Belle of the ball


FOR more than three decades, India has played bridesmaid to China’s bride. No longer. Suddenly, it is India that is the belle of the ball. It has replaced China as the world’s fastest-growing large economy and is now bigger than both France and Britain. A quarter-century ago, Germany’s GDP was more than six times India’s. Partly because of the recent weakness of the euro, Europe’s largest economy is now only 16 per cent bigger than India’s, and Japan’s 24 per cent bigger. Barring accidents and reverse currency movements, India should comfortably overtake both of them at some point in the second half of the current decade. That would make it the world’s third largest economy, behind the US and China – though considerably smaller than both of them. Still, the momentum is now with India, already the third largest contributor to global economic growth.

India’s continued role as the leader of the growth pack (among large economies) seems assured, since China has seen a slow decline in its growth rates over the past decade and is beset with two structural problems: a declining population and deeply troubled financial and real estate sectors. To that one could add its seeming inability to contain the Covid pandemic without economically counter-productive lockdowns. In contrast, India has solved what was billed as its ‘twin balance sheet’ problem, with the banks and most of the corporate sector now financially healthy. India’s public debt, in relation to its GDP, has risen during the Covid phase but is smaller than the ratio for developed economies like Japan, the US, France and Britain.

In short, the macro-economic constraints on growth that some of the other large economies confront do not operate quite as much in India’s case. Smaller economies like Vietnam and Bangladesh (both of which have much smaller public debt in relation to their GDP) will play catch up, and have already moved ahead on per capita income, but in total size they will remain relatively small. Larger potential challengers like Brazil and Indonesia are unlikely to make the cut.

Some qualifications should be quickly stated, lest triumphalism cloud judgement. China, once roughly equal to India in economic size, is now more than five times India, and the gap will not close in any meaningful way in the foreseeable future. India remains only marginally above the bottom quartile in a country-ranking by nominal per capita income, with about 20 per cent of the global income average. Even on the basis of purchasing power parity, it remains two-thirds of the way down the list, with per capita income less than half the global average. It is no different when it comes to social indicators; on the UN’s human development index, India is yet to progress to the ‘high’ category, let alone the ‘very high’ group. The country has a long, long way to go.

And yet, India’s great advantage – matched only by China – is the size of its population. Therefore, weak metrics like a low per capita income do not change the country’s future trajectory because even if only a quarter of India’s population (close to 350 million) becomes truly middle class, that is a bigger number than the total population of any third country. India is or will in the foreseeable future figure in the three largest markets for a range of consumer goods (vehicles, refrigerators, etc.) and services (mobile phones, internet usage, aviation). The head of Unilever’s Indian subsidiary has said, for instance, that India will soon overtake the US as the conglomerate’s biggest market for its bouquet of everyday food products and personal care items. With luck, therefore, India could develop into a slower repetition of the China story, with a lag of perhaps 15 years. For most large companies, Indian and foreign, that is an arresting thought.

Once again, qualifications are in order – and they have been articulated most clearly by Arvind Subramanian, the former chief economic advisor, in an article written jointly with Josh Felman in Foreign Affairs. They argue that India’s investment risks are too big because of policy uncertainties and partiality to domestic oligarchs; policy inwardness is too strong because of steadily higher tariffs as an inevitable complement to the package of production-linked incentives (PLI) offered for those setting up manufacturing facilities in specific industries; and the macro-economic imbalances (fiscal deficits, current account deficits and inflation) are too large. These, they say, will encourage companies looking for alternatives to China to go elsewhere.

The constraints listed by the authors are real. There is uncertainty in many companies about future consumption growth, and fear of the state among many executives and businessmen. A rapidly increasing number of wealthy Indians are choosing to go overseas. And the fiscal pressures are real despite buoyant tax revenues, one indication being the sudden rush of state governments choosing to revert to the old (defined benefit) pension system for government employees that has proved unsustainable in even wealthier economies. Finally, it is too soon to comment on the success of the PLI initiative, though some early successes have been notched up.

If more and more observers tend to gloss over these realities, it is because of the geopolitical context. India has become an essential element in any western strategy for containing China. This has encouraged geostrategists and the western media to talk up India as the next big thing although its growth record of the past decade suggests deceleration rather than acceleration. It is this geopolitical and geo-economic framework that has helped India carve out a middle ground in the context of the Russian invasion of Ukraine – the country gets praised by Vladimir Putin despite being subjected to a talking-to by Narendra Modi, while western leaders avoid overt criticism of its refusal to boycott Russian oil. In the event, the country has become a truly swing power on the global stage – as evident at the last round of G-20 and environmental summits.

What observers look at also is relative rather than absolute performance. As noted, India has not done better on growth in the past decade than in the previous one, but other leading economies have slipped badly. Britain is a good example of how one mistake after another, committed over the past decade and more, has left it with stagnant productivity, falling living standards, the prospect of stagnant real wages for another decade, and a set of unpleasant choices when it comes to maintaining a minimum standard of welfare services.

Though not quite as stark, other western economies face similar predicaments that had their genesis in the measures taken to tackle the financial crisis of 2008 and then the Covid pandemic – loose fiscal and monetary policies that now have to be reined in because of soaring inflation, at the cost of recession and spreading industrial strife. The resulting policy dilemmas (how quickly to rein in inflation, while minimizing recession; how much to subsidize energy costs for consumers) have to be confronted amidst deepening socio-economic divides that are at least in part the cause of identity politics – Brexit and Trumpism, for example. China too is paying the price for a sharp increase in debt levels, in relation to GDP, in the wake of the 2008 crisis – the problem compounded by the peculiar nature of its financial sector which makes it hard to distinguish public from private debt.

The 2008 crisis in the countries around the North Atlantic was, at root, a fallout of the rise of China as a manufacturing and trading power (causing a hollowing out of both western manufacturing and its social middle) combined with a post-Thatcher/Reagan decline in welfarism, both leading to economic stagnation or worse for the less privileged, in economies that have lost momentum and are unlikely to regain it in a hurry. Many have correctly perceived that the slow shift of power in the global system is therefore the story of the new millennium.

For a relatively brief period after the end of the Cold War, global power had been seen to vest primarily in the United States and to some degree Western Europe. China’s enormous successes once it was allowed entry into the World Trade Organization in 2000 made global power to rest on a three-legged stool. It is much too soon to suggest that India’s rise will be on a scale sufficient to make it a fourth world power, but relative outperformance can impact perceptions through magnified projections into the future – as indeed happened with China well before it had actually arrived.

It is precisely this which has prompted some over-the-top forecasts for the next decade, like one by Morgan Stanley that talks of Indian GDP moving from $3.3 trillion to $7.5 trillion in a decade, with manu-facturing growing at an annual rate of 11 per cent. Such projections imply economic acceleration when the recent history is of significant deceleration. In dollar terms, the economy has less than doubled in the last decade, whereas it more than trebled in the decade before that.

This is partly explained away by the pandemic, which has lost the country two years of growth, but the government’s handling of the crisis involved two major bungles: first the lockdown of 2020 and then the lack of preparedness for the second wave in 2021. These added to the effect of the demonetization of 2016 and the bungled introduction of the goods and service tax in 2017. But to its credit, the government played its hand cautiously on both the fiscal and monetary fronts during the last three years, even though subsidies at the central level rose by 1.5 per cent of GDP; so, while the fiscal deficit and public debt soared, they remained within manageable limits. That has now stood India in good stead.

The current storyline of relative out-performance internationally rests on this foundation of cautious macro-economic conservatism and the slow digesting of the twin-balance sheet problem that afflicted banks and companies for several years. In a strange twist, it sits comfortably
with the evidence of increased unemployment, perhaps increased poverty (the government has suppressed the data, or not collected it, on both employment and consumption), a fall in the investment ratio and other such indicators that fuel skeptical comment. The Indian economy’s climb to fifth rank, from about the tenth place a decade ago, is therefore a product of the rest of the world’s problems, reflected also in recent currency movements – with the rupee having lost less against the dollar than the euro and pound.

France and Italy have seen little or no growth in a problem-ridden Europe, while the Brazilian and Russian economies have yo-yoed. All of them plus troubled Britain had bigger economies than India’s a decade ago. The sense of a power shift grows when the developed economies stare ahead at a coming recession while India has recovered from the pandemic and is chugging along once again.

At the same time, the Modi plan for the economy has taken shape and some results have begun to show. His strategy has been radically different from what the economic pundits have advocated since the mid- to late-1980s. He has raised tariffs, not lowered them. He has stayed away from regional trade liberalization arrangements like the RCEP (Regional Comprehensive Economic Partnership). He has consciously eschewed a level playing field by actively promoting national champions without paying much heed to how this has damaged the interests of international firms that have taken the plunge in the Indian market. He has centralized rather than decentralized economic decision-making and fiscal resources.

And Narendra Modi is now trying a version of Nehruvian industrial policy through the subsidized growth of high-end manufacturing, as opposed to promoting the growth
of labour-intensive industries. He has also done little by way of privatization, the notable exception being Air India. Not for Narendra Modi, therefore, the ‘LPG’ formula of liberalization, privatization and globalization. Anything but. Where he has bought into that set of ideas, by attempting labour reform and changes to the current state-driven agricultural marketing, he has run into determined opposition and given up.

What Modi has done instead is what only a very brave prime minister would have attempted, given India’s poor history of implementing programmes and projects. He has delivered on execution by relentlessly driving handpicked officials and ministers (some of them inducted from outside the ruling party’s ranks) to go for outsize targets, whether it be in renewable energy or toilet provision, highway construction or railway transformation, financial inclusion or targeted welfarism. He has also digitized the system in a way that has opened up previously unimagined opportunities and efficiencies, through the combination of Aadhaar identification, the Unified Payment Interface for low-cost banking and financial transactions, and the Open Network for Digital Commerce. This last should help small businesses access customers more easily.

The benefits have been twofold. One, he has improved the business environment in multiple ways, and reduced waste in the government’s welfare budgets. And two, he has been able to sell the image of a government that delivers – in a way that drowns out or renders ineffective all the criticism about growing unemployment, sharper divisions among rich and poor, the relative neglect of school education and public health care, and (on the social register) the communal divide that is at the core of his political positioning.

The drumbeat on achievements does not make dissatisfaction disappear; indeed, Reserve Bank surveys of the consumer mood continue to show that the majority of the urban population remains downbeat about the way things are going on the economic front. But one of the consequences of having a dominant political leadership is that such negative sentiments among the people tend to stay subterranean. Modi’s personal popularity and the meta-narrative of Hindu assertion are enough to divert attention away from the dissatisfaction over very real issues like the lack of jobs and inflation.

All this fits very well with the model of traditional strongman government as has been practised in some East Asian countries. In India’s case, it is within the framework of an electoral democracy that is increasingly presidential in nature, with high-pitched oratory about demonstrable delivery of goods and services by the state combining with autocratic methods (like suppression or co-option of the media and autonomous agencies) and populism to create an atmosphere in which negative sentiments have limited space for being aired. The democratic skeleton does not change the growing muscularity of what used to be a flabby or ‘soft’ state. Many would argue that this is just what the doctor ordered.

Western countries are familiar with many decades of performing the double act of talking democracy while hugging autocrats. So they make the occasional noises about India’s recent human rights record, but are mostly quiet when opposition politicians and civil society activists are targeted, because they know that in the final analysis they have to deal with a leader who has the merit of being popularly elected and who also has a firm hold on his country’s future and will therefore be around for some time to come. They would have preferred it if the leader were someone more like them instead of someone whose standard form of greeting a fellow head of government used to be an uncomfortable bear hug, but they have been more than willing to hug back because, in a world of stagnant economies and shifting power balances, they need India’s growing market and its strategic support against threatening challengers old and new. India may not always accept or play by their rules, but at least it is not Putin’s Russia or Xi’s China.

Recognizing how the winds have blown India’s way, the question must be asked: How might the belle of the ball find that she is Cinderella again? On present reckoning, the damage would have to be self-inflicted, because the external threat from China, while real, may not materialize as that country has a great deal already on its hands. And Modi on his part is not likely to play a game of dare with Beijing, as he did some years ago with Islamabad. Note how he played down the Chinese incursions into Ladakh in 2020 by stating, contrary to the known facts, that there were no foreign troops on Indian soil.

Internally, three significant dangers present themselves. The first has to do with economic management. If the issues highlighted by Subramanian/Felman are not addressed, if economic growth proves to be underwhelming and the pressures from suppressed dissatisfactions start testing the system’s capacity to cope, the scenario could change. Only if tax revenues are buoyant can the state pay for the welfare expenditure to neutralize joblessness, since the fiscal deficit for centre and states combined is already sky-high. That in turn implies an economy with good growth momentum. Absent that, the mood could turn sour and then no political party is likely to have any answers. It would only be natural then for the diversionary politics of identity to assume more virulent forms.

The second internal danger has to do with the strength of autonomous institutions. The thesis is now widely accepted that the countries that do well have benefited from strong institutions. It is equally widely recognized that India’s institutions have been atrophying. The risk of institutional failure or weakness is that it could lead to untrammelled political power, especially with the presence of a supremely popular leader who stands head and shoulders above everyone else. The tension that is there currently with the Supreme Court over judicial appointments is one manifestation of other possible conflicts provoked by an increasingly assertive political executive.

The court is on less than firm ground in insisting on appointments by a collegium of judges that is a self-created system with obvious deficiencies when it comes to process transparency. Yet many would be even more uncomfortable with the government having the sole or preponderant power to appoint judges, given the way the same government has dealt with an Election Commissioner who chose to demur, and given also how appointments done by panels that include the leader of the opposition or even the Chief Justice have been neutralized.

Bear in mind that an ordinance was issued to facilitate extra-long tenures for the heads of the Central Bureau of Investigation and the Enforcement Directorate – two of the ‘agencies’ that run up increasingly against judicial roadblocks when they cannot justify prosecution and/or prolonged arrests without trial. So this is an issue more than ordinarily important for the future of the system and the sense of safety among citizens. As Lord Acton famously warned, power tends to corrupt and absolute power corrupts absolutely.

The third obvious danger concerns the deepening and sharpening of fault lines – a rich-poor divide that could become too wide to be papered over with welfarism, the privileged employed vs the many millions on the margin even if employed, the communal division that has so far not boiled over, and – just over the horizon – a new north-south face-off. There has been some talk, for instance, of Hindi being pushed as the primary language of governance. It is not clear exactly what that might mean, but it could in practice privilege those from the Hindi-speaking belt in one way or another.

Relevant in this context is the delay in holding the decennial census, due originally in 2021 and delayed ostensibly because of the pandemic, but still nowhere in sight and now – it has been reported – not likely before the 2024 elections. Given the extended preparations and training required for conducting the census, and the digital methods proposed to be used for the first time, it is entirely possible that the census will not be conducted before 2026.

That is when the 84th amendment to the Constitution kicks in with the provision that statewise allocation of parliamentary seats will remain frozen for the time being and changed only on the basis of the first census undertaken after 2026. Such a change cannot be postponed indefinitely because of the sheer numerical size of individual constituencies in the more populous states of the north – some of them with twice as many voters as some constituencies in the south that have seen much slower growth of the population.

Ordinarily, a change in the statewise composition of seats would have meant waiting for the 2031 census, but that may not be necessary if the 2021 census is held in or after 2026 – early enough to influence the outcome of the Lok Sabha elections that would be due in 2029. The allocation of more seats to the northern states (where the ruling party has its base) in an expanded Parliament – for which a new building with greater seating capacity is nearing completion – could well make the Bharatiya Janata Party undefeatable. The flip side of that is reduced relative representation for the southern states, where the BJP wins few seats. The numerical strength of the southern states in the Lok Sabha, at barely a fourth, is not enough to block such a change. Nor, for that matter, can the regional parties of the north oppose the change, for obvious reasons.

If such a foundational change is accompanied by the perceived ‘imposition’ of Hindi, coming on top of financial devolution of resources being sought to be skewed to help the ‘Bimaru’ states of the north (again, a course of action in favour of which legitimate arguments exist because inter-state disparities need to be addressed), the dangers hardly need to be spelt out. How would people in the southern states view it if they lose their share of voice on account of their very success in the national family planning programme, or if they lose out also on both tax money and jobs?

That north-south inter-state disparities are large and perhaps growing is in little doubt. So the need to address it by channelling more funds to states like Bihar as a necessary though not sufficient step can hardly be denied. The India represented by Tamil Nadu in the south has less than a third of
the diarrhoea cases reported from northern India as represented by Bihar. It also has only 40 per cent of the infant mortality rate, and 60 per cent of the fertility rate. The obverse is that Bihar has only two-thirds of Tamil Nadu’s ratio for literate women, or doctors per 1,000 population, but a 50 per cent higher ratio of stunted and wasted children. Tamil Nadu has net income per head that is a third more than the national average, whereas Bihar has barely a third of India’s net income per head.

If international comparisons are made, Tamil Nadu could hope to match the Philippines, while Bihar might get bracketed with Niger, ranked 204th out of 215 countries and territories on per capita income, and with the world’s lowest human development index. UP might get clubbed with Niger’s neighbour in the Sahel, Mali. While labour migration could help people from the north enjoy the economic conditions of the south and west, that is never going to be enough. More has to be done, and a different pattern of fiscal devolution is an obvious method, especially since the south and west already attract most of private investment.

The point though is that such gaps cannot be closed in a day, or with a magic bullet. Fiscal reallocation, along with language imposition and political marginalization, if they come together or in rapid succession, would almost certainly mean stirring the political pot. As it happens, Narendra Modi has shown a weakness for maximalist play and a will-ingness to take large risks, as with demonetization in 2016 and the Covid related lockdown of 2020. So it must be hoped that he will have the wisdom to play a more careful hand when dealing with what could be a very touchy set of issues in precisely that part of the country where the ruling party has the least political traction.

That brings up the question: How dominant really is the ruling Bharatiya Janata Party, if it wants to ride roughshod on tricky issues? Its apparent strength is obvious. It has won successive Lok Sabha elections with an absolute majority and, by any realistic reckoning at this point, it will do so a third time in sixteen months’ time. In Narendra Modi it has a leader with no rival, and so he is likely
to be the first prime minister after Nehru to win three parliamentary elections in a row. The party has a committed cadre, with a tested election machinery on the ground and a troll army for the digital space. Its majoritarian ideology has found steadily more takers, and it is much better funded than perhaps all other parties put together.

Yet, one could point out the limits of its dominance. In its best-ever performance, the party won 37 per cent of the popular vote in 2019, less than what the Congress did in almost all elections till the era of coalition politics began in 1989. The BJP enjoys a majority in the Lok Sabha, but not the two-thirds majority required for a Constitutional amendment. In the Rajya Sabha, it will struggle to put together even a simple majority, because of the loss of alliance partners.

As for the country’s 21 major states (defined as those with more than two Lok Sabha seats, and therefore including Delhi but leaving out the special case of Jammu and Kashmir), the BJP rules directly in just six, and along with coalition partners in another two. Of these eight, it did not actually win the election in three; it was able to form the government there only by engineering defections or by encouraging a split. That does not count as a popular mandate. But what counts in the BJP’s favour is that, where it is not in power, it is the principal opposition party in another eight states. An effective footprint across 16 of the 21 major states is impressive. Notably, it is in four southern states and Punjab where it is neither the ruling party nor the principal opposition.

The flip side of the coin is that as many as 13 of the 21 major states are ruled by other parties, of which three are by the Congress and the rest by regional parties, some of them in alliances that include the Congress. In other words, there continues to be space for the opposition. To be sure, Modi and his party have no credible challenge when it comes to Lok Sabha polls. But that is the prime minister’s strength, more than BJP dominance per se.

Why is this important? Because in a democracy what matters is contestation. So long as that is possible, the system will hopefully find its way to perhaps messy compromises for even the most intractable and potentially dangerous problems. If so, the Cinderella moment may not come, and India could remain by and large the good news story that it is just now.