Courtesy of The Financial Times, commentary warning that – without reform – India will be unable to capitalize on the country’s economic potential:

Last year on the 75th anniversary of its independence from British rule, India’s prime minister, Narendra Modi, urged the nation to “dominate the world”. India’s rising role in the global economy is indeed becoming harder to ignore. In April, it overtook China as the world’s most populous country. The IMF expects its economy to grow over 6 per cent this year, and investors increasingly see the country as an alternative to China. On Tuesday, as India celebrates 76 years of freedom, a look back at the progress made since Modi’s rallying cry only underscores the good, the bad, and the ugly sides of the country’s new assertiveness.

Optimism surrounding India’s economy has boomed this year. Its stock market has surged as foreign investors have bought into its national growth story. Multinationals have shown an interest in shifting manufacturing to the country as part of “China plus one” diversification strategies, particularly as tensions between Washington and Beijing mount. The government has also played a part. It committed to raising capital spending by a third in its budget in February, building on promising investment in its road, rail and renewable energy infrastructure.

For all the positivity, India’s economic limitations have also been on full display. This year, the Adani group — led by Indian billionaire Gautam Adani, who has close ties to Modi — was accused of “brazen stock manipulation and accounting fraud” by the short seller Hindenburg. Adani denies all the allegations. The affair was a reminder of the country’s longstanding problems with weak corporate governance as well as the government’s championing of industrial conglomerates. Investors remain cautious about the business environment; in the last fiscal year foreign direct investment inflows fell for the first time in a decade.

Democratic values have also taken a beating under Modi’s Hindu nationalist Bharatiya Janata party. Press freedoms have declined across the country, and political opponents have been undermined. Rahul Gandhi, leader of India’s Congress party, was sentenced to two years in prison in March for making defamatory remarks about the prime minister. The conviction was suspended earlier this month. Meanwhile, there has been a troubling rise in targeted attacks on religious minorities, including Muslims and Christians, as outlined in a recent US State Department report.

If India wants to capitalise on its economic advantages, New Delhi will need to make significant changes. First it should embrace domestic and international competition. This means shifting away from its support of national champions, increasing trust in its regulatory institutions, and quashing its protectionist instincts. Indeed, under Modi’s “Make in India” initiative, tariffs on foreign components which are intended to support the growth of domestic supply chains have made relocation to India a much less attractive proposition.

Next, it must invest in its people. India is home to roughly one in five of the world’s population aged below 25, but it also has large numbers of illiterate adults. It will need to boost spending on skills and education in order to benefit from its demographic dividend. Modi must also change course on the country’s descent into illiberalism. Social unrest and a weak rule of law is not an effective recipe for sustainable growth.

Ever since India announced itself to the world with a series of liberalising market reforms in 1991, the country’s economy has attracted high expectations. Poverty has fallen, a middle class has emerged, and its low-cost and youthful workforce has grown. But it has tended to underwhelm relative to forecasts. Without reform and commitment to democratic values, the momentum will stall and India’s economy will have yet another false dawn.