The digital public infrastructure of India has received recognition from esteemed institutions such as the World Bank and the International Monetary Fund. These organizations have praised India's exemplary digital infrastructure, which has facilitated the government in effectively targeting welfare programs and enhancing tax compliance.
The indicators of human development display a parallel pattern of progress. Access to essential amenities such as flushing toilets and cooking gas, as well as improvements in infant mortality rates and household electrification, have witnessed remarkable advancements over the past decade. It is worth noting that ten years ago, a significant 40% of households did not have access to electricity, whereas today, this proportion has diminished to less than 3%. This signifies that development in India is positively impacting the lives of a broader population, extending beyond just the privileged few.
The third factor contributing to India's growth is the influence of China. China's growth rate returning to its economic average has resulted in a shift of capital and attention towards other regions. This shift has provided a stimulus to India's economy, prompting increased investment and focus on its potential for growth.
In the past four years, India has witnessed significantly higher levels of net foreign direct investment as a percentage of its GDP compared to China. This indicates a shift in investment patterns, as just fifteen years ago, China attracted foreign investment flows that were often four times larger than those into India. It is important to note that foreign direct investments tend to attract expatriates and international expertise, as they follow the investment opportunities and contribute to the overall development of the respective economies.
During the past four years, which can be characterized as a challenging period for capital inflows into emerging markets, India has managed to attract positive net portfolio flows. In contrast, China has faced significant outflows, reaching levels that are unprecedented in recent history. This divergence in capital flows highlights India's resilience and attractiveness to investors, despite the overall market conditions, while China has experienced challenges in retaining portfolio investments.
Indeed, despite the clear evidence of India's impressive performance, there are still skeptics who question its ability to sustain its outperformance. It is possible that some individuals hold this skepticism due to past disappointments. It is true that India has had a legacy of unmet expectations, which may contribute to a sense of doubt regarding its future prospects.
However, it is crucial to provide clarity regarding the nature of the disappointment. India's historical challenge has not been as much about achieving rapid growth, but rather about sustaining that growth over time. For instance, between 2004 and 2010, India recorded an average GDP growth rate of 7.2%.
A prevailing concern regarding India has been its historical reputation for chronic underinvestment. However, it is important to recognize that this narrative is no longer applicable. India's capital investment has undergone a significant transformation, surpassing 30% of the GDP. This level of investment now exceeds that of Taiwan and is on par with South Korea. Thus, it is evident that India has made substantial progress in addressing the issue of underinvestment and has emerged as a competitive player in terms of capital investment.
India stands out among Asian economies as the only one with an investment-to-GDP ratio that has surpassed pre-pandemic levels. Additionally, there has been a notable decline in its import dependence. This can be attributed to the robust growth in remittances and the emergence of global capability centers, which build upon India's previous success in the field of business process outsourcing. Furthermore, there has been significant growth in remittance volumes since 2022. In summary, India's ability to increase investment levels and reduce import dependence, along with the growth in remittances, highlights its resilience and potential for sustained economic growth.
India's economy has undergone significant changes, transitioning from a closed economy to a more open one. In fact, its current level of openness surpasses that of China when it was at a similar stage of development. Over the past decade, the proportion of trade in India's Gross Domestic Product (GDP) has averaged around 50%, a substantial increase from the less than 15% recorded in the 1990s.
While the average import tariff rate on agricultural products in India remains high, there has been a significant reduction in tariffs on manufactured goods. In 2008, the tariff rate on manufactured goods had decreased to approximately 10% from a previous high of over 80% two decades earlier. After a ten-year pause, India has recently resumed signing trade agreements. Notably, it has finalized agreements with Australia and Mauritius, and is currently engaged in discussions with Oman, the U.K., and four other European nations.
Over the next year or two, household consumption in India is expected to outperform other countries in the region. Households in India have high expectations regarding income, employment, and spending, which are all contributing to this positive outlook.
The primary macroeconomic policy challenge facing India is to ensure the effectiveness of recent measures taken to reduce the rapid growth rate of credit, which stands at nearly 20%. It is crucial to prevent another boom-bust credit cycle from eroding the benefits of financial sector reform. While tighter regulations on personal loans and credit cards are expected to be helpful, there is a need for further moderation in lending growth across the entire sector. This adjustment is necessary to align lending growth more closely with the growth of deposits.
The government's conservative budget plan for the upcoming fiscal year, starting in April, will have a positive impact. The plan includes a significant reduction in overall spending and sets a lower-than-anticipated budget deficit target of 5.1% of GDP. This approach will help moderate the pace of economic growth, while infrastructure spending continues to increase.
However, to fully realize India's economic potential, further reforms are necessary. India has a tendency to impose trade restrictions to address cost-of-living issues, the agriculture sector remains heavily protected, and production often lacks scale. Additionally, the participation of women in the labor force is disappointingly low.
Nonetheless, there is still an opportunity to address these challenges. While India's past issues should not be ignored, it is important to focus on the present opportunities for improvement.