Export growth and inbound FDI should receive a leg-up if advanced economies are not headed for a hard landing, as the narrative from central bankers is indicating. Inflation is sluggishly heading towards its target, and RBI may have to delay its anticipated shallow rate cuts on account of food price volatility.
Structurally, however, the economy is not transforming as rapidly as it ought to. This is having adverse consequences on capital allocation and income distribution. Production is concentrating in large companies that are feeding top-tier consumption from the formalised economy. India’s potential to grow is constrained by lack of reforms in its informal economy, a chapter that remains pending in the Great India Story. This shifts the policy objectives away from employment towards self-employment, which is disadvantaged by access to credit. Factor markets like land and labour remain caught in legacy imperfections despite the present government’s attempts to reform them. The outcome of the general elections could weigh in on acceptance by states of a new set of codes that address rigidities in the labour market.
The road to a developed economy cannot bypass manufacturing, whose share of economic output is stagnating. In 2024, India’s efforts to become a global manufacturing base will come more clearly into focus as the world builds resilience to supply chains. It will also be a period of strengthening globalisation in services where India has built considerable capacity. To avoid the middle-income economy trap, India will require similar manufacturing capacity. The country will have to ratchet up its charm for foreign investors.
