With India now in its 75th year of independence, perhaps the biggest disappointment has been the country’s failure to become an economic powerhouse. In more confident times, in 2019, Prime Minister Narendra Modi talked to build a $5 trillion Indian economy by 2025. But with three years to go, and India’s GDP currently $3.1 trillionit’s hard to find someone who still believes they can achieve this goal.
India was supposed to benefit economically from what Modi called the “3Dâ advantageâdemographics, democracy and demand. In particular, India would reap a “demographic dividend” due to its young population: the the median age in India is 28compared to 37 in China and the United States and 49 in Japan, and more than two thirds of its 1.4 billion inhabitants are of origin working age.
Instead, the economy stumbled, GDP growth deceleration each year from 2017 to 2020, inflation risingand unemployment reached a record 23.5% in April 2020. India currently has 53 million unemployed, and its participation rate in the labor market fell from 58% in 2005 to only 40 percent in 2021, one of the lowest levels in the world.
Modi’s economic incompetence since his first general election victory in 2014 has surprised even his critics. After more than a decade as chief minister of Gujarat, one of India’s most developed and industrialized states, Modi had sold himself to voters as a leader who would transform the economy and achieve the hopes of the 11 to 12 million young and unskilled Indians who Enter the working population each year.
Almost eight years later, the hopes of young and old are in tatters. Although Covid-19 and associated lockdowns have taken the economy down 7.3% contract in 2020, the problems had appeared long before the pandemic. Beaten by Modi’s disastrous demonetization high-value banknotes At the end of 2016, all the main growth drivers of the economy – consumption, private investment and exports – remained weak and the government failed to provide a significant fiscal stimulus to end the slow-down.
On February 1, the government responded with a budget which finally delivers a stimulus to the public sector, increasing spending to â¹39.45 trillion (US$528 billion) in the coming financial year to boost infrastructure investment. But that will lead to a projected budget deficit of 6.4% of GDP â which will almost certainly be exceeded â and record borrowing. The budget also neglects much-needed funding for the rural employment guarantee scheme, let alone measures to extend the scheme to the urban poor.
Meanwhile, India’s agricultural sector remains in crisis, with Modi deciding last November, after a year of street protests by farmers, to withdraw three laws he had bulldozed through parliament. And micro, small and medium enterprises, which contribute 30% of India’s GDP, have struggle after demonetization, and more than 6 million have closed.
Even the government’s attempts at reform have proved disappointing. Labor and land reforms have been all but abandoned, while social welfare mini-projects and cash handouts are back in fashion, boosting support for Modi’s Bharatiya Janata party among poorer voters but alarming rating agencies.
India’s National Goods and Services Tax, which was meant to create a seamless national market when it came into force in 2017, has been hampered from the start by multiple tax rates and inconsistent exemptions, and has failed to meet expectations until this year. Tax compliance in general has become a nightmare, while tax raids on hapless companies make daily headlines, frustrating existing investors and deterring potential future investors. The government also has little to show for its privatization efforts, beyond the recent sale of Air India to the Tata Group in a deal that will let taxpayers foot the bill for most of the flag carrier’s accumulated losses.
The pandemic prompted Modi to proclaim atma-nirbharta, or self-sufficiency, as its economic goal, raising the risk that growing trade protectionism will supplant India’s growing integration into global supply chains. Modi imposed more than 3,000 rate increases affecting 70 percent of India’s imports. Under former Prime Minister Manmohan Singh, India concluded 11 trade agreements; under Modi, he did not sign any.
A return to the restrictive regulatory environment that previously kept India’s GDP growth rates below 4% – in derision called “the Hindu growth rate” – would be calamitous. But the government stumbles, trapped in its own rhetoric.
Modi’s supporters often point to the impressive influx of foreign investment into India. But this largely reflects portfolio investments in the usual IT-related sectors, which add little in terms of new capital and create little or no jobs. More generally, the widespread perception in India that Modi is beholden to a handful of business interests and tailors his economic policies accordingly, does little to bolster international confidence in the country’s economic future.
Instead, glimmers of hope come from young Indian entrepreneurs, who have created hundreds of businesses and more than 40 “unicorns”â private start-ups valued at over $1 billion â over the past year. During this time, the gig economy currently employs around 8 million Indians, although many are underpaid and overworked.
The World Bank predicted that India’s GDP will grow by 8.3% in the current fiscal year ending March and 8.7% in the following 12 months, making it the fastest growing major economy fast in the world. But, after eight years of Modi’s rule, the growth rate will be flattered by a lower base than even the pessimists expected.
So far, Modi’s government has prevented serious domestic unrest through a combination of small-scale social programs, especially in rural areas, and polarizing rhetoric targeting Indian minorities, especially its Muslim population, in order to consolidate the support of the Hindu majority. That such tactics could divide the country and derail its long-term progress doesn’t seem to trouble Modi much.
But unless the economy returns to growth rates of 9% or more, India risks creating a mass of young, uneducated, unemployed and angry people â the classic formula for social and political unrest. If the government’s economic incompetence persists, hopes for a demographic dividend could turn into a nightmare.