INDIA’S

STALLED
RISE
How the State has Stifled Growth
ARVIND SUBRAMANIAN and JOSH FELMAN
(2022)

Prastuti Sachan , Prince Kumar , Priyanshu

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, Rahul , Rajkaran
Kumar
 INTRODUCTION: AS AN OVERVIEW

• For much of the 1st decade of twenty-first
century, India’s economy captivated the
world’s imagination. Other countries looked
on enviously as India became the fastest-
growing free market democracy.
• India, powered by prominent information
technology companies like Infosys, Tata
Consultancy Services, and Wipro, had the
potential to become a global player and
even an economic superpower.
• But then came the global financial
crisis of 2008. India’s three decade long
structural transformation ground to a
halt and the initial shock was
compounded by years of poor
economic management.
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• By the time the COVID-19 pandemic
struck, the world had turned its
attention away, with India seemingly
disappearing from the global economic
map.
• In 2021, however, India suddenly
reappeared. Foreign portfolio
managers, convinced that the country
was on the move again, funneled
money into its stock market, sending it
soaring.
• India has made impressive recent
progress in building the “hardware” of
economic success—its physical and
digital infrastructure

Yet at the same time, the country continues to struggle to fix its “software,” the crucial economic framework under which domestic
entrepreneurs and foreign firms must operate. As a result, domestic entrepreneurs and foreign companies have been reluctant to
undertake the investments needed to exploit India’s rapidly advancing hardware .
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 INDIA’S LOST  Indian firms' heavy investments during the boom years, assuming

DECADE
continued rapid growth.
 Financial crisis led to soaring interest rates and collapsing exchange rates.

 Many large companies struggled to repay debts, leading to default.

India's Economic Challenges and Debt Crisis
a

 Banks faced nonperforming loans exceeding ten percent of their assets.

 Government initiatives launched to address the "twin balance sheet"
problem.
 Measures alleviated the debt problem but left firms financially feeble and
banks reluctant to lend.
 Lackluster investment and exports hindered economic recovery.

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Impact of COVID-19  COVID-19 brought significant economic and human devastation.

and Social Challenges  Indian economy shrank by over seven percent in 2020, worst
performance among major developing countries.
 Poverty increased substantially, reversing a long-term downward
trend.
 Small and medium-sized businesses ravaged, following
demonetization and introduction of complex GST.
 Education system disrupted, with children out of school for 18
months.
 Disaffection in politics, with disputes between central and state
governments over revenue sharing.
 Revival of "reservation" policy, reserving jobs for disadvantaged
social groups.

The most telling statistic, for an economy with an aspiring, upwardly mobile
middle class, came from the automobile industry: the number of cars sold in
2020 was the same as in 2012-13. ALPINE SKI HOUSE 4
 IMPROVING HARDWARE ,FIXING SOFTWARE
Government has been busy building the foundations for a renewal boom, by strengthening the economy’s hardware and
attempting to remedy some of the problems of its software.
• A number of the hardware improvements are readily visible. Rail
and road networks have been expanded, with some major new
highways and the Delhi–Mumbai freight corridor nearing
completion, alleviating India’s most obvious constraint on
growth.
• At the same time, important digital infrastructure has also been
built. A national digital payments system, the Unified Payments
Interface, or UPI, has been established, allowing smooth digital
transactions.
MAJOR INITIATIVES
• In 2019, the corporate tax rate was reduced to 25
percent from 35 percent, and new manufacturing
firms were offered the possibility of securing a tax
rate of just 15 percent.
• In August 2021, the government announced that
it would settle nearly $7 billion in tax disputes.
• in October 2021, the government privatized
India’s iconic national airline, Air India, selling it
back to its original owner, the Tata Group (the
multinational conglomerate that also owns Tata
Consultancy Services), after 68 years of maladroit
public ownership.
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 NEW WELFARISM: DISTINCTIVE APPROACH TO REDISTRIBUTION AND INCLUSION

• Traditional redistribution, which aims to deliver on

intangibles like health and education, has ceded to a
distinctive ‘New Welfarism’, where Centre is demonstrably
providing tangible essentials to citizens

• This “New Welfarism” has included bank accounts, cooking

gas, toilets, electricity, housing, and, more recently, water
and just plain cash.

• . By 2019, 98 percent of all households had access to

electricity, up from just 75 percent a decade ago, and 60
percent had access to clean cooking gas.

• According to survey data, nearly three-quarters of all

Indian women now have bank accounts that they can use
themselves.
And the government’s subsidies to the poor—previously known for extraordinary rates of “leakage” —are now provided in
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direct cash payments, ensuring that they reach their intended beneficiaries. They now amount to $100 billionSKI
per HOUSE
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 ASPIRING OUTWARD, TURNING INWARD

• • The Modi government’s new industrial policy is motivated by

its well-founded desire to lure international manufacturing
away from an increasingly uncompetitive China.

• Since the financial crisis, China has lost about $150 billion of
global market share in labor-intensive goods.

• Yet until now, India has been able to attract no more than ten
percent of that lost share.

a
• In an effort to capture a far greater amount, the government
has launched a three-pronged strategy, called Atmanirbhar
Bharat (Self-Reliant India).

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Atmanirbhar
Bharat (Self-
Reliant India)  The subsidies take the form of production-linked incentives (PLIs) for
manufacturers in designated sectors, including makers of cell phones,
electronics, and pharmaceuticals. Available to both domestic and
Targeted foreign-owned companies, the PLIs could cost the government about
subsidies one percent of GDP over five years.
 Since 2014, there have been some 3,200 tariff increases, affecting about
70 percent of total imports. As a result, the average tariff rate has
increased from 13 percent to nearly 18 percent, pushing India’s trade
Protectionism barriers well above those of its East Asian counterparts.
 Under Modi’s predecessor, Manmohan Singh, India signed 11 trade
agreements; since Modi came to power, in 2014, it has signed none.
Non-participation  Modi government has declined to participate in the Regional
in regional trade Comprehensive Economic Partnership, a pact that has been joined by
nearly all Asian countries
agreements
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 WILL SELF-RELIANT INDIA WORK?

• Self-Reliant India's success is doubtful, given India's past MISTAKES

experiences with similar industrial strategies.
• The protectionist tariff regime is unlikely to attract
• The new approach, called the "subsidy raj," carries risks manufacturers away from China.
of difficult enforcement, arbitrary decision-making, and
• Higher tariffs hinder access to inexpensive, high-
creating a challenging system of entitlements.
quality imported inputs crucial for modern
• The strategy fails to address India's crucial needs, production.
particularly providing gainful employment to its young,
low-skilled workforce.
• India's exclusion from comprehensive trade
agreements puts its exports at a disadvantage in
• India should focus on boosting labor-intensive exports to
dynamic global markets.
meet the aspirations of its population.
• The government's actions make it harder for India to
• However, the strategy, including Production-Linked
integrate into global supply chains and compete
Incentives (PLIs), prioritizes technology and capital-
with China as a global manufacturing center.
intensive sectors, offering limited job opportunities for the
majority of the population.

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