By Nirupam Bajpai and Jeffrey D. Sachs

India is one of the fastest growing economies in the world today. The economic reforms implemented in the country since the early 1990s have helped India grow at 6-plus percent on an average since 1992-93. We believe that this growth, though impressive, is still below India’s potential of around 8 percent per annum. Should India be able to implement the remaining reforms on its agenda and re-orient governmental spending towards high priority areas of health, education and infrastructure development, then it is very likely to attain and sustain rapid economic growth for decades to come, though at a gradually diminishing rate as India’s per capita income rises.

Relative to agriculture, the manufacturing sector is a much more consistent engine of growth, and it is likely to play a growing role in the Indian economy in the years ahead. As China’s experience demonstrates, trade liberalization in a low-wage, surplus-labor environment permits a rapid expansion of export-oriented manufacturing industry, which can absorb large numbers of workers to provide goods for the world market. India’s insertion into the world economy has been much less dramatic than China’s, but it has been important nonetheless. Interestingly, India’s initial export boom was in IT-based services, though now manufacturing exports are growing very rapidly as well. China’s reforms were bolder than India’s in promoting both foreign direct investment (FDI) and manufacturing exports, and China benefited immensely from the vast inflows of FDI, especially from the overseas Chinese investors, based in Hong Kong, Taiwan, Singapore and Macao.

India’s inland areas will, however, likely continue to face the same problems as China’s inland areas, particularly in rural settings. Even with faster national growth, the inland areas are likely to grow more slowly than the coastal areas, opening a widening gap between the fast and slow-growing regions. This does not mean absolute stagnation of the interior, of course, but it will likely provoke political pressures as well as increasing internal migration from rural areas to cities and from the interior to the coast. One of the biggest challenges for India, like China, is to think through and inject fresh growth impetus in its rural economy. Among other things, this would entail raising agricultural productivity, promoting agro- based industries in the rural areas, improving rural infra- structure in the areas of power, roads, telecommunications and water and providing access to good quality healthcare and schooling in India’s 600,000 villages. The scale of the challenge is, of course, immense, but so too is India’s capacity.

How will India fare as the globalization process continues? Going by the experience of the last 14 years of India’s post-reform period, it would not be unreasonable to say that the coastal states of western and southern India along with regions with high urbanization rates will probably continue to grow faster than the northern and central states of India. In the post-reform period, some states have achieved rapid economic growth, while others have languished. The difference of performance across states can be explained by a combination of factors. The geographical and demographic characteristics of states have been important. To a certain extent the differences are a manifestation of global economic forces acting upon India, and to some extent they reflect differences in economic policies at the state and union levels. The market reforms will tend to make the rich states richer in relative terms, and the poor states are likely to lag behind, an experience similar to that of China.

Read the report