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India is undergoing another transformation. The India I first visited, in the 1970s, was impressively democratic — with the exception of the period known as the Emergency imposed by then prime minister Indira Gandhi between 1975 and 1977. But its economy grew too slowly. After the balance of payments crisis of 1991, India introduced radical reforms. Over the next two decades its economy became faster-growing, while the political system remained robustly democratic. After the global financial crisis, however, growth slowed. India’s politics is also now moving towards an aggressively illiberal form of majoritarianism. These twin changes are not for the better.

Chart showing that the sharp post-crisis slowdown of  India's engines of economic growth. Annual average growth (%), 2002-11 and 2012-18.

Arvind Subramanian, a former chief economic adviser, has co-authored a paper on the post-crisis slowdown. It notes that every important indicator — investment, credit, profits, tax revenue, industrial output, exports and imports — has weakened sharply since the financial crisis. Yet overall economic growth has supposedly risen. This contradiction persuaded him to challenge the reliability of official estimates of economic growth. His conclusion was that the overestimate of growth between 2011 and 2016 averaged about 2.5 percentage points annually, which would lower average growth to somewhere around 4.5 per cent. If true, this has been really poor.

Chart showing Two of the drivers of India’s growth have shut down. Annual % growth of exports (real) and Investment (real)

Alas, there is worse. The economy has been slowing even more dramatically in the recent past, even on the official statistics. These show that growth of gross domestic product slowed to just 4.5 per cent, year on year, in the third quarter of last year. Growth may now turn around. But the slowdown has been dramatic, comparable even to what happened in the crisis of the early 1990s.

So what explains the weak growth after 2008 and the sharper slowdown in the recent past? First, unsustainable expansion of exports and credit-fuelled domestic investment exaggerated India’s pre-crisis growth rate. Second, despite the post-crisis emergence of severe balance-sheet-problems in financial and non-financial corporate sectors, government spending, falling oil prices and buoyant lending from non-bank financial companies sustained growth. Finally, credit from these last institutions collapsed in 2019. Consumption then joined other sources of demand — notably investment and exports — in weakening sharply. Today, argues Mr Subramanian, a vicious spiral is at work: high interest rates, weak economic growth and poor profitability are worsening debt burdens and so aggravating the problems of financial and non-financial corporations.

Chart showing India's current slowdown looks similar to the one in 1991. Annual % change

The government’s response seems to be to deny the evidence of a slowdown. A discussion at the ministry of finance last week suggested that the reaction is the sort of managerialism I remember from my work on India for the World Bank in the 1970s: protectionism, higher government investment, lending targets for banks and direct assistance to exports. It is impossible to believe that such actions will resolve the deep weaknesses behind recent growth failures.

Good economic policy is hard. As the Indian economy becomes more complex and advanced it has become even harder. It requires reliable data, world-class expertise, independent advice and open debate. Instead, the best advisers have mostly gone and policymaking has, by all account, been concentrated within the prime minister’s office. Everybody else is expected to show loyalty, above all. Rahul Bajaj, a well-known Indian businessman, has even accused the government of “creating an environment of fear”. In the short time I was there last week, I found many agree with him, if only privately.

Chart showing profits in India have collapsed, which makes it hard for companies to service their debts. Corporate profits as a % of GDP, 2002 -18.

It is essential for India’s future that growth be raised back above 7 per cent and that this growth be both employment-generating and environmentally friendly. This is a huge challenge. It will demand cleaning up the bad debt, raising savings and investment, improving international competitiveness, in a more difficult external environment, and bringing about reforms in agriculture, education, energy and a host of other important areas.

Chart showing The interest/growth pincer in India. Rate of interest minus the rate of nominal GDP growth (percentage points).  Private versus government, 2003-19.

The current government does at the least have the mandate it needs to revitalise the economy and so opportunities for better lives for all. That mandate is also due to Prime Minister Narendra Modi’s indubitable political talents. But knowing how to use such a mandate is no less vital than being able to win it. One alternative to the hard road of making good economic policy is making dramatic gestures, such as demonetisation, or botched reforms, such as the introduction of a far-too-complex goods and services tax. An even easier alternative is reliance on identity politics.

Chart showing the sharp post-financial crisis decline in savings and investment in India. % of GDP, total investment versus Gross national savings, 1980 to 2019.

That seems to be the current choice. The crackdown in Kashmir, the explicit discrimination against Muslims in the new Citizenship Amendment Act, the proposed national register of citizens, in a country with notoriously bad documentation, and the apparent intention to deport Muslims who cannot prove their right to stay, do together suggest a transformation of the Indian polity. So, too, is the free use of labels like “traitor” for those who disagree and “sedition” about those who protest. It is quite clear, surely, that the transformation of India into another “illiberal democracy” is long-intended. Little wonder US president Donald Trump admires Mr Modi. They play the same game, but Mr Modi’s majority gives him more cards.

India has now come to a watershed. Its powerful government can either focus its efforts on reinvigorating the economy or it can proceed with a transformation of an imperfect liberal democracy into something very different. It is easy to understand the appeal of this dangerous project. But we must hope that Mr Modi will listen, even now, to the better angels of his nature.


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