A few decades ago, India was a relatively minor player on the world stage. Despite its size and vast population, the country grappled with what became pejoratively known as the "Hindu rate of growth," with GDP increasing at a tepid annual pace of 4%, or 2% per capita from 1947, when it gained independence, until the 1980s.

How things have changed. India's economy has become one of the world's fastest-growing, with GDP rising at an annual average rate of 6.2% since 2006. But can India sustain this impressive performance?

One reason why independent India's economy took so long to grow fast is that the government heavily regulated domestic economic activity for decades, imposing stringent controls on international trade and discouraging foreign investment. But in 1991, a deep economic crisis forced India's government to pursue reforms that opened the way for a rapid expansion of trade. India's share of world exports rose from 0.5% in 1991 to 2.6% in 2022, and its share of trade in commercial services reached even greater heights, contributing to a sharp increase in incomes.

While India's economic rise was impressive, it was eclipsed by that of China for decades. But in 2021, India's growth exceeded China's for the first time. And the International Monetary Fund expects this to continue, with India achieving 6.3% growth in both 2023 and 2024, compared to 5% and 4.2%, respectively, in China. Per capita income is also rising faster, even as India's population, at some 1.42 billion, surpasses that of China. India now boasts not only the world's largest population, but also the fifth-largest economy at current exchange rates, and the third largest in purchasing-power-parity terms.

Of course, more work has been done by Indian policymakers and central bankers since the 1990s. Telecoms have been modernized substantially, as anyone who remembers what it was like to make a phone call in India before 2003 can attest. The banking system was stabilized and strengthened under former Reserve Bank of India Governor Raghuram G. Rajan.

More recently, Prime Minister Narendra Modi's government increased spending on infrastructure maintenance and upgrades. Electricity access has been extended to cover 98% of households, and cash transfers have improved the lot of the country's poorest. Meanwhile, the tax structure has been rejigged (to reduce some of the inefficiencies resulting from differences in sales-tax rates between states), and the bankruptcy code has been improved.

India's recent economic success has strengthened its international standing and boosted its confidence. Now, with geopolitical shifts, especially the US-China rivalry, further enhancing India's position, some are predicting that the country could well be the next global economic superpower.

But that will require further economic reforms, and, worryingly, Modi's government seems to be turning away from some of the principles and policies that propelled India's rise. For starters, the government has announced a "Make in India" initiative, which uses subsidies, tariffs, and other measures to encourage companies to develop, manufacture, and assemble products at home, even though liberalizing the trade regime is precisely what enabled India's growth over the last few decades.

Furthermore, with large Indian companies receiving considerable government support, they are enjoying an even greater advantage over small and medium-size enterprises (SMEs), which are struggling to navigate the rules and regulations governing economic activity. The Modi government appears not to realize that a robust start-up culture and dynamic SMEs are essential to healthy economic growth.

It does not help that the privatization of inefficient state-owned enterprises has proceeded very slowly. And when it comes to dealing with the government or the courts, long bureaucratic delays are still the norm.

On the political front, Modi's government appears to be abandoning the principles of secularism embedded in India's constitution in favor of Hindu chauvinism. Modi's Bharatiya Janata Party has demonstrated scant tolerance for non-Hindus, especially Muslims, against whom the government is accused of discriminating. There are also serious concerns about suppression of press freedom and concentration of economic and political power.

With its large and relatively youthful population, India could benefit from a powerful "demographic dividend" in the coming years. But to make the most of it, the government must ensure that young people have access to quality education and good jobs, and there is good reason to doubt that it can. Already, India is grappling with high youth unemployment. Though school enrollments have risen, the quality of education remains poor, reflected in high adult illiteracy. Labor-force skills are in serious need of upgrading.

A rapidly growing, democratic India would benefit not only Indians, but the entire world. But the government's current path leads to a dead end. India's leaders must abandon it and focus on strengthening education and training, streamlining bureaucracies, and leveling the economic playing field. If they do, the twenty-first century could be India's.

From Project Syndicate