The nation’s growing middle class and a young demographic skew are driving consumption.  In 2018, India entered a 37-year period of demographic dividend, an interval in which the working-age population grows faster than the dependent population.  Higher capital expenditures by the government over the last few years have been another pillar of growth.  Cheap data and an exponential increase in mobile subscriptions are driving rapid digitization, accelerating the formalization of the economy. 

External account vulnerabilities to global shocks have faded, with foreign exchange reserves climbing to an all-time high of $646 billion, equivalent to over 10 months of import cover.  The rupee was one of the best performing currencies and the least volatile among global peers in 2023.  India has fared better than several of its emerging and developed counterparts in keeping price pressures contained, despite heavy reliance on commodity imports.  Equity markets scaled new highs, delivering 20% returns last year.  Fiscal concerns have been fading, thanks to higher tax revenues and the government’s commitment to reining in public deficits.

The optimism extends beyond the country’s strong domestic performance.  Amid tense U.S.-China relations, India is increasingly seen as an alternative to China for diversification of supply chains.  The government has been actively courting multinationals to set up shop by offering incentives and spending billions on improving infrastructure.  Annual foreign direct investment inflow has almost doubled from $45 billion in 2014-15 to about $85 billion in 2021-22. 

That said, India’s strong headline GDP growth masks a host of economic challenges.  The benefits of strong economic performance have not trickled down to the bottom of the pyramid.  Extreme poverty is falling from a high level, but a high proportion of the population still struggles to make ends meet.  800 million residents qualify for the government’s free food program.  Inequality has worsened to a 100-year high.  The top 1% of Indians account for over one-fifth of the national income, compared to less than 15% earned by the bottom half of the population. That is higher than countries like the U.S. and South Africa.

India has the world’s largest workforce, but not enough jobs. This situation is a major issue surrounding this year’s election.  India’s youth unemployment problem is one of the most acute among its emerging market (EM) peers, and more dire than reported in the official surveys.  The labor force participation rate among women is still quite low, relative to other EMs.  Millions of young people are becoming a drag on the economy.  According to HSBC, India needs to create 10-12 million jobs a year to prevent the demographic dividend from turning into a disaster.  That is about twice as many as are being created annually at present.

India seeks to become more of an industrial hub.  Our "Make in India" campaign seeks to increase manufacturing’s share of national output from 17% to 25% of gross value added (GVA) by 2025.  Though more and more companies are seeking to shift or diversify their supply chains to India, the share of manufacturing in GVA has remained unchanged over the past decade.  Infrastructure, along with an improved ease of doing business, will be needed if goals are to be met.