The weekly political economy column, about to complete its fourth year, is bound to struggle for ideas from time to time. This is more likely to happen at the end of the year when the news cycle slows down and there isn’t much to say right away. This is the year-end edition of the column and aims to set out five broad points that can become the starting point for a political economy thesis to understand the challenges facing India.
Inequality is a necessary condition for political instability, not a sufficient one.
Time and again, we see an animated debate on how bad or not so bad inequality is in India. There have been claims by some very reputable economists such as this being the worst situation since the days of the British Raj and such figures have also been cited, sometimes selectively, to argue that things are actually not so bad and that India has lower inequality than many major economies. Academics can continue to debate these things, but the politics of it are more important. The fact is that economic distress in India has not led to large-scale political unrest culminating in the Emergency since the 1970s. The reason for this cannot be found in the Gini coefficient or other such statistical measures of inequality. What has kept the political temperature down on inequality is the three-fold palliative in post-reform India. First, there is the gradual expansion of the welfare net in terms of covering basic needs such as food grains. Second, there is an increase in the income of the lower class through migration, which, although not substantial, is still more than what they are earning in their village farms. Third is a bipartisan political consensus against regulating migration (such as to China) which is responsible for much of the chaos in our cities, among other things.
But peace does not necessarily imply prudence on the political economy front
The angry young man who should have been fighting India’s inequality is not to be found at the barricades because he is busy delivering our biryani in the gig economy. The only rule-breaking he is willing to engage in is against traffic rules rather than against those in power. As mundane as the work is, it still enables the gig worker to earn enough money to send something out of the ballpark. 10,000-20,000 back home in the village. This is far from a nominal amount in large parts of India even today and can make the difference between whether your child goes to a private school and whether you can pay back that small loan you took for a government-provided house or avoid taking a loan for your sister’s wedding. This would be a better arrangement if it were sustainable for the entire working life of the representative migrant worker. But the chances are that doing this kind of work for a decade will wear down the body’s physical ability to survive in what can only be described as India’s version of an electric scooter mounted sweatshop. This physical capacity window will close at a time that will coincide with our shrinking demographic dividend window. Our problem is that we are not doing enough to handle this day of reckoning. If one uses Marxist jargon and links it to market jargon, India is jeopardizing the social reproduction cost of labour. This is a dangerous game to play.
Friendships, both retroactive and prospective, will fail rapidly.
Amid the pandemic and before Donald Trump regained power, Indians were convinced of the fact that we were going to become rich by default as the rich world wanted to move away from China. China plus one, friends-shoring etc. were terms that entered the geo-economic vocabulary during this period. Fast forward to today and it feels like a fantasy. India is now the country with the highest tariffs in the US export market, and even its service sector advantages are facing a native backlash against immigration to the US. Trump’s counterattacks on the H-1B visa program are currently in India’s favour, but we should know better than to trust him as India’s well-wisher. If the political sentiment in other countries of Western Europe is any example, the migration response in the advanced capitalist world is just beginning. Very few people in this writer’s generation (early 40s) would know someone who had made their fortune in the manufacturing sector in India. But beyond a certain level of material privilege almost all of them know more than one person who has made their fortune in exporting services. Chances are, AI and migration will drag it down further. This not only means slower growth (more on this later), but also fewer patrons for the biryani delivery guy and his cousin who has the odd job of driving or cleaning. To be sure, there are certainly some opportunities to be exploited in areas like AI and the GCC, but India has a lot more to do to maintain its leadership position as it did in pre-AI IT.
If you think all this is unnecessarily creating a doomsday scenario, just look at the poor performance of the Indian stock markets this year. The Financial Times reported last week that “the MSCI India index has returned 2.5 per cent in dollar terms this year, while the MSCI Emerging Markets index has returned 27.7 per cent, India’s weakest relative performance since 1993”. The world is going crazy over AI stocks this year and India has very little AI in its portfolio. The AI bubble or when will it burst also raises serious questions about the future drivers of India’s corporate growth and its harvest of fruits.
Growing protectionism doesn’t mean India can’t achieve growth-boosting things
This is the most important lesson to be learned from 2025. I am writing this column on a day when China’s merchandise trade surplus crossed the $1 trillion mark for the period between January-November 2025. The annual merchandise trade surplus of one trillion dollars in one year was unprecedented in history to date. That China’s export surplus should have surged in a year when Donald Trump promised to escalate his economic war against the country shows what motivates trade: competitiveness, not friendship. That Trump had to roll back the tariffs on Brazil – he clearly hates the Brazilian government much more than the Modi government in India – was more an acknowledgment of the difficulties of making a living in the US than his ideological change of heart. If India can make things cheaper and better than other countries, it will still see its exports grow (and imports fall) even if global trade does not grow at the same pace as before. Some of this is simply a question of getting sweatshop workers into factories on electric scooters and encouraging their female counterparts to do the same. This is not an original argument on my part, and has been presented clearly by economists like Sajid Chinoy. Things are moving forward on this front, but at a very slow pace.
India’s problem is the asymmetry of political economy incentives.
This is the hardest part of the puzzle. India today is stuck in the quagmire of political economy. Democratic competition is motivating governments to introduce more and more welfare measures for the lower class. Although they are not enough to make India a model welfare state like the Nordic countries, they still appear to be enough to turn political sentiment. This increased spending is coming at the expense of investment in areas that will drive future growth and the structural drivers of poverty (think public health for example). While such palliative measures are being used to perpetuate a centralized political governance at both the Center and the States level, our parliamentary elections still require the deployment of arbitrators at the constituency level. The people filling (and financing) these ranks across the political divide are more likely to come from a pool of capital that is either predatory in nature (taking too much to give little) or has a vested interest in putting sand in the wheels of creative destruction without which the Indian economy cannot become truly competitive on a global scale. If you are checking your IndiGo flight or refund status while reading this column, you will understand what I am trying to say. While we hear a lot from the opposition in India about the pervasive grip of big capital on the economy, their silence on local predatory capitalists is a tacit acceptance of their partial complicity in the distorted way capitalism operates in India.
conclusion
There are many who believe that the reforms are the silver bullet to India’s material concerns. Although the reforms are indeed important, any argument that celebrates them without appreciating the extra-legal political economy that discourages structural change is bound to end up on the side of disappointment. The question worth asking and answering honestly is whether there is an equal appetite in India for substantive reforms rather than statutory reforms and whether politics and democracy are contributing to or eliminating this appetite. Is there a danger of India becoming democratically inactive? It’s a provocative question to ask, but in this writer’s opinion it’s one worth asking, and it’s a good question to end the year on.
(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)
