India's Economic Growth: Challenges and Opportunities for the Modi Government

The Modi government is facing significant economic challenges, including balancing investment and institutional demands for high growth, while managing political blowback. The government has been successful in reducing extreme poverty to a marginal level of one per cent of the population, but it needs to streamline its welfare schemes and reduce fiscal deficits to achieve sustainable growth. The primary mechanism behind the sharp drop in poverty is providing free food to 800 million people, or more than half the population, and other measures such as special cash transfers for women, farmers, and the aged.

To achieve sustainable growth, the government needs to update poverty estimates and streamline the efficiency with which doles are conceived and transferred. Forensic auditing of welfare schemes can determine which schemes are necessary to keep the bottom 10 per cent by income above the poverty line, and devise a progressive implementation strategy to weed out beneficiaries as they become better off. The government also needs to reduce fiscal deficits below the 4.5 per cent targeted for 2025-26 and below the four percent of GDP assured by 2026-2027 to reaffirm fiscal responsibility.

Despite the challenges, India's economic growth has been higher than comparators, with GDP growth in real terms during the third quarter of this fiscal at 6.2 per cent. The IMF estimates annual growth in India this fiscal at 6.5 per cent, which implies a required growth rate of about 7.7 per cent during the final quarter. The government needs to remain fiscally prudent, reduce the fiscal deficit, and keep resources in reserve to manage uncertainty. By doing so, India can achieve sustainable growth and become a high-income country in the next two decades. The government's focus on trade, deregulation, and privatization of government companies can also help boost economic activity and attract foreign investment.