India needs to address some major structural inefficiencies to sustain its growth momentum. While economies worldwide face headwinds from geopolitical uncertainties, India remains relatively well-positioned to overcome these challenges. By focusing on structural reforms, India can mitigate pressures from trade fragmentation and inflation. These reforms involve comprehensive changes in the economy’s institutional and regulatory framework to enhance efficiency, productivity, and growth potential.
Structural reforms have been pivotal in India’s economic liberalisation experience. Initiatives such as the Insolvency and Bankruptcy Code and the Goods and Services Tax have streamlined business operations and improved the investment climate. Economists identify three major structural inefficiencies in India’s economy that demand urgent attention.
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Structural reforms in India
Addressing underutilisation of capital: Underutilisation of capital remains a significant challenge for the Indian economy, as unproductive firms continue to operate, limiting the potential for resource reallocation to more efficient and value-adding enterprises. Streamlining business regulations and improving access to credit are essential to encourage capital reallocation towards productive and innovative ventures. Addressing the challenges faced by micro, small, and medium enterprises (MSMEs) is critical, as they are experiencing a credit crunch that could hinder their growth.
Optimising talent allocation: Despite a skyrocketing demand for skilled labour, India underutilises a significant portion of its talent pool, particularly women. The low participation of women in the workforce prevents India from fully leveraging its demographic dividend. Breaking down barriers such as gender-based discrimination and inadequate childcare facilities is essential to unlock the country’s human capital potential. Investments in quality education and skill development are equally crucial. Initiatives like the PM Kaushal Vikas Yojana and PM Internship Scheme are steps in this direction, but much more needs to be done to equip the workforce with the skills required for an evolving job market.
Reforming the energy sector: As one of the world’s most energy-intensive economies, India must significantly enhance its energy production. Investing in renewable energy is a forward-looking solution to address the country’s energy inefficiency. Scaling up renewable energy capacity will reduce dependence on fossil fuels, mitigate climate risks, and ensure long-term energy security.
Seizing periods of stress for reforms
Periods of economic stress are opportunities to implement bold structural reforms. Key areas for reform include job creation, skill development, sustainable growth, innovation, modern infrastructure, and quality of life improvements. A steadfast commitment to these areas will help India sustain its rapid growth trajectory.
Former Reserve Bank of India Governor Shaktikanta Das echoes these sentiments, highlighting the importance of continuing reforms in critical sectors like land and labour. He noted the success of initiatives like the Insolvency and Bankruptcy Code (2016) and the Goods and Services Tax (GST) in driving economic progress. Recent policy measures, including eliminating over 40,000 compliances, decriminalising the Companies Act, and introducing the National Single Window System for business clearances, demonstrate the government’s intent to simplify business operations. However, more needs to be done.
Avoiding the middle income trap
India faces the risk of falling into the middle-income trap, where robust growth stagnates before reaching high-income status. To avoid this, India must prioritise long-term, sustainable growth over short-term populist measures. Allocating significant resources to populist schemes diverts funds from critical investments in education, healthcare, and infrastructure—the pillars of economic development. Lessons from states like Tamil Nadu, Kerala, and Karnataka highlight the importance of sustained investments in these sectors.
Resistance to tough reforms further complicates matters. Labour code reforms, which aim to improve labour market flexibility and productivity, face significant opposition. Similarly, privatisation of public sector enterprises, a key step toward enhancing efficiency, has stalled despite government announcements.
Geopolitical and economic realities
India’s growth aspirations must contend with shifting geopolitical realities, climate change, and rising debt levels. A recent World Bank report highlighted the monumental task of transitioning to a high-income economy under these conditions. Policymakers must act decisively to capitalise on India’s demographic dividend, as the window of opportunity is narrowing.
India stands at a critical juncture in its economic journey. While the country has achieved remarkable growth in recent decades, sustaining and accelerating this momentum requires a comprehensive approach to structural reforms.
Policymakers must prioritise long-term economic building blocks over short-term political gains. Ignoring these fundamentals risks derailing India’s aspirations of becoming a global economic powerhouse and achieving developed-nation status. The time for bold and sustained action is now.