Except for a small continent like Australia, there is no place in the world that is not going through extreme unrest. (symbolic photo)
The latter part is undoubtedly true. Except for a small continent like Australia, there is no place in the world that is not going through extreme unrest. Americans are dealing with highly destabilizing interventions by President Donald Trump both inside and outside the US. Undoubtedly, his economic actions are sending shock waves beyond the continent. Europe will have to spend four years with the war that broke out on the continent in February and an equally prolonged cost-of-living crisis and related political instability. South Asia, our immediate neighbourhood, remains turbulent, with at least two of our neighbors – Bangladesh and Pakistan – becoming more hostile towards India than in recent history. West Asia is on the brink of anarchy, to the extent that even its traditional rivals are wary of the Iranian regime losing power after the recent unrest. At the time of writing this column, America’s West Asian allies had convinced Trump not to intervene militarily in Iran.
Of course, all these disruptions are in addition to the now entrenched great power rivalry between the US and China, where China appears to be sitting out territorial disputes, but is winning or gaining the edge in physical battles as far as material production and strategic prowess are concerned. The biggest proof of this is that China ended 2025 – a year when Donald Trump tried to triple US tariffs on China – with an unprecedented trade surplus of $1.2 trillion.
Nothing mentioned above is unknown. However, there is a more provocative question waiting to be asked. Are the achievements of this macroeconomic stability sufficient for India? The short answer is not clear.
A highly unequal economy in the ballpark of 6.5% headline growth over the next few decades is not going to result in a very different and better kind of India than it is today. This will fundamentally involve highly uneven growth both across geographical areas and people, as well as a large group of economically precarious populations seeking livelihoods by striking a balance between hard work and economic palliatives. This does not mean that there will be no wealth creation in the economy. But wealth creation will happen more through the Stalinist principle of quantity, which has its own quality – you can become a billionaire delivering biryani or get nominal commissions on people’s SIPs in this country – rather than unlocking global dominance or leadership of the country at large.
The lack of a cutting-edge, indispensable feature for India, is the biggest reason for our power asymmetry, which is now between the US and China, compared to Donald Trump’s America. As far as India is concerned, the situation will be worsened by the advent of AI and its expansion in the activities of various economies and the rising anti-immigrant sentiment in the West, especially the US.
Of course, this isn’t exactly unknown either. However, the question is, what should be done?
The cliched answer is, once again, reform, which we have been doing for the last three and a half decades and seem to be doing even now. Certainly, economic reforms in India have had benefits. This can be best seen in the graph below, which shows that our five-year average GDP growth rate has increased by a few percentage points in the post-reform period.
The problem, however, is that a few percentage points more is not enough as far as solutions to our long-term problems are concerned. Incremental reforms will yield only incremental benefits in our endeavor to pursue long-term development on a sustained basis.
There is a line of reasoning here that may seem a little harsh. We often hear that there is still no massive revival in private investment in India due to lack of demand. Increasing demand in a big country like India is not an easy thing. Even if the government increases its fiscal deficit by a few percentage points in the upcoming Budget – it would send financial markets into a frenzy – there will be only so much and only so much growth in demand that will be generated.
In other words, India can run fast only on a model where the horse of investment pulls the cart of demand, and not the other way around. This only leaves aggressive import substitution as an opportunity for investment in the domestic economy by creating production capacity that replaces imports with domestic production.
Imports only make sense if they are cheap, unless they are natural resources like crude oil or technical skills that are beyond a country’s capability. There are plenty of both of these types in our overall import basket, but there are many that can be easily produced at home, though not as cheaply as in China. Such a policy may initially give rise to some inflationary headwinds. But some additional inflation in the economy would not be a bad idea if it spurs private investment and also creates some jobs with the potential to unlock value creation and manufacturing skills.
Critics will no doubt argue that you can’t force private capital to do so unless the government itself makes these investments. In an ideal world, the logic makes sense. But nation-states rarely become powerful under ideal circumstances.
What would happen if the government issued an ultimatum to capital to do what it wanted? The typical liberal would once again call this a violation of the free-market spirit and economic rationality. Such talk of rationality must be countered with the counterfactual that this so-called rationality will continue to push capital in search of attractive returns in investment avenues that are either speculative or targeted outside the economy. Of course, it is perfectly logical for a small group of businessmen in a country to gain profits by eliminating competition in regulation heavy or high entry barrier sectors such as infrastructure rather than investing their resources in facing international competition to boost the country’s overall strategic strength. One of India’s largest industrial houses shelved its battery manufacturing plans because a Chinese firm did not share the technology. How much have India’s business leaders spent on R&D to develop such technology domestically?
In many ways, this is what the Chinese state did in the recent past when it replaced entrepreneurs who appeared larger than life but engaged in activities that the state did not view as enhancing the state’s productive capacity.
Why has the Indian state not taken any such hit on its capital despite some suggestions from its top level that it is not happy with curbing investment or stepping back from its role in boosting India’s overall manufacturing strength?
Leaving aside democratic and regulatory nuances, there is a significant difference in the relationship between capital and the state (at different levels), that is, political finance, in India and China. Is capital allowed to look for easier ways to wealth creation without facing the more difficult game of ruthless competition leading to creative destruction as is inevitable when it comes to political finance in India? Has this evil become the major driver of our larger political economy rather than a problem of a handful of politicians and parties or a lack of so-called reforms?
The global environment has become turbulent after the current government spent two full terms in power. This is a government that claims to be committed from day one to a paradigm shift in the larger political economy of India. The fact that things have not changed much from before suggests that India’s problems are more structural than any political camp would like us to believe. Much of the debate over these causes is more shadowboxing than taking the bull by the horns.
It’s useful to end the column with a quote from Shakespeare. “At times men are masters of their fate: dear Brutus, the fault is not in our stars, but in us, that we are subordinate”.
Maintaining this low-level-balancing style of stability is not going to solve India’s problems. We need a big and deep change in the system, which will create urgency in the system, some may even see it as destabilization. Such change would not be limited to a few basis points of change in the level of fiscal deficit.
(Roshan Kishore, HT’s data and political economy editor, writes a weekly column on the state of the country’s economy and its political fallout, and vice versa)
