India poised between global clout and looming domestic threats

Strong economic growth, but democracy at risk

Standing out for its economic stability during a time of global uncertainty, India became the fifth largest economy in the world last year, surpassing the UK. Economy growth rose to 6.8%, according to the International Monetary Fund, which forecasts 2023 gross domestic product growth to be 5.9%. For comparison, the IMF forecasts the UK at -0.3%, Germany at -0.1% and Japan, 1.3%.

India’s strong economic performance did not happen overnight, but were the result of policies followed over the past decade. There have been significant investments in strengthening infrastructure and the country has reaped the benefits of a skilled, cheap and vast labour force. In its most recent budget, the government has increased capital expenditure by one-third to INR10tn ($122.3bn) – most of which has gone into urban infrastructure projects.

Compared to neighbouring countries, India stands out as a beacon of stability. Three of its immediate neighbours approached the IMF for support last year. Sri Lanka has been showing signs of emerging from its debilitating debt crisis, while Pakistan presents symptoms of descending into one. Bangladesh became the third country in the region to seek support from the IMF in 2022, following a widening current account deficit, a depreciation of its currency and a decline in its foreign exchange reserves. And as tensions between the West and China heighten, India finds itself in a favourable position as a counterweight to Chinese influence in the region.

One element of the diversification away from China has been that multinationals are looking at alternative countries to shift production and India is a viable option. Poor infrastructure and extensive red tape have deterred investment, but changing this has been a priority for the government. Under the ‘Make in India’ policy, which was launched in 2014, several policies and subsidies have been introduced to attract manufacturing business to the country. This has paid off most recently with Apple’s decision to shift iPhone production to the country, potentially signalling a more favourable future for the manufacturing sector.

However, there are strong critics of such policies who argue that this will boost the profits of the top income earners in an already unbalanced country. Despite this, manufacturing still only accounts for 14% of India’s economic output and it is not creating the intended employment boost.

Domestic threats

As India’s role on the global stage continues to grow, a closer look inside the country reveals potential threats that could derail the country’s path towards becoming a superpower.

While India holds the presidency of the G20 this year, its citizens remain the poorest of the group. Both wealth and income inequality have worsened persistently since 1995. And while India has had the highest growth rate of ultra-high net worth individuals between 2018 and 2023 at 39%, it is also home to the world’s largest number of poor people at 226.9m. A recent report by Oxfam found that the top 1% own nearly 40% of the wealth in the country.

In addition to rising inequality, the country also faces rising unemployment. Job creation has not been able to match the fast-paced growth of the economy in recent years. Overall unemployment rate in March was 7.8%, up from 7.45% in February. This is especially concerning for a country where half the population is under the age of 30. Youth employment in India between 2021-22 was 41.5% compared to an overall unemployment rate of 7.7% – which is cause for concern, especially if India wants to take advantage of its demographic dividend.

While the country is the world’s largest, in terms of population, it is losing its hold on the title of the largest democracy. Since 2014, there have been deteriorations in the political freedoms enjoyed by citizens. Freedom House changed its classification of the country from ‘free’ to ‘partly free’ in 2021. Similarly, V-Dem classifies India as an electoral autocracy, calling it ‘one of the worst autocratisers in the last 10 years’.

Democracy at stake?

The erosion of freedoms in the country stems from growing dissent. There has been an increased crackdown on the media, both domestic and international, with recent tax raids on the BBC offices in India. This is also accompanied by more stringent laws governing foreign funding for non-governmental organisations and think-tanks, which have been under extreme scrutiny in recent months. Moreover, news reports from the country point towards a weakening of institutions in general, especially the judiciary and oversight bodies, which, if true, does not bode well for the country.

The perceived threat to democracy is reflected in the conviction of Rahul Gandhi, a prominent politician from the largest opposition party, the Indian National Congress. The conviction was based on comments Gandhi made in a speech that were taken out of context and deemed to be defamatory. The court has also rejected a petition seeking a stay on this conviction, which means that Gandhi is disqualified from the Lok Sabha (lower house of parliament) and will not be allowed to stand for the next general election in 2024. Members of other opposition parties have also been detained and questioned ahead of elections next year.

Amid increasing polarisation, geopolitical tensions and economic slowdown, India’s robust economic growth, neutral foreign policy stance and strong representation of the Global South positions the country to lead effectively in strengthening governance to better address the multitude of shocks to the global economy. The question remains: will it rise to the occasion or fall victim to domestic threats that loom closer?

Arunima Sharan is Senior Research Analyst at OMFIF. 

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