World Economy

Under Modi, can India’s economy take on China?

India's economic growth potential looks much higher following a decisive election win for Narendra Modi's Bharatiya Janata Party, economists say, putting it in a position to outpace powerhouse China.

A member of the club of fast-growing economies known as the BRICs (Brazil, Russia, India, China), India has disappointed in recent years with economic growth falling to a decade low of below 5 percent, inflation running above 8 percent and reforms stalling.

Modi has a clear mandate but can he deliver?

A supporter takes a picture of a map of India made of flowers with a picture of BJP leader Narendra Modi on it at the party's headquarters.
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The chances of India getting back on its feet look much brighter following the BJP's victory, the country's biggest election win in 30 years, and that raises India's growth potential to as high as 8 percent per annum, economists say.

"The resounding victory by the BJP-led alliance in Indian elections likely ushers in a period of significant economic reform in India. Reforms are likely to focus on improving the business environment, privatization reducing the budget deficit and support for inflation targeting," Shane Oliver, head of investment strategy and chief economist at AMP Capital in Sydney, said in a note on Wednesday.

"This should help boost India's growth potential back to around 8 percent per annum, after a bout of stagflation in recent years," he added.

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India's economic development has often been compared to that of its neighbor China.

China, the world's number two economy, has an official growth target of 7.5 percent and is expected to slow in the years ahead as it transitions into a consumer-driven economy from an investment-led one.

While China's economy grew at an annual pace of 7.4 percent in the first quarter of this year, India's gross domestic product (GDP) grew 4.7 percent in the last quarter, according to latest available data.

"Like China, India will become an increasingly important driver of global economic growth, it will add to commodity demand and its abundant cheap labor and cost advantages will see India play an ever increasing role in world trade," said Oliver.

Morgan Stanley: Predict India GDP at 6.5 to 7.5%
Morgan Stanley: Predict India GDP at 6.5 to 7.5%

Reform, reform, reform

Shweta Singh, senior economist at Lombard Street Research, said to attain structurally higher growth rates, India must boost domestic savings and mobilize those savings to lift investment and productivity.

"It must embark on aggressive reforms to improve physical and financial infrastructure and develop human capital. It needs to create investor-friendly institutions, reduce government interference in the economy and pursue fiscal consolidation," she said.

"If it makes headway on these fronts, it can grow at an average of 6.5 percent- 7 percent during the second half of the decade, faster than any other EM [emerging market] we cover," she added.

Expectations that the business-friendly BJP will kick-start reforms drove India's stock market to a record high in the wake of last Friday's election result.

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Modi, meanwhile, has a reputation for taking measures that boost investment and economic growth in the state of Gujarat, which he has governed since 2001.

"The reforms that you need in India are not complex. As long as you get a functional government, which you have now, you should get there", Morgan Stanley's Chief Asia Economist Chetan Ahya told CNBC earlier this week.

"What this election confirms is that India's GDP is going to accelerate by 210 basis points over the next six quarters," he added. "We think India will have an average of 6.75 percent GDP growth over the next 10 years."