India, explained.
Workers assemble mobile phones at a factory in Noida, Uttar Pradesh, India (Anindito Mukherjee/Bloomberg via Getty Images)
The shock of US tariffs has helped revive India’s stalled liberalisation efforts.
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Green shoots emerge in India’s economic reform agendaGreen shoots emerge in India’s economic reform agenda
India now faces a US tariff burden of 50 percent – higher even than China. Yet so far, the worst-case prognostications of an up to one percent hit to Indian GDP have not come to pass.
Prima facie, India’s 2025 GDP growth of 7.3 percent is the envy of the developing and rich world alike. But peer under the hood of the Indian economy, and the picture looks conspicuously less bullish. Private investment has remained stagnant over the last decade, in part because government spending – which has doubled in GDP terms since 2014 – has unwittingly driven up interest rates for private borrowers.
Despite major headline investments from multinational behemoths ranging from Japanese automakers to Apple suppliers, foreign investment is now a derisory 0.1 percent of GDP. This is down from historical highs of 1.5 percent, and well below the 4 percent that China registered in its explosive growth phase.
India’s persistent jobless growth phenomenon – whereby growth is concentrated in high-value but labour-light services industries – is another serious challenge.
Growing India’s manufacturing sector, as Modi has long sought to achieve, would be a helpful antidote to these sources of economic malaise. But formidable tariff barriers from the US, India’s largest export market, are not conducive to this ambition. Labour-intensive sectors like textiles, machinery, electronics and pharmaceuticals constitute a major share of India’s exports to the US.
Whilst the sum total of these reforms is undoubtedly positive, they still show a strong preference for incrementalism.
For now, exemptions for goods like electronics have blunted tariff impacts, but states with large manufacturing sectors like Tamil Nadu are hurting. Competitors like Vietnam will be eyeing opportunities to take market share.
Like all good politicians, Indian Prime Minister Narendra Modi has made a virtue out of necessity. Whilst holding out hope for an eventual rapprochment with Washington, Modi has declared that India has “boarded the Reform Express”.
Bombast aside, Modi has moved with genuine alacrity over the last six months. The list of reforms include streamlining the country’s notoriously unwieldy Goods and Services tax, removing foreign investment caps in the insurance sector and opening nuclear power to private investment.
Modi is also revisiting the 2016 bankruptcy code, which has failed to shift the dial on expediting India’s sclerotic insolvency process. New Delhi has continued to pursue selective trade liberalisation, recently inking an agreement with the European Union which will offer both sides substantive tariff reductions.
Reforms consolidating India’s profusion of labour regulations, passed in 2020 but delayed until now, are likely to be prove the most impactful. Under a range of laws, some dating from 1947, Indian business has been fettered by an escalating gradation of regulations according to company size. This included a requirement to get government permission to fire workers in factories with over 100 people.
These laws created a perverse incentive for factories to hire fewer than ten workers (where many additional regulations start to kick in). Unsurprisingly, 95 percent of Indian industrial firms employ fewer than ten people. An uncanny amount employ exactly 99.
This is hardly a propitious foundation for realising economies of scale, which should be India’s natural advantage. Modi’s labour changes will amalgamate 29 labour codes into four, increase the threshold on government approval for severance to 300 workers, allow women to work night shifts and formalise large parts of the gig worker sector.
India’s reliance on small-scale agriculture and lack of reliable ownership records means contiguous plots of land which can be easily acquired for industrial purposes are scarce.
Whilst the sum total of these reforms is undoubtedly positive, they still show a strong preference for incrementalism. The inconvenient truth is that India faces strong competition from Asia for attracting investment from companies like HP, Microsoft and Google, which are all looking to aggressively move supply chains out of China.
Apple, which is on track to source a quarter of its iPhones from India, has only been able to achieve this milestone through negotiating reform packages with more business friendly governments in southern India. The factories of Apple’s suppliers, as with Indian manufacturing writ large, are overwhelmingly concentrated in India’s south.
India’s sheer heterogeneity and rambunctious politics means that comparisons to polities like Vietnam, let alone China, are not always particularly edifying.
However, India can still do more to get the basics right.
The difficulty of acquiring land has long been recognised as a major impediment for business. India’s reliance on small-scale agriculture and lack of reliable ownership records means contiguous plots of land which can be easily acquired for industrial purposes are scarce.
The government has powers to acquire land but under changes introduced by the then Congress-led government in 2013, this requires a level of consent from affected communities which many view as prohibitively high.
Modi tried reform in 2014 but resiled after vehement opposition. Agricultural voters are a major, albeit fragmented, constituency, whose potency was demonstrated by the protests across 2020-21 which derailed agricultural reforms.
With Modi quite possibly in his last term and undoubtedly eyeing his legacy, his appetite to reprise highly contentious reforms remains uncertain. What is clear is that India will likely under-deliver against its growth ambitions without more aggressive reforms.
About the author
Henry Storey
Henry Storey is Manager - Projects, Research and Analysis at Dragoman with a focus primarily on Asia and the South Pacific.
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