The Price of Modi's Economic

Incompetence
Feb 7, 2022 | SHASHI THAROOR

NEW DELHI – 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, back in
2019, Prime Minister Narendra Modi had spoken of building a $5 trillion Indian economy by 2025. But
with three years to go, and India’s GDP currently $3.1 trillion, it is difficult to find anyone who still
believes he can achieve this goal.
India was supposed to benefit economically from what Modi called the country’s “3D” advantage –
demographics, democracy, and demand. In particular, India would reap a “demographic dividend”
owing to its youthful population: the median age in India is 28, compared to 37 in China and the United
States and 49 in Japan, and more than two-thirds of its 1.4 billion people are of working age.

Instead, the economy has been stumbling, with GDP growth decelerating each year from 2017 to 2020,
inflation rising, and unemployment reaching a record 23.5% in April 2020. India currently has 53
million unemployed people, and its labor force participation rate has declined from 58% in 2005 to just
40% in 2021 – one of the lowest levels in the world.

Modi’s economic ineptitude 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 fulfill the hopes of the 11-12 million young and poorly skilled Indians who enter the labor force
each year.

Almost eight years later, the hopes of young and old alike lie in tatters. Although COVID-19 and
associated lockdowns caused the economy to contract by 7.3% in 2020, problems were apparent well
before the pandemic. Battered by Modi’s disastrous demonetization of large-denomination banknotes
in late 2016, all of the economy’s major growth engines – consumption, private investment, and
exports – remained subdued, and the government failed to provide a significant fiscal stimulus to end
the slowdown.

On February 1, the government responded with a budget that finally offers public-sector stimulus,
increasing spending to ₹39.45 trillion ($528 billion) in the coming fiscal year to boost infrastructure
investment. But this will entail a projected fiscal deficit of 6.4% of GDP – almost certain to be exceeded
– and record borrowing. The budget also neglects much-needed appropriations for the rural
employment guarantee scheme, let alone measures to extend the scheme to the urban poor.
Meanwhile, India’s agriculture sector remains in crisis, with Modi deciding last November, following a
year of street protests by farmers, to retract three laws he had bulldozed through parliament. And
micro, small, and medium-size enterprises, which contribute 30% of India’s GDP, have struggled after
demonetization, and more than six million have closed.

Even the government’s attempted reforms have proved underwhelming. Labor and land reforms have
been all but abandoned, while mini-welfare projects and cash handouts are back in vogue, boosting
support for Modi’s Bharatiya Janata Party among poorer voters but alarming credit-rating agencies.

India’s national goods and services tax, which was expected to create a seamless countrywide market
when it came into effect in 2017, was hobbled from the start by multiple tax rates and inconsistent
exemptions, and has failed to live up to expectations until this year. Tax compliance in general has
become a nightmare, while tax raids on hapless businesses 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 leave
taxpayers footing the bill for most of the national airline’s accumulated losses.

The pandemic prompted Modi to proclaim atma-nirbharta, or self-reliance, as his economic goal,
raising the risk that growing trade protectionism will supplant India’s increasing integration into
global supply chains. Modi has imposed more than 3,000 tariff increases affecting 70% of India’s
imports. Under the previous prime minister, Manmohan Singh, India entered 11 trade agreements;
under Modi, it has not signed one.

A return to the restrictive regulatory environment that previously kept India’s GDP growth rates below
4% – derisively called “the Hindu rate of growth” – would be calamitous. But the government stumbles
on, a prisoner of its own rhetoric.

Modi supporters often point to India’s impressive inflows of foreign investment. But this largely
reflects portfolio investments in the usual information technology-related sectors, which add little in
terms of new capital assets and create few or no jobs. More generally, the widespread perception in
India that Modi is beholden to a handful of corporate interests, and tailors his economic policies
accordingly, does little to enhance international confidence in the country’s economic future.

Glimmers of hope come instead from young Indian entrepreneurs, who have created hundreds of
firms and more than 40 “unicorns” – privately held start-ups valued at more than $1 billion – in the
last year. Meanwhile, the gig economy currently employs about eight million Indians, though many are
underpaid and overworked.
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The World Bank predicts that India’s GDP will increase by 8.3% in the current fiscal year ending in
March, and by 8.7% in the following 12 months, making it the world’s fastest-growing major economy.
But, after eight years of Modi’s rule, the growth rate will be flattered by a lower base than even
pessimists expected.

So far, Modi’s government has forestalled serious domestic unrest through a combination of small-
scale welfare programs, especially in rural areas, and polarizing rhetoric targeting India’s minorities,
particularly its Muslim population, in order to consolidate support among the Hindu majority. That
such tactics may divide the country and derail its long-term progress does not seem to trouble Modi
greatly.

But unless the economy returns to growth rates of 9% or more, India risks creating a mass of young,
poorly educated, unemployed, and angry people – the classic formula for social and political unrest. If
the government’s economic incompetence continues, hopes of a demographic dividend may turn into a
nightmare.

SHASHI THAROOR
Shashi Tharoor, a former UN under-secretary-general and former Indian Minister of State for External
Affairs and Minister of State for Human Resource Development, is an MP for the Indian National
Congress. He is the author of Pax Indica: India and the World of the 21st Century (India Penguin, 2020).

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© Project Syndicate - 2022