“India surprised forecasters last year. While much of the global economy slowed under the weight of high interest rates and geopolitical uncertainty, the world’s most populous country grew upwards of 7 per cent. Inflation has fallen sharply, and the external deficit remains modest…

Has the Indian economy finally shifted on to a structurally higher growth trajectory?

There is a plausible case that something has changed. India has long oscillated between two uncomfortable states: rapid expansion accompanied by inflation and external imbalances, or macroeconomic stability achieved at the cost of slower growth. Recent performance appears to sit between these extremes.

Improved macroeconomic management is part of the story. India formally adopted inflation targeting in the past decade, and monetary policy has since been more predictable and transparent. Fiscal policy, while hardly tight, has become more credible, with an explicit medium-term consolidation path and a sharper distinction between day-to-day spending and public investment. On the external front, India is less reliant on foreign capital to finance growth than in the past — an important change for a country with a history of balance-of-payments pressures.

Structural reforms reinforce the optimistic reading. A nationwide goods and services tax has reduced internal trade barriers in what was once a fragmented market. New bankruptcy rules have disciplined creditor behaviour and improved capital reallocation, even if enforcement remains uneven. Perhaps most striking for outsiders is India’s digital public infrastructure. National biometric identification, real-time payments and interoperable digital platforms have sharply lowered transaction costs, deepened financial inclusion and strengthened the state’s ability to deliver services.

There are also early signs that India’s supply side has become more responsive. Large public investment in roads, ports and logistics has eased bottlenecks that once caused growth accelerations to spill quickly into inflation. Targeted incentives have begun to attract manufacturing investment into electronics, renewables and other tradeable sectors. If supply can respond more smoothly to rising demand, higher growth need not be destabilising — a prerequisite for any lasting structural shift.”

From Financial Times.