Could India become the next economic superpower?

It’s the world’s biggest democracy, but will India overcome its deep-rooted issues and realise its economic potential? EDGAR investigates…

Peter Iantorno April 12, 2015

In many ways, India is already a superpower. It is the seventh largest country in the world, the world's largest democracy and, with 1.2 billion people living there, the second most populous country, ranked only behind Communist China, which boasts some 1.35 billion residents.

India's nuclear capabilities make it militarily strong, while it is also a leading player in space exploration, having sent its first spacecraft to the moon in 2008 and launched many of its own satellites. And that's not even mentioning the country's massive film industry, which produces some of the most widely watched films on the planet.

Financially the future looks bright for India too. According to the International Monetary Fund, the country's $1.9 trillion economy is projected to expand by 6.4 per cent this year, and recent figures from the US Department of Agriculture suggest that by 2030, India will have the third largest economy in the world, behind only China and the US.

While there are undoubtedly a lot of promising projections for India, which could suggest that it is indeed set to join the top table of the global financial elite, there can be no denying that the country does still have some serious issues to contend with.Crowded train IndiaPerhaps most troubling is the outdated hierarchal caste system, which continues to dictate the unfair way in which many people in rural areas are treated. This is made worse by the vast public infrastructure, which is continually put under strain by the massive population, with extreme poverty, lack of clean running water, electricity and appropriate medical care common issues.

High-level government corruption is also a big problem, having dogged the country for many years, but with last year's election of Prime Minister Narendra Modi of the of the Bharatiya Janata Party, it looks as though the corruption is gradually being weeded out from the top down.

In fact, the installation of Modi as Prime Minister has done much more that just get rid of a few crooked politicians. As well as pushing forward tactical economic relations with the likes of Russia, Japan and the US, on home soil a plan has been devised to turn what at the moment is one of India's big weaknesses into potentially a great strength.

According to the 2014-15 Indian Economic Survey, there are 48 million small- and medium-sized enterprises (SMEs) in India, which employ around 40 per cent of the country's workforce, yet they contribute only 17 per cent of India's gross domestic product. In some cases this because of the aforementioned corruption, cash-in-hand work and poorly organised operations, but in many others, it's simply a case of a well-run yet small business crying out for a bit of investment to push on to the next stage, be it bigger premises, more staff or better equipment.Modi meeting ObamaSo to make borrowing more accessible, the Indian government has launched the Mudra Bank - a micro finance initiative that aims to make it easier for SMEs to borrow money. Where there used to be mountains of paperwork and reams of red tape to cut through, the new bank will make the process much faster, meaning that more fledgling companies will be able to get the capital to expand.

Of course, loaning a few rupees here and there to small businesses isn't going to make much difference to whole-country economic development, but in India, the massive population and huge reliance on SMEs that has at times been a curse, could potentially become a great strength.

Just imagine if even half of those 48 million SMEs took loans, and half of those succeeded in scaling up their operations to grow into larger businesses. The amount of extra revenue this would create would far outweigh any losses from unreturned loans, while the productivity of the country would increase as a whole. Suddenly the immense potential of this massive and densely populated country begins to unlock.

Clearly the road ahead is going to be a bumpy one, and more than a few of the companies that borrow money from the new scheme will fail. But the fact is, India has the size, power and population to flourish as the next global economic superpower, and with an ostensibly switched-on leader in Modi, there's no reason why it should not fulfill that potential.