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India – a rising star and a strategic economic partner for Australia

India’s liberal democracy and secular foundation has served as the base on which Australia has pursued bilateral ties.

India’s recent estimate of economic growth exceeded expectations. The economy grew at an annualised rate of 7.8% in the March quarter, taking growth in the fiscal year ending March to 8.2%. These numbers cement India’s position as the world’s fastest growing major economy. 

The country’s economic performance continues to be tracked closely by others, including the United States, and Australia, especially as geopolitical tensions exert influence over global supply chains. India’s young and sizable labour force and relatively cheap cost of production offers global manufacturers an alternative base as economic security and trade diversification grow in importance. Additionally, India’s vast consumer market presents businesses with diverse opportunities. At the current rate of growth, India is on track to become the world’s third largest economy by 2030.

The recently signed Australia-India Economic Cooperation and Trade Agreement recognises these trends and gives Australian businesses an opportunity to tap into India’s growth. The agreement is part of a longer-term strategy crafted by the Department of Foreign Affairs and Trade (DFAT) which lists three broad reasons for Australia to build stronger ties with India. These are scale, complementarity, and a backdrop of diversifying risk. 

Chart 1: Share of world GDP projections (PPP)

Source: International Monetary Fund

One of the reasons for India’s economic rise and its attractiveness to overseas investors has been political continuity over the last decade. Prime Minister Narendra Modi has held office since 2014 and has presided over a modernisation of the Indian economy since then. This wave of modernisation includes generous spending on India’s infrastructure and an expansion of the digital economy. The recently concluded general election resulted in Narendra Modi winning a record third term as Prime Minister. Yet, support for his ruling Bharatiya Janata Party has waned compared to previous elections and governance over the next five years will be dependent on alliances with smaller regional players. 

While political continuity remains intact, a narrower mandate could make much-needed economic reform more challenging. Despite impressive headline growth, India faces significant challenges. Job creation has not kept pace with the rapidly growing labour force, inequality remains a stark reality, and, despite recent progress, conducting business in India continues to be challenging, especially for foreign companies. Other challenges include gender disparity and heightened risks from climate change.

While the results of India’s general election might cast some doubt over the pace of critical economic reform, it is likely to draw attention to one of the most important aspects of India’s value proposition as a strategic partner – its position as the world’s largest democracy. India’s liberal democracy and secular foundation has served as the base on which Australia has pursued bilateral ties. The recent general election which saw approximately 650 million Indians exercise universal suffrage across six weeks, and the subsequent result, pushes back on fears of growing authoritarianism.

Thriving democracy is likely to complement India’s structural growth engines over the next five years. This phase will be critical to Australia-India ties as geopolitics exerts a stronger influence over trade and broader economic strategy, and as the transition to net-zero accelerates.

This newsletter was distributed on 12th June 2024. For any questions/comments on this week's newsletter, please contact our authors:

This blog was co-authored by Lester Gunnion, Manager at Deloitte Access Economics

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