India Needs Tariff Cuts, Reforms to Boost Investments: WB

General Studies Paper -3

Context: As per the World Bank’s report (India Country Economic Memorandum), India will need to accelerate reforms to achieve an average annual growth rate of 7.8% for becoming a high-income economy by 2047.

About

• From 2000 in real terms, the economy has grown nearly four-fold, and GDP per capita has almost tripled.
• India grew faster than the rest of the world, its share in the global economy has doubled from 1.6% in 2000 to 3.4% in 2023.
• India has become the world’s fifth largest economy.

Key Points from the India Country Economic Memorandum:

• Target of High-Income Status by 2047: Achievable with ambitious reforms, building on India’s past growth (6.3% from 2000-2024).
• Global Examples: Countries like Chile, Korea, and Poland succeeded in transitioning to high-income by integrating deeper into the global economy.

Key Growth Scenarios for 2047:

• Achieve faster, inclusive growth across states.
• Increase total investment from 33.5% to 40% of GDP by 2035.
• Raise labor force participation from 56.4% to above 65%.
• Overall labour force participation rates have remained low in India compared to countries like Vietnam (73%) and Philippines (60%).
• Accelerate productivity growth.
• India’s GNI (gross national income) per capita must increase nearly 8 times, requiring accelerated growth.
• Demographic Dividend: Invest in human capital, create better jobs, and raise female labor force participation from 35.6% to 50% by 2047.

Critical Areas for Policy Action:

• Increase Investment: Strengthen financial sector regulations, ease MSME credit access, and simplify FDI policies.
• Create More Jobs: Target job-rich sectors (e.g., agro-processing, hospitality), invest in skills, and foster an innovation-driven economy.
• Promote Structural Transformation: Shift labor and resources to higher productivity sectors like manufacturing and services, improve infrastructure, and streamline labor market regulations.
• Enable Faster State Growth: Tailor policies for less developed states (focus on fundamentals) and more developed states (focus on advanced reforms and GVC participation).
• Federal Support: Incentivize low-income states with federal programs like the Urban Challenge Fund to improve public expenditure, efficiency and accelerate growth.