India's economy has demonstrated considerable resilience, repeatedly surprising on the upside. But can this momentum translate into sustained growth, better jobs and higher living standards? As geopolitical tensions, volatile energy prices and uncertainty around the global technology boom reshape the economic landscape, India must navigate new risks while capitalising on emerging opportunities.

In this episode of How India's Economy Works, journalist and author Puja Mehra speaks with economist Dr. Prachi Mishra and former member of the Economic Advisory Council of Prime Minister about the strongest reasons to be optimistic about India's economic future, and the challenges that could hold it back. They discuss how India can diversify its trade and investment partnerships, particularly with Japan, and what it will take to achieve the sustained growth needed to become a high-income economy. The conversation examines sluggish manufacturing investment, foreign direct investment, the need to expand labour-intensive industries, and the importance of creating more high-quality jobs. Mishra also explains why strengthening state capacity, improving municipal finances and fixing last-mile infrastructure are essential to translating India's economic potential into better outcomes for its citizens.

Tune in for insights on India's growth prospects, the opportunities in a changing global economy, and the reforms needed to build a more prosperous, employment-rich and resilient economy.

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TRANSCRIPT

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Puja Mehra: Welcome to the show, Dr. Prachi Mishra.

Prachi Mishra: My pleasure, Puja.

Puja Mehra: Today, I want to talk to you about the case for optimism about India's economy.

We know that India has demonstrated considerable resilience and its growth has often surprised on the upside. Yet, I find that the discussion of its economic prospects can be surprisingly subdued. What do you think is the strongest case for optimism?

Prachi Mishra: Looking ahead, Puja, I think we should start talking a little bit about the global context, I mean, before we move to India, because we live in an integrated world, you know, which is integrated in goods, finance and every aspect, right? So, the global backdrop is very important. And in my view, the global economy is really walking a tightrope with two forces at play, and both of them have implications for India.

The first is the war in West Asia, as you can guess, it has gone from shock to ceasefire to re-escalation, and oil product prices have again surged since July. The global economy, of course, has adapted, and part of the drop in oil flows through the strait has actually been offset by drawing down inventories or getting oil from other sources. So, this is the first big force.

This has, of course, created challenges for India, for inflation, for fiscal. Second is the cross-currents from technology. So, as Asian tech exports actually are surging and rising dramatically, especially if you look at, you know, Korea, Taiwan, et cetera, what we are seeing in the global economy is actually the balance of these two forces.

All said and done, I think the global economy is expected to remain resilient. As you said, you know, Indian economy is also expected, you know, has been surprising to the upside. But the context is that despite these two cross-current, one on the negative side and one on the positive side, you know, balancing each other, the result is we are expecting global growth for next year, somewhere close to three and a half percent.

We are closer to pre-war levels. This is, you know, the backdrop of the global context. And of course, this has implications for India in terms of challenges.

I think the challenges are, as I said, inflation, fiscal, but also in terms of offering opportunities to recalibrate, to rejig, and so on. Okay.

Puja Mehra: You made several points. Let's take them up one by one. I will first list the points and then I will also ask you questions one by one to go in a more linear fashion.

Let's start with what you said about the global economy. The global economy has proved more resilient than many had expected. And as you say, the picture is hardly reassuring still.

There is the geopolitical conflict in West Asia. There is the uncertain promise of the technology boom. There is the continuing tension between the US and China.

And all of these shocks matter. Let's first discuss how exposed India is to these shocks and what we should be watching to distinguish a temporary setback from a more persistent macroeconomic problem.

Prachi Mishra: Again, let's understand the context a little bit. We didn't talk much about the two systemic economies. You mentioned US and China.

Energy prices are rising in the US too. This could actually be a deciding factor in the midterms. Central banks, including the Federal Reserve, is raising rates.

And US 10-year yield has risen sharply, barring we've seen slight softening over the past week or so because of AI-related risks. Yet, the stock market S&P is at an all-time high. In times of high rates, macroeconomics 101 would suggest that stocks would have a negative correlation.

Yet S&P is at an all-time high, and there are concerns about the stock market model. As you rightly pointed out, that there is a lot of uncertainty about an uncertain AI-related boom and its implications. The second is China.

Chinese economy, of course, again, very resilient, strong growth numbers. But underlying, there are issues in the Chinese economy. The economy continues to show divergence.

If you look at the supply and demand, if you look at production and consumption, if you look at exports and domestic demand, there is a divergence. And its property sector problems are far from over. We should keep the backdrop of the two systemic economies in mind before we talk about India.

Puja Mehra: So should this AI bubble burst, how do you think the spillovers into the Indian economy could play out?

Prachi Mishra: Well, I think it really depends on if there is macroeconomic implications for the world as a whole, I think it's going to spill over to India. You know what happened in the global financial crisis? I think we are so integrated, and contagion has increased so much that how your investors or how your consumers, producers, each economic agent, how they're exposed to different parts of the world can have severe macroeconomic consequences.

Of course, then it's conditional on policies, what policies the government chooses to attenuate some of the impact. But given that, by and large, we are living in a world which is integrated, I say integrated purposely, despite all this talk about de-globalisation, fragmentation, slobalization, the fact is that global trade and the global economy have done quite well. There have been a lot of reallocations, rejig, but if you look at the aggregate numbers, they've done quite well.

So we are still de facto, we are living in quite an integrated world. And if there is a spark in any part of the world, the macroeconomic implications for any country, including India, can be quite big. That said, as I said, in terms of the financial market, given that we are not that AI dependent, our financial markets are not so AI dependent, so the direct spillovers could in fact be limited, and it might be a boon or a silver lining, but there are a lot of indirect spillovers, which can also be quite big.

Such as? If the global economy is affected, we trade, we have investment, so this is such a big part of the Indian economy, services exports, services trade is such a big part of the Indian economy. If you take the example of goods, if you take the example of investment, if the global economy is doing well, we benefit from that.

If the global economy is not doing that, well, just think about again, a simple economic model where you have economic agents, and you are a source country and there's a destination country. Something happens in the destination country, depending on how your exposure is, you're going to be affected.

Puja Mehra: There's also a world in which the US and China are reshaping their economic relationship and also their relationships with other countries. Of course, technology is advancing rapidly, but you're right that there is a lot of economic integration, but at the same time, the old assumptions about globalisation are under strain. So what is this new global environment that India must now navigate?

And I'm also asking this because I'm keen to understand what are going to be the new opportunities and the new vulnerabilities that our policymakers must watch out for and respond to.

Prachi Mishra: I think, Puja, there's a lot of opportunity to rejig and reallocate. Let me give you an example. So in times of global crisis or global shocks, how are you resilient?

You reallocate, you diversify across partners, across markets, across products. And one opportunity which is crying for us to leverage is India-Japan. India-Japan, if you look at trade between India and Japan, in fact, if you look at both exports and imports side, the share of Japan and our trade and share of India and Japan's trade, both are minuscule, literally.

And in fact, that relationship quantitatively has declined compared to a decade or two. So there is clearly opportunity to leverage new partners and partners where the intent is there. With Japan, I think so many high-level people like the external affairs minister at the Kautilya Economic Conclave, the prime ministers of both the countries, they all mentioned that India and Japan are naturally indispensable partners.

So I think there's a clear opportunity sitting there to leverage across different sectors. If you look at sectors like semiconductors, if you look at sectors like one of the sectors, labour. Japan is an ageing population.

India still has a demographic dividend. If we can increase labour mobility between the two countries, again, investment, there is scope in rare earth minerals, where it's very concentrated. China is a big player.

Very few people know that Japan actually invented some of the permanent magnets which go into producing a lot of these consumer electronics. So in fact, we can think about a model where actually Japanese firms produce some of the raw materials here and then produce these magnets and export, use the skill and talent in India. So I think India-Japan, for example, is a strategic relationship which needs proactive execution.

The intent is really strong. And this is the right time because I think Japan is looking in areas such as rare earth minerals. I think it's really concentrated exposure to one country, which is China.

I think both India and Japan are looking to diversify. How do you build resilience? We always talk about resilience.

You build resilience by diversifying. And there are plenty of opportunities to diversify.

Puja Mehra: So I think we've spoken a bit about the near-term challenges and some of the opportunities such as India's relationship with Japan. But let's talk also a little bit about the long-term goal, which is the goal of Vixit Bharat, high income employment, sustainability, quality of growth. How do you think India can sort of translate some of the current opportunities and overcome some of the current challenges to meet that goal of Vixit Bharat?

Prachi Mishra: Again, I would step back, Puja. And the big picture is that India's importance in the global economy has risen dramatically. So if you look at per capita income, it has increased more than tenfold over the last four decades.

We used to be close to $250. And we are forecasted to keep growing steadily. If you look at India's share in global GDP in purchasing power parity terms, we are projected to rise to about closer to 10% in the next five years.

And if you look at India's contribution to GDP growth, again, we are projected to contribute somewhere around one-fifth of global growth. So I think it's important to keep this big picture in mind. And of course, we know that recent data have been beating expectations, whether you look at aggregate GDP data, but also if you look at micro data such as vacant sales, bank credit.

I think the truth is that we've adapted very swiftly to the West Asia shock. We quickly rebalanced oil imports across suppliers. And of course, we were helped by strong initial.

We went into the global crisis with very strong initial conditions and a series of structural reforms which helped us. That said, as you rightly point out, there are challenges. I think in the near term, of course, there are challenges of course, inflation, fiscal.

Inflation is still within the RBI's target, but there are signs that pressures are becoming more broad based. If you look on the fiscal side, I think the central government has stayed on course. But I think as a federation, we need the same discipline across state governments and public sector enterprises where the risks may lie.

In the long term, I think becoming a developed economy, a Vixit Bharat, could mean different things. Of course, the most basic for economists is high income. And to become a high income economy, I think everyone can do these calculations on your fingers.

If you do simple compounding, you need 8% real growth on average over the next 20 years. And as you rightly said, we don't only want to become rich, we also want to become rich along with more jobs, high quality jobs, and we want to grow sustainably. And we want to improve quality of lives.

So I think that is where the real challenges are. And we should ask, you know, where will this growth come from?

Puja Mehra: Yeah, as you say, it has many of the ingredients for a much more prosperous economy. We have a large domestic market, we have a young force, we have strengths in the services sector, we have digital infrastructure, which is growing. There is also a lot of investment in physical infrastructure.

There are, of course, opportunities created by shifts in global supply chains. And this comes up in most of my podcast episodes and my conversations with economists, that India has all these strengths. But the unresolved question remains, how much of this resilience and these strengths can be translated into sustained productivity growth, like you're saying, which is needed for 8% growth.

So would you want to discuss some of the things that will ensure that translation happens? Do you want to say something on that?

Prachi Mishra: I think manufacturing is one area. I think we are seeing green shoots in manufacturing. But I think by and large, if you look at your manufacturing share of GDP over the last decade or so, it's been, you know, in aggregate, it's been roughly stagnant, despite, you know, some of the green shoots and we know the mobile revolution, we know certain sectors, which are doing very well.

But I think in the aggregate, your manufacturing share of GDP has been constant. If you look at private corporate investment, if you look at, you know, high frequency data, for example, look at Capex, how much Capex is being added. If you look at data from the Centre for Monetary and Economy, I think they're all showing green shoots.

But in, you know, in the aggregate, I think private corporate investment is still in the range of, I'm looking at the numbers in front of me, it's still in the range of 10% or so. It used to be, it had gone to closer to like 12% about a year ago, but I think it's now closer to 10.2%. You also know the story about FDI, right? Foreign Direct Investment.

I think foreign direct investment in India is well below our potential. The gross flows are holding up, but we are seeing outflows of both domestic residents investing abroad, and also repatriation of profits by foreign multinationals abroad. So net terms, again, it's showing, I'm looking at the numbers as we talk, the net FDI is showing improvement, actually, quite a significant improvement.

If I look at the annual numbers, it's almost six or seven times, but still very low relative to our potential. And I know that there's a debate going on between analysts, that is what is really driving it. Why are private corporates not coming in and investing big time and much more?

Is it the outlook for demand, you know, because they're not perceiving as much demand as they would like to for big investments? Or is it still the supply of funds? Is the cost of capital still high?

Or is it the ease of doing business? It's some combination of all three. We know that household financial savings, again, I've picked up actually quite by two percentage points or so, but households are increasingly putting their savings also into physical assets like gold.

So we have to ask ourselves, you know, how can this huge ideal stock of gold be put to productive use? So these are all, you know, important questions as we think about where will additional growth come from to become a high income economy? And, you know, how, and we can also talk about, you know, it's not only the quantity of growth, but the quality of growth, what kind of, you know, what is the quality of growth we are looking at?

Puja Mehra: Yeah, I was in fact going to come to that. So say something also about the quality of growth and what you'd like to see there.

Prachi Mishra: You know, I think the quality of growth depends on the quality of employment, quantity and quality of employment. So we want employment elasticity to growth to be much higher. And here, I think one of the stylised facts, we're very well known now that India is a young country and at least for another decade or so, the dependency ratio of people in the working age, you know, very young and old people as a ratio working age population is going to decline at least based on UN projections.

But again, a very commonly known fact is that India is a labour abundant country and it's going to remain young for another decade or so. But the fact is that our technology is very capital intensive. So if you look at capital to labour ratio in production, you just go to the RPI Clems data and plot capital to labour, just aggregate numbers, you will get a very increasing and a sharply increasing.

Any international trade economist is going to say this is not comparative advantage. So India should specialise in factors. It's relatively more abundant and relatively more cost efficient.

But we actually end up doing the opposite. If you look at exports as well, we tend to export more electronics, engineering goods, more capital intensive. So how to push labour intensive industries like manufacturing, but beyond manufacturing also.

I think our prime minister has said, you know, why do you always treat agriculture as agriculture? Why can't you treat agriculture as manufacturing? And that can be labour intensive manufacturing.

Or horticulture, which is more high value agriculture. Or services, labour intensive services like tourism. And again, there's potential waiting to be leveraged in tourism, I think in several states in India.

I think one of the episodes we talked about, Bihar, for example. Tourism is really a low hanging fruit where we can push. So it can be labour intensive manufacturing, it can be labour intensive services.

So how to push labour intensive sectors so that we meet the twin goals of both higher GDP and higher employment, I think is a challenge. It's a challenge of execution. It's a challenge of implementation across the country.

Because there are certain states which have definitely done much better than the other states. I think we need to go into the micro of these macro trends.

Puja Mehra: One of the things that will come into play for doing this is the role of state capacity, both at the national level, as the state level, and as well as the granular level of cities and municipalities. You gave the example of tourism. I think the state of Rajasthan does a very good job of tourism relative to some of the other states in India.

Any thoughts on the role of state capacity?

Prachi Mishra: I wrote a recent article in Times of India as well. I think for quality growth, we need to fix the plumbing of state capacity. And we have shown in one field after another that we can fix plumbing quite fast.

And there are a lot of interesting examples within the country itself. If you look at, for example, in the late 2000s, economists found that much of the NREGA wages were failing to reach workers. Andhra Pradesh quickly moved those wages into biometric smart cards, and the leakage fell as payments sped up.

And direct benefit transfers, you mentioned digitisation. They run across 318 schemes. ILO records social protection coverage has doubled close to half of the population.

Open defecation, we know that once practised by more than nine in 10 rural Indians is down to one in nine. So few countries have moved that fast on anything. But I think there's a lot of work that remains, and a lot sits at a more granular level.

If you look at the seventh schedule of the constitution, I think most of the areas are actually either state subjects or on current subjects. So almost all of the hard jobs sit with cities. And the fact is that cities are not funded.

Revenues raised by municipalities is very low. It's below 1% of GDP and stayed stagnant over the past few decades. And centre and state revenues have actually climbed up.

So there are a lot of last mile issues. Again, I wrote about the last mile issues as well. We've built metros.

Now across 10 states, nine of the 10 metros are carrying fewer riders than forecast. You know, Chennai is at 37%, Ahmedabad is at 11%. The towns have got built, but I think which was the hard and expensive part.

But I think what decides whether the money was well spent is feeder buses, footpaths, where the city allows people to live. So I think fix the plumbing, fix the last mile work that needs to be done. And I think benchmark for developed need not be Germany or Japan.

You know, realistic first threshold is upper middle income standards, high human development and services that work for the average Indian, most of whom live in villages and towns.

Puja Mehra: Prachi, in every episode, I have economists who come and discuss. Usually what we do is we take up specific subjects and then we discuss what needs to be done. And I always feel that we come out of the conversation very well versed with what needs to be done, but also with the impression that things are not working.

But you know, which is why I want to come back now to my original question to you, which is that what is the strongest case for optimism for India? Because surely with the kind of recent growth figures we have seen, things cannot be as downbeat as sometimes the conversations in the mood, prevailing mood seem to suggest. So what is really our strongest economic case for optimism?

Prachi Mishra: Just to summarise. So first of all, number one, there is opportunity. There's opportunity in the population.

There's opportunity in services. There's opportunity also in manufacturing. There's opportunity in agriculture.

So there's lots of opportunity. And I think we have actually shown tremendous progress in many of the areas. So I'm completely optimistic about the next 10 years.

That said, I think we have to execute over the next 10 years. So I think a lot depends on fixing the last mile, fixing the plumbing to get to where we want to.

Puja Mehra: Thank you. Thank you so much.