The Indian Economy at a Crossroads

April 9, 2014

Indian economic growth in 2014 is expected to come in at less than 5 percent—the lowest level in over a decade—potentially signaling the end to 20 years of robust economic development often known as the “Indian Economic Miracle.” While the recent global economic downturn has played a part, a major factor in India’s economic slowdown has been the loss of momentum for continued economic and trade liberalizing reforms. In recent years this has been replaced by an economic development approach that has prioritized expanding domestic manufacturing and import substitution rather than across-the-board productivity growth, which has in part contributed to India’s recent embrace of several trade-distorting “innovation mercantilist” policies.

With national elections now underway, this report details the evolution of India’s post-independence economic policies and explains how the liberalizing reforms of the early 1990s spurred two decades of turbocharged growth. It explains how that success is increasingly threatened by innovation mercantilist policies—such as Preferential Market Access (PMA) rules for government procurement of ICT products and compulsory licensing of biopharmaceutical intellectual property—designed to promote selected domestic industries, even at the expense of other Indian industries and Indian consumers. But while such policies may seem beneficial in the short-term, they will ultimately prove counterproductive, by hampering domestic productivity, lessening India’s attractiveness to foreign direct investment (FDI), and potentially leading to retaliatory measures by other nations that would imperil the global trading system.

To reverse its slow growth, spur global competitiveness, and restore the Indian Economic Miracle, India should instead embrace a “Modern Economy Path” that aims to spur across-the-board productivity growth across all sectors—based on competitive markets, liberalized trade, and robust innovation policies. This strategy will create strong, innovation-based industries at home that can effectively compete globally, while providing a much more effective strategy to achieve the broad and sustainable income and employment growth India seeks.

The report concludes with a series of recommendations designed to create a comprehensive, pro-productivity strategy that can strengthen Indian innovation and spur the development of new industries and high-tech sectors that can generate sustainable growth. Sample recommendations include:

  • Improve the process of Indian interagency communication and coordination in the development and promulgation of administrative and agency rulemaking, including increased transparency and mechanisms for soliciting stakeholder input.
  • Bring increased clarity and certainty to India’s regulatory environment across national, state, and regional levels.
  • Appoint a National Productivity Commission (modeled on Australia’s).
  • Establish a Best Public Policies Practices Council that identifies effective economic growth policies and practices in India’s states and promotes them at the national level across India.
  • Join international negotiations seeking to expand product coverage of the Information Technology Agreement (ITA).
  • Fully repeal Preferential Market Access (PMA) rules.
  • Complete a U.S.-India Bilateral Trade and Investment Agreement to promote foreign direct investment in India.