Skip to content

Obstacles and Potential Opportunities for Economic Growth in India

Thursday, July 24, 2014

Each issue of The Regional Economist, published by the Federal Reserve Bank of St. Louis, features the section “Ask an Economist,” in which one of the St. Louis Fed’s economists answers a question on his or her field of expertise. The answer below was provided by Vice President and Economist B. Ravikumar

What are the obstacles and potential opportunities for economic growth in India?

There are two main obstacles. The first is labor regulations. Developing economies usually transition from agriculture to manufacturing. But the transition in India has been to the service sector. This is due in part to labor regulations. For instance, a firm with 100 or more workers has to seek permission from the government to reassign the workers to different tasks, to lay off workers or to close the firm. Such regulations impede large-scale manufacturing operations that could employ thousands of workers producing unskilled-labor-intensive products. As a result, the movement of workers from agriculture to manufacturing is practically nonexistent. This is evident in the share of labor force in agriculture in India: It is almost 50 percent. That is a large number.

The second is infrastructure. This is a well-known problem. Decades of underinvestment have left the country with dire deficits in critical areas, such as railways, roads, ports, airports, electricity and water. In the World Economic Forum's Global Competitiveness Report for 2013-14, India ranked 85 out of 148 countries for infrastructure.

The opportunities are extensive. The first one, which people usually are aware of, is that India is well-equipped with talent in science and engineering. The second, not so well-known, is the size and age distribution of the consumers. The chart below depicts the age distribution of the population. Just to give you some perspective, there are more than 600 million people in India aged 25 or younger. How big is that? Well, if you added up the entire populations of the U.S., Mexico and Canada, you wouldn't come to even 500 million. So, India is a big market. And this, of course, will be the working-age population in the next few decades, when these millions will be not only earning but also spending. These are potentially good opportunities not only for India but also for U.S. firms that sell consumer goods abroad.

population in India

To overcome the obstacles and take advantage of the opportunities, India has to be more efficient at managing its resources. Economists use total factor productivity (TFP) to measure such efficiency. A country with a high TFP produces more with a given amount of inputs, such as capital and labor, than does a country with a low TFP. The economic reforms since 1991 have indeed increased India's efficiency. Before the reforms (1960-1991), TFP growth accounted for 15 percent of GDP growth, but between 1991 and 2011 TFP growth accounted for almost 25 percent of the GDP growth. So, the prognosis based on TFP looks promising for India's future.

Additional Resources

Posted In LaborOutput  |  Tagged b ravikumaremerging marketsindialabor
Commenting Policy: We encourage comments and discussions on our posts, even those that disagree with conclusions, if they are done in a respectful and courteous manner. All comments posted to our blog go through a moderator, so they won't appear immediately after being submitted. We reserve the right to remove or not publish inappropriate comments. This includes, but is not limited to, comments that are:
  • Vulgar, obscene, profane or otherwise disrespectful or discourteous
  • For commercial use, including spam
  • Threatening, harassing or constituting personal attacks
  • Violating copyright or otherwise infringing on third-party rights
  • Off-topic or significantly political
The St. Louis Fed will only respond to comments if we are clarifying a point. Comments are limited to 1,500 characters, so please edit your thinking before posting. While you will retain all of your ownership rights in any comment you submit, posting comments means you grant the St. Louis Fed the royalty-free right, in perpetuity, to use, reproduce, distribute, alter and/or display them, and the St. Louis Fed will be free to use any ideas, concepts, artwork, inventions, developments, suggestions or techniques embodied in your comments for any purpose whatsoever, with or without attribution, and without compensation to you. You will also waive all moral rights you may have in any comment you submit.
comments powered by Disqus

The St. Louis Fed uses Disqus software for the comment functionality on this blog. You can read the Disqus privacy policy. Disqus uses cookies and third party cookies. To learn more about these cookies and how to disable them, please see this article.