) mass-scale technological adoption enabled by the spread of telecommunications and low-cost smartphones; (iv) mass consumption as households move from low income to  middle income status; and (v) large scale financial inclusion increasing participation in the formal economy.  With many of these drivers having reached critical mass in the last several years, India has established a solid basis for further growth.  Of course, India like every country in the interdependent world in which all nations operate remains susceptible to external events that can accelerate or hinder growth, as well as to internal political moves that can damage or derail growth, as the experience of the previous Congress government has demonstrated.


Indias economic journey from 1960 to 2030 image

India’s growth since 1960, or even during the past decade, has not unfolded uniformly, but has taken place in the context of distinct growth phases.  Following a pattern established earlier by China, India has to date passed through two of these growth phases and is currently in the process of transitioning to a third, namely

The transition between each phase is marked by turning points that drive the step changes in GDP growth.  The turning point for the transition between the first and second phase of India’s growth came in 1991, when it discarded its failed socialist style planned economic model and embraced the market economy, driving increased foreign investment and exports and helping the economy scale to US$1tn by 2006.  During Phase II growth averaged 7.3% but was highly uneven due to various global and domestic factors.  Following rapid initial growth boosted by the increased liquidity post the global financial crisis, a series of self-inflicted major dislocations quickly brought growth to a halt:  Multiple large corruption scandals under the Congress-led government paralysed further policy reforms, and a battle with a foreign investor, Vodafone, led to a massive outflow of capital and precipitated the collapse of the rupee, depreciating by c.50% between 2007 and 2013, further eroding returns.  The turning point came in 2014 when voters elected the BJP and its leader Narendra Modi with an unprecedented parliamentary majority.  Mr. Modi’s government restarted India’s reforms program and attracted FDI back to the country, with GDP projected to cross US$3 trillion this year, positioning India on threshold of the transition from Phase II to the Phase III.  This is an important ‘Turning Point” for India.[3]  To understand and plan for this phase, the government will need to consider three concurrent factors that impact the growth story of India, namely:

  1. Independent Drivers.  The momentum and impact of the above five domestic drivers which can take India to US$5 trillion economy.
  2. Supporting Policy and Internal Dislocations.  Internal decisions and events can damage or support growth.  Importantly, India’s Independent Drivers have transcended the government’s ability to directly drive economic growth, so that the most effective support the government can give is in the form of removing obstacles to these drivers’ continued ability to deliver growth.
  3. External Supporting Events and Dislocations.  External events that can either damage or support growth.

The first of the three factors is largely independent of the others and is a major driver that, unhindered, can take India to a US$5 trillion economy, which has now become a formal target of the current Modi administration.


India’s “Growth Multiple”: Insulated from but not Immune to Global Macro Risk

In the five-year periods before and after the Global Financial Crisis of 2008, global economic growth was strong, averaging 4.7% and 4.1%, respectively.  While India’s Growth Multiple during each of these five-year periods remained fairly steady at 1.7-1.8x on average, actual growth in India was highly volatile during both periods.  Particularly in the period 2009-2014, corresponding roughly to the first half of Phase II of India’s growth, allegations of corruption and a complicated regulatory and taxation framework meant that growth ranged from 10% in 2010 to 5.5% in 2012 and India was widely perceived to have squandered its opportunity to emerge as a major global economy at that time.  Over the last five years however, roughly corresponding to the second half India’s Phase II growth, this perception appears to have changed, thanks in large part to the supporting policies undertaken by the NDA government (see inset), which have unlocked the India’s ‘Independent Drivers’ ability to deliver growth through mass inclusion and increasing economic participation.  In the face of external dislocations created by the ongoing global slowdown, India’s GDP growth has continued to materially outpace global growth, emerging as one of the few bright spots in a global economy that is seeing increased volatility and risk.  While there has been a temporary lapse in the country’s growth over the last few quarters arising from internal (losses in India’s financial services sector) and external (US-China trade dispute) dislocations, India remains well positioned to grow and maintain a healthy growth Multiple of 2.1x against the global economy, with the potential to build this out further given the implementation of additional supporting policies.


iNDIA VS WORLD Average Image



AmongKey reforms table the key ’Supporting Policies’ introduced by the NDA government during the past five years, those that have focused on the removing obstacles to growth have been among the most effective.  Among these, the initiatives that have increased ease of doing business have been critical to unlocking growth.  With India ranked a lowly 142nd on the Global Ease of Doing Business Ranking in 2014, the government’s focus was the removal of regulatory and legislative roadblocks that reduced India’s competitiveness and attractiveness as a market, including reforms like  project clearances, labour law compliance, land acquisition, new business formation and bankruptcy resolution (see inset).  These in turn resulted in India achieving an unprecedented jump in its Global Ease of Doing Business Ranking, 77th in 2018.  Of course, many of the government’s other major initiatives, particularly around inclusion e.g. driving banking/financial inclusion, cashless payments, and transparency in governance[4], also increased India’s long-term growth potential by also increasing economic participation and made Indian businesses more competitive.

An important consequence of India’s reforms has been an increased resilience of the Indian economy against global volatility.  Whereas the earlier phase of 7-8% growth in India (2004-2014) was underpinned in part by external supporting events in the form of a strong global economy and liquidity, in the current phase, the slowdown over the last three quarters notwithstanding, India’s growth has been driven  by virtue of its intrinsic growth drivers and the government’s supporting policies, resulting in a significantly higher Growth Multiple.




Indias Growth Multiple table

This Growth Multiple notwithstanding, the Indian economy’s linkages with the rest of the world, and therefore its sensitivity to external dislocations’, continue to increase, primarily through trade and investment.  Since India liberalised its economy in the early 1990s, its dependence on trade has more than doubled (from c.20% in 1994 to c.43% in 2018)[5].  As such, the impact of potential external events remains significant, and its relative decline in GDP growth over the last few quarters (see below) is at least partially attributable to the recent slowdown in global growth (in addition to domestic structural and cyclical factors).


India Quarterly GDP Image

However, Indian GDP growth is expected to recover to c.7.5% levels in the near-to-medium term[6], and India is expected to maintain its Growth Multiple of c.2x over the rest of the world.  However, given the ongoing headwinds caused by the macro-economic slowdown, generating growth above this level (with 8% representing the base case growth needed for India to provide adequate opportunities for its burgeoning workforce) will likely require the government implementing further supporting policies.  The potential prize for India is an attractive one: in times of volatility, global capital and assets tend to flow towards economies that demonstrate stability, and at a time where the global economy is re-setting to a lower growth trajectory,[7] India has a unique opportunity to emerge as a premier global investment destination, and in the process, secure and strengthen its linkages to and its position in the world.


Delivering a Stable and Sustainable 8%+ Growth Trajectory: Strategic Financial Policy Initiatives

Ms. Nirmala Sitharaman, India’s new Finance Minister, in her maiden budget speech last month outlined the vision to make India a US$5 trillion economy by 2024 and emphasised the need for further structural reforms to achieve this.  Achieving this target will require sustainable and stable levels of growth in excess of 8% over the coming years, above the levels India’s five growth drivers are likely to support in the current global macro-economic environment.  To fully leverage India’s potential this stage, in particular its population and demographics and its highly entrepreneurial business environment, two policy areas stand out as potential focal points for ’Supporting Policies’: those that support mass inclusion as a key factors underlying India’s growth drivers, and those that reduce the cost of doing business as a key blockage to further growth and economic activity.

This month’s Sign of the Times is focuses on the latter, the policy initiatives that can drive the ease of doing business, and more importantly, make a structural change to India’s cost structure.  Successfully doing so can drive private sector investment and job creation by making Indian businesses more profitable and competitive globally, thereby unlocking further GDP growth based on India’s own five macro-drivers.  To make a lasting impact to the ease of doing business, India will need to focus on reducing the cost of doing business.  India’s businesses already have the unique advantage of the largest and lowest working population in the world.  However, this comparative advantage is currently mitigated by various other costs of doing business which are higher in India than elsewhere in the world.  If India can effectively change its cost structure it can create a level playing field for all Indian firms, in particular small and mid-sized ones, to compete with their larger peers in India and abroad and thereby drive investment, job creation and economic growth.

A systematic focus on making private companies more competitive can dramatically improve their ability to grow globally and compete in international markets, and therefore also improve India’s overall terms of trade with the world, driving both exports and growth.   There are a number of critical obstacles faced by companies in India today that are contributing to both the difficulty and cost of doing business, and the government’s focus will need to be on addressing these:  (i) a high cost of capital, (ii) high levels of taxation, (iii) working capital constraints, (iv) high logistics costs and (v) high transportation costs.  In this regard, there are five supporting policy initiatives focused on structural cost reductions that should form a multi-pronged, coordinated policy response by the government across fiscal and monetary policies, and structural reforms:


Supporting 1

Supporting 2

Supporting 3

Supporting 4

Supporting 5

In addition to policy initiatives to reset the country’s cost structure, India will of course also need to directly respond to external dislocations that have the potential to impact growth.  Therefore, in addition to the supporting policy initiatives making a structural change to the cost of doing business outlined above, it will also need strategic and tactical policy responses to respond to global macro developments.  Given that current developments seem to be increasing macro global volatility, the Modi government will also need to formulate (i) a dynamic monetary policy to counter the impact of changing monetary regimes in other major economies; (ii) bilateral trade alliances and agreements to open up export markets in the context of the escalating trade war between the US and China, and (iii) securing access to foreign capital.

Macro-global volatility is only one of the ‘External Supporting Events and Dislocations’ that can impact India’s economic growth, and thereby delay its ongoing transition to the next phase of development and growth:  wars, civil conflict, policy and execution paralysis and natural catastrophes stand out as four key factors that can impact growth and thereby the duration of time spent in a given phase.  China for example also had to contend with external financial pressures: the Global Financial Crisis, saw Chinese GDP growth drop from 14.2% in 2007 to a low of nearly 6% in Q4 2008 and triggered a massive US$586bn financial stimulus package in response.  However, China also faced dislocations of its own making, with the events of Tiananmen Square threatened to derail China’s reform agenda and growth trajectory.  Finally, dislocations in other parts of the world can also benefit a nation on this path.  For example, 9/11 and the two wars that followed distracted America and allowed China to grow unencumbered by real competition in its quest to secure resources, expand into foreign market and participate in major global institutions.

India will need to learn from China’s example and similarly need to chart a course that flexibly responses to external dislocations, opportunistically seize chances to advance into the gaps left by others, and most important avoid shooting an own goal, whether in the form of war (e.g. with Pakistan) internal conflict (e.g. in Kashmir), escalations with major powers (e.g. with China over regional issues or with the US in a trade dispute) or social discord (e.g. by falling victim to National Populism that closes the economy)[16].  While Mr Modi’s government has to date successfully avoided these risks, its prior actions with regards to a number of these issues point to the potential risks the country faces.[17]


Conclusion: Creating a Pillar of Stable Growth

If India can grow at 8%+ over the next several years and scale to a US$5tn economy by 2024, then it will become a critical pillar of stable growth in the world economy.  At this rate of expansion its Growth Multiple against the global average would substantially underwrite India’s position as a leading global destination for trade and investment, further increasing its ability to contribute to global growth and promoting the country’s ongoing rise in global significance.  To put that into perspective, while India’s GDP in 2024 would still only account for 4% of the world GDP (and 10% in terms of purchasing power parity), it would account for approximately 20% of global growth (see chart).  If it can achieve this, it has the potential to become a significantly positive macroeconomic force in the world economy.


India China US Contribution Image

China’s experience in the wake of the Global Financial Crisis provides a potential template that Indian policymakers can use for a longer-term resetting of India’s cost structure and the improvement of its competitiveness.  In addition to a US$586bn stimulus package launched to counter the immediate effects of the crisis, the Chinese government implemented a number of longer-term reforms and policies to drive growth including easing credit for mortgage and SMEs, lowering taxes, and increasing public investment into infrastructure development.  This package led to significant continued domestic industrial investment and the creation of economies of scale that increased China’s competitiveness.  These measures allowed China to leverage the full benefits of its own macro-drivers (which included mass technology adoption and urbanisation, similar to India’s) and scale its GDP from  US$2.8 trillion in 2006 to US$6.0 trillion in 2010 and US$11 trillion by 2015, a period during which much of the rest of the world was inward focused and pre-occupied with dealing with the fallout of the crisis.


A successful trajectory in the next phase of India’s growth requires India to maximise the value of the momentum of powerful drivers centred around favourable population-based dynamics (such as demographics and urbanisation).  As this Leader has laid out, the the restructuring of India’s cost base stands out as perhaps the most critical near-term action the government can take to support this growth. In this regard, India can follow a similar path to China’s, albeit they have very different models and circumstances and without the headwinds of the Global Financial Crisis; India has the potential to rise to middle-income status, establish itself as a stable ‘haven’ that investors can turn to during times of global volatility and finally fulfil its “once-in-a-generation” economic potential.  More importantly, through its growing linkages to the world, India also has the opportunity to become a force for good and in the process, stepping into the global leadership vacuum[18] that is likely to be left behind by many Western countries as they struggle with debilitating domestic issues and regional conflicts[19].  The peaceful development of its society has the potential to not only help rekindle global faith in the liberal economic model that has been a key driver of peace and prosperity – particularly among like-minded Western economies – but also to provide a template for the next generation of rising economies, particularly in Asia and Africa, to develop based on democratic values and principles.



Global slowdown| Indian GDP Growth | India Reforms| US$ 5 trillion economy | Growth Multiple

1. See GPC’s February 2019 Sign of the Times, “India’s Journey to a US$5tn Economy: Growth Beyond Policy”
2. Ibid
3. Source: GPC’s April 2019 Sign of the Times, India’s Growth: Critical Turning Points and Geostrategic Implications
4. See GPC’s November 2017 Sign of the Times, “The Maths of India’s Reforms: Where to Next?” and June 2016 Sign of the Times, “India’s Steady Pace of Change: The NDA Government at 2 Years”
5. Trade as a percentage of GDP; Source: World Bank
6. Source: IMF
7. Source: Ruchir Sharma, Our Irrational Anxiety About ‘Slow’ Growth, New York Times, 17 August, 2019
8. The potential loss of taxation revenue on account of cutting tax rates will need to be offset by increased divestments of government-owned entities and the enlargement of India’s taxation base
9. In the case of some foreign enterprises the corporate tax rate can increase to up to 40%
10. Source: Library of Economics and Liberty
11. Source: LiveMint, based on analysis by McKinsey & Co.
12. China logistics costs are higher than India on account of its higher manufacturing base (Logistics cost to Manufacturing Output in India is 93% compared to 50% for China)
13. Source: McKinsey & Co.
14. Source: PayPal Seller Fees for Indian Businesses; https://www.paypal.com/in/webapps/mpp/paypal-seller-fees
15. The government has launched the United Payments Interface (UPI) in [2016] to streamline cashless payments amongst Indian residents
16. See the August 2019 Sign of the Times, “National Populism and the New World Order”
17. Cf the February 2019 airstrike exchange with Pakistan, its current administrative restructuring of Kashmir, recurring border stand-offs with China, US$13bn worth of populist measures including pay outs for farmers
18. See GPC’s July 2017 Sign of the Times, “Path to Power: India’s Great Opportunity in the Changing World Order”
19. See GPC’s August 2019 Sign of the Times, “National Populism and the New World Order”