India continues to be the fastest growing economy in the G20.Atul Loke/Getty Images
At first glance, the IMF's latest GDP growth forecast for India should have been a cause for celebration. The multilateral agency expects India's economy to grow by a whopping 6.7% this year and an even more robust 6.5% in 2025. This once again positions India as the fastest growing economy in the G20 and keeps Prime Minister Narendra Modi bragging rights as he prepares for elections in the next few months.
On a recent visit to India, I was surprised to find starkly differing views on the health of the economy and whether high growth rates were masking deeper, structural problems that the government had failed to address. Given India's recent above-average GDP performance, it would be tempting to dismiss the critics, but with an important caveat. Because of the sheer magnitude of the challenges and the huge unfinished reform agenda in India today, one can often be simultaneously optimistic and pessimistic about the economic prospects.
First, the government's case. Finance Minister Nirmala Sitharaman presented the country's interim budget (a final budget will be presented by the new government after the elections) on February 1 with the appropriate mix of optimism and confidence. “The Indian economy has witnessed profound positive change in the last decade,” she told Parliament. “The people of India are hopeful and optimistic about the future.”
The speech reads more like an election manifesto at times, as Sitharaman devoted a large section to the government's welfare populism and listed the generous subsidies and cash handouts provided during Modi's second term. The ruling party's election strategists expect hundreds of millions of welfare recipients, whom the prime minister describes as members of the country's four castes (poor, women, youth and farmers), to support the BJP in the crisis general elections. Sitharaman also focused attention on the government's other achievements – increasing infrastructure spending to $134 billion, containing the fiscal deficit to about 5% of GDP and supporting the claim made by the Modi government's decade of this resulted in 250 million people being lifted out of poverty.
Not so fast, say the critics. Subramanian Swamy, a maverick politician from Modi's own party, has described the ten years of the Modi government as an “unstructured flop”, pointing to lower average GDP growth rates compared to the hefty 6-8% that India recorded during that period Decade before 2014. If Swamy's views are pure political theater, other serious commentators have expressed similar views.
Former central bank governor Raghuram Rajan, who has released a new book on the Indian economy, has warned that Prime Minister Modi's goal of making India a fully developed nation by 2047 (which happens to be the 100th anniversary of independence from British rule) is failing will not be realized if average GDP growth remains at the 6% level. “So if you do the math, at our current growth rate, you know, as strong as it is, the highest in the G20, we are not getting rich, but we will remain in the lower to middle income bracket until 2047,” he was quoted as saying by news agency PTI.
Writing in the Economic Times, columnist TK Arun painted a stark Dickensian picture of the health of India's economy (relying on the metaphor of “the best of times and the worst of times”). Drawing on several data points, Arun writes that India's fixed investment to GDP, a key indicator of a growing economy, is at 30%, well below China's 50% during its high-growth phase. This is despite the fact that India has attracted a record $596 billion in foreign direct investment since 2014. Arun added that inflation-adjusted rural wages have fallen over the past five years, painting a stark picture of rural distress far from the glittering urban hinterland. Even in major cities, there are tangible signs that the economy is not creating enough jobs to sustain the sheer number of new entrants, which in turn is a sign of favorable demographic trends.
Modi and his supporters pushed back against this criticism, pointing to the prime minister's continued high popularity, his economic track record and the ruling party's overwhelming support in parliament. These factors, including the BJP's explosive identity politics, could well prove to be a factor in its success in this year's elections. But the new government will face deeper structural challenges that India must overcome before it can claim Viksit Bharat status, a fully developed nation.
I have had the privilege of working as a journalist – in India, Singapore and Indonesia – and holding senior positions in the public and private sectors at the International Monetary Fund, the Monetary Authority of Singapore and Standard Chartered Bank. At Chatham House, where I am an Associate Fellow in the Asia Pacific Program, my research interests include Asian financial and economic integration, the interplay between technology and public policy, global governance and sustainability. I have written two books about Asia. The first, “Resurgent Indonesia – From Crisis to Confidence,” was published in 2018 and traces Indonesia’s remarkable democratic rise from the ashes of the Asian financial crisis. My new book – Has Asia Lost It? Published in February 2021, “Dynamic Past, Turbulent Future” takes a skeptical view of the evolving ability of Asia to weather the headwinds of deglobalization and the pandemic. I live in Washington DC
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