HAMISH MCRAE: Britain can benefit from India’s economic growth

The world’s fifth-largest economy is growing at 5.4 percent a year and people here in the Indian capital are worried something has gone wrong as the Reserve Bank of India forecast 7 percent.

It’s an extraordinary testament to the magnitude of the country’s achievements: that the world’s most populous country is also the fastest-growing major economy, even when it hits a bump in the road.

India’s economic growth is a story with profound implications for India’s 1.44 billion people, but also for its trading partners, especially Britain.

Until you come here, you don’t realize the magnitude of the transformation over a generation from a relatively slow-growing economy, hobbled by regulation and corruption, to one that is now blowing out the lights.

It is difficult to imagine that there are circumstances that will prevent the country from being the third largest in the world by 2030, after the US and China.

That path to number three is the theme of a conference I’m attending, so the idea that this will be India’s fate is a hot topic at the moment.

What could hold India back, and why is India’s success crucial to us?

It’s usually easier to see negative sides than positive ones, and there are plenty of them. They include inflation – 6.2 percent in October and well above the Reserve Bank of India’s target of 4 percent.

The RBI governor was not reappointed last week. There are concerns about corruption, about governance, about pollution, about climate change (excessive heat was one of the most googled searches this year), about general education levels, and about how the wave of wealth doesn’t trickle down to the still huge group of poor .

The Indian middle class, estimated at 450 million, is expected to reach more than 700 million by 2030. That’s a huge achievement, but it still leaves India far behind China when it comes to lifting its people out of poverty.

One of the big issues discussed here is how India will become a fully developed economy by 2047, the centenary of its independence. That will be quite a job.

Yet any country that achieves an average growth rate of between 6 and 7 percent per year will outpace the laggards in the developed world. The Indian economy surpassed the United Kingdom in 2022, and Morgan Stanley believes it will surpass Japan and Germany in 2027.

The world’s third largest economy will also be the world’s third largest market.

There lies the opportunity. There are three areas where we can achieve mutual benefit. First, and most obvious, is trade. India is only our eleventh trading partner. While both exports and imports have risen steadily, India accounts for only 2.4 percent of our trade.

That does not fit the size of the two economies. Efforts to reach a free trade deal stalled last week, but talks will resume in January.

The point here is that both Britain and India tend towards trade in services rather than goods.

We have a large surplus in trade in services, which partially covers our deficit in goods.

India has about 2 percent of the global goods export market, compared to 4 percent of the services market. If Donald Trump’s tariffs lead to broader disruption, it is in our mutual self-interest to work together and push for an easing of restrictions on trade in services.

Then there are investments. We have high-profile investments such as Jaguar Land Rover from the Tata group, but the total amount of foreign direct investment in each country remains small.

India accounts for just over 1 percent of our foreign investment, and just 0.5 percent of foreign investment in Britain. We need to look at why these numbers are so low and what we can do to increase them.

And finally, there are people. There are an estimated 1.9 million people of Indian descent living in Britain, the largest ethnic minority group. That’s a huge potential asset. The challenge for both countries is to think creatively about how we can turn this asset into something that benefits us all.