The Roar of India: Key Factors of Economic Success

In the past ten years, India has recorded impressive economic development, becoming the fastest-growing nation in the world with an average annual rate of 6-7% over the past twenty years. Thanks to this dynamism, it has managed to carve out an increasing role in the global economy, rapidly rising from the thirteenth position in 2000 to the fifth in 2022, with the prospect of reaching third place by 2027, according to estimates by the International Monetary Fund (IMF), positioning itself behind the United States and China and surpassing Japan and Germany.

Growth of India's Gross Domestic Product

Overall, the IMF estimates that India's Gross Domestic Product (GDP) at purchasing power parity (PPP) – which takes into account the purchasing power of its citizens and is not simply based on nominal income – has shown exponential growth from 1980 to 2029 (see graph on the left). In particular, it is noted that between 2010 and 2020, GDP grew particularly rapidly, and after 2020, the growth became even more pronounced, projecting to exceed 20 trillion dollars by 2029.

According to economic growth theory, there are several key factors that may have fueled this development, including demographic growth, the attractiveness of human resources, openness to foreign trade, an increase in foreign direct investments (FDI), and the enhancement of infrastructure.

Demographic Growth and Youth

Demographics is certainly one of the most relevant factors in the growth equation of the country, whose population surpassed that of China in 2023 (1428 vs 1425 million). India's demographic dynamics, characterized by one of the youngest and fastest-growing populations in the world, have provided a solid base for the workforce and supported domestic demand for goods and services.

A defining aspect of the Indian economy is the strong incidence of domestic consumption in the country's growth trajectory: according to analysts, it accounts for about 60% of GDP. The demographic boom and the progressive increase in disposable incomes support the expansion of domestic consumption. A second “demographic” factor undoubtedly pertains to the growth of the country's labor force, that is, the population between 15 and 64 years old, which ensures a great availability of labor. A growing and young population represents a significant advantage for the economy, providing an abundant workforce and a vast market of consumers.

Attractiveness of Enterprises and Human Resources

Another aspect not to be overlooked is India's ability to attract foreign enterprises and human resources.

Investments in training and skill development of the workforce have improved India's attractiveness to global enterprises. Initiatives like "Skill India" have trained millions of workers, making them internationally competitive. Working conditions for better-trained individuals have improved, increasing the attractiveness index for new talents. This, as represented by the graph for the period 2013-2017, has progressively increased, reflecting governmental and private efforts to improve workforce skills and attract global talents.

On this front, it is particularly significant that India surpassed China starting from 2016.

Ability to Attract Talent

Opening of the Indian Economy to the World

Although a clear strength of the Indian Tiger is its large and vast domestic market, growing geopolitical tensions have increased international attention toward the country as a new global manufacturing power. Over the century, the country's integration into international trade has progressively increased.

Rising Foreign Trade of Goods

Since 2005, India has progressively liberalized its degree of openness to foreign trade – measured here by the Trade Freedom pillar of the Index of Economic Freedom (The Heritage Foundation) – by reducing tariff and non-tariff barriers and promoting more favorable international trade policies. From the graph, a significant leap can be observed between 2005 and 2010, followed by a steady growth trend, with the index exceeding 70 points in 2020 on a scale where 100 indicates maximum trade openness. This has led to the country's growing integration on the international front.

Degree of India's Openness to Foreign Trade

The export of services is another supporting pillar of this phenomenon. Global trade in services is expanding, and Indian companies are capitalizing on this trend by offering services such as legal assistance and accounting at an international level.

Export of India's Services

Boom of Inward Foreign Direct Investments

Talking about openness to foreign trade, it is necessary to analyze the topic of inward Foreign Direct Investments (FDI), another side of the coin in the process of opening an economy. According to economic theory, inward FDIs play a crucial role in supporting economic growth by bringing in capital, advanced technologies, and managerial skills. Since 2000, India has seen a significant increase in FDI inflows, as highlighted by the graph covering the period from 1990 to 2022, with particularly accelerated growth after 2012. Notably, in 2020, FDI inflows reached a peak of nearly 70 billion USD, confirming India's strong attractiveness to foreign investors.

Inflows of Foreign Direct Investments in India

Infrastructure Development

A fundamental pillar of India's economic growth, affecting both its domestic market and international integration, is the massive infrastructure development program. Besides physical infrastructure, such as roads and bridges, India is also investing in intangible infrastructure such as digital payments, modern capital markets, banks, and a unified digital tax system. According to the Economist, these developments have allowed businesses to exploit national economies of scale and improve the overall efficiency of the domestic market.

Despite economic progress, India remains partly a semi-rural society. To address this paradox, the government has implemented a new welfare system, delivering digital transfer payments to hundreds of millions of poor citizens. This policy has led to increased digitization of the Indian economy and, according to the Economist, a reduction in the proportion of the population living on less than $2.15 a day, a global measure of poverty, from 12% in 2011 to the current 5%.

Challenges and Future Opportunities

Despite progress, India faces the challenge of creating formal employment for its vast working-age population. Only 100 million out of 1 billion working-age people have formal employment, with many workers relegated to casual jobs or unemployed.

A potential solution indicated by analysts could lie in expanding the IT sector and creating clusters of export industries, such as digital finance, food, and defense. Spending by workers in these industries could generate further jobs in other sectors, from construction to hotels. An efficient and sustainable domestic market would increase overall productivity, and targeted welfare could help those left behind. To achieve this, India should transform education and agriculture and allow greater migration from northern regions to large southern and western cities.

Conclusion

India is on an extraordinary growth trajectory, emerging as one of the most dynamic economies in the world. Population growth and size, openness to foreign trade, increased inward investments, a young and skilled workforce, and robust infrastructure developments are the pillars of this economic transformation. However, to maintain and enhance this momentum, the country must address the challenges of creating formal employment and reducing inequalities. Overcoming these obstacles will consolidate its position as a global economic power and ensure a prosperous and inclusive future for its citizens.