India's moment has arrived — but many hurdles remain

• India's economy is expected to expand by 6.5% this year, according to IMF forecasts. 
• The world's most populous nation was keen to talk up its prospects at the World Economic Forum in Davos.
• Whether India's potential is as great as its ambitions remains to be seen.

"India has seized the moment," proclaimed housing minister Hardeep Singh Puri with confidence during a panel at the World Economic Forum in Davos last month.

That was the message being spread to the business leaders and investors by the Indian cabinet ministers who attended the Davos event.

"There isn't a segment of economic and social engagement that India has not delivered with," Smriti Irani, the minister for minority affairs and women, told Business Insider.

Many need little convincing. There has been increasing buzz about India as its economic growth converges with political stability, digital transformation, and the potential of a vast youth population.

Its economy is set to post growth of 6.3% this financial year, per the IMF, and rise to 6.5% in 2024 and 2025. That's more than double the global average and comfortably ahead of China too.

The finance ministry says India aims to become a $7 trillion economy by 2030 — although that's still only a quarter of the US economy's value today.

Prime minister Narendra Modi's program of public investment is helping, with spending up from 3.5% of GDP in 2019 to nearly 4.5% last year, The Economist reported.

Cash is being poured into connectivity upgrades, transport infrastructure, digitizing the economy, and better welfare packages that the government says have brought the country from "fragility to stability and strength."

Reforms to the financial sector, such as putting the tax system online to reduce evasion, and relaxing some commerce regulations, have also helped win foreign investment.

As the world's third-largest energy consumer, the green transition has been seen as a major investment opportunity — potentially creating tens of millions of jobs, per a 2021 report from the World Economic Forum.

The high probability of Modi's party winning the forthcoming national elections adds an attractive assurance of stability, compared to the destabilizing political polarization of some Western markets.

"I've not met a business leader either in India or investing into India who thinks that's bad," Andy Baldwin of EY told Business Insider.

A huge, young population

The other key marker of India's potential is its population of about 1.44 billion.

The country not only has the world's largest population but it also skews young, unlike the aging populations of Asia's leading economies such as Japan and China. About two thirds of Indians are under 35, a factor that drives up consumer spending potential and provides a vast workforce.

Rather than meeting the needs of an aging population, the government can spend on innovation and further boost its long-term economic prospects.

Last year India became the first South Asian nation to host the G20 summit, a platform that Modi used to announce India as "the voice of the Global South."

It came just months after he backed the expansion of the "BRICS." The 10-strong group of emerging market nations now accounts for 45% of the world's population and 28% of global GDP.

An alternative to China

India is also trying to benefit from the tensions between the US and China by maintaining a neutral position and offering an alternative for companies looking to diversify manufacturing away from China. Apple, for example, now makes some products in India, but the vast majority of iPhones still come from China.

There was also a potent symbol of progress last August when India became only the fourth nation to land on the moon.

Goldman Sachs analysts have predicted India will become the world's second-largest economy by 2075, up from fifth place. But for all this optimism, India's "moment" is far from assured.

Some economists have criticized the government's narrative as a "false growth story," highlighting discrepancies in the data and criticizing the methods used to calculate economic growth.

Ashoka Mody, a visiting professor of international economic policy at Princeton University and a former World Bank economist, argues that India's GDP growth would be 4.5% if calculated according to the US Bureau of Economic Analysis methods.

Double-digit unemployment

Though the forecasts are strong, India needs to create more jobs, particularly in manufacturing, improve education and tackle structural issues.

Just one in three women work and about half the workforce are in agricultural work — a lower-value sector of the economy that is increasingly at risk from extreme weather.

The unemployment rate peaked at 10% last year, higher than during the pandemic.

While startups, IT, and fintech attract buzz, they only employ the well-qualified. And under Modi, manufacturing has fallen from 18% of the economy to 16%, per The Economist.

Rising inequality, along steep regional and urban-rural divides, also highlights how the benefits of economic growth may not be as widespread as the government claims.

The top 10% of Indians now hold 77% of national wealth, according to the Harvard Business Review.

Rajesh Kumar Singh, the industry and internal trade minister, says internal migration is solving regional inequality.

"You have people going for jobs in faster-growing regions of the country," he told Business Insider at Davos, adding that financial support is being sent to the "more backward areas" where incomes are lower.

Russian oil and weapons

However, in India's huge cities, fewer than half of workers have full-time jobs, while the government's prioritization of welfare payments over job creation has been criticized as an unsustainable solution for wider employment issues.

Lastly, the future of India's favorable international standing can't be assured to last.

(Defying Western sanctions, the country has amped up purchases of Russian oil since Vladimir Putin invaded Ukraine almost two years ago, and is now its second-largest customer after China.)

It's unclear whether India would prioritize Western investors over such a key provider of oil and arms if it had to stop playing both sides.

And while social problems are overlooked by many business leaders, the BJP's divisive Hindu nationalist policies and persecution of Muslims threaten to destabilize progress and detract from job creation.

If Modi's erosion of the judiciary and clampdowns on free speech escalate in a third term, India's title of the world's largest democracy could be under threat.

Nevertheless, Singh is optimistic about India's prospects: "We look at ourselves and we feel that we are in a good spot right now, vis a vis other countries. We have to seize our opportunity."