The truth about ‘the India story’

What makes India’s growth story worrying is that the slowdown began much before the COVID-19 pandemic

Updated - November 02, 2022 11:51 am IST

Published - November 02, 2022 12:16 am IST

‘Where India is doing especially poorly is in employment generation’

‘Where India is doing especially poorly is in employment generation’ | Photo Credit: Getty Images/iStockphoto

As the COVID-19 pandemic fades and hopes rise for nations and societies to return to some kind of normalcy, there is effort all around to take stock of where we stand and what our prospects look like. It is in this spirit that I want to look back over the last few years at how India performed in terms of its economy.

These are polarising times and one hears some arguing that the Indian economy is doing dismally, and others chanting that it is a blazing success. The truth lies somewhere in between. It is true that the Indian rupee has been doing very poorly (especially in comparison to the stated target of our political leaders to strengthen it) and inflation, at 7.41%, is high, but these are global problems. Virtually all currencies are losing out against the U.S. dollar, and inflation right now is a global phenomenon.

Where India is doing especially poorly is in employment generation. India’s unemployment rate is high. In October, it stood at 7.8%. However, what is really worrying is youth unemployment. According to International Labour Organization (ILO) data, collated and presented by the World Bank, India’s youth unemployment, that is, from among people aged 15 to 24 years who are looking for work, the percent that does not find any, stands at 28.3%. This places India in the cluster of troubled West Asian nations such as Iran (27.2%), Egypt (24.3%) and Syria (26.2%), and in a much worse state than most Asian countries such as Indonesia (16%), Malaysia (15.6%), and Bangladesh (14.7%).

The growth story is mixed

India’s growth story is more mixed. In 2021-22, its GDP growth was 8.7%, which was among the highest in the world. This is good but, against this, we must offset the fact that much of this is the growth of climbing out of the pit into which we had fallen the previous year. In 2020-21, India’s growth was minus 6.6%, which placed the country in the bottom half of the global growth chart. For 2022-23, the International Monetary Fund has cut India’s growth forecast to 6.1%. There are two special worries related to this. First, given that most of India’s growth is occurring at the top end, with a few corporations raking in a disproportionate share of profits, and unemployment is so high, it is likely that large segments of the population are actually witnessing negative growth. The second worry is not so much about India’s dropping rank in the world, as about how India’s performance has been sliding compared to its own past performance.

The short story of India’s growth is the following. After sluggish growth for about four decades after Independence, India’s growth picked up in the early 1990s, following the reform of 1991-93. From 2003, it rose again, and India joined the ranks of the Asian super performers. From 2005 to 2008, it was being acclaimed globally for being on top of most charts. For three consecutive years, India grew at, respectively, 9.3%, 9.2% and 10.2%.

It must be pointed out that in recent years, the official Indian estimates for these years have been revised downwards. The latest Economic Survey has cut these growth rates to 7.9%, 8.0%, 8.0%. But, even with that, India stood out. In fact, from 2003 to 2011, barring one year, the start of the Great Recession in 2008-09, India was on top of most global rankings in terms of growth performance.

What makes the current situation dire is not that India grew slower than a majority of nations during the COVID-19 pandemic. Those were troubled times, and nations were often, understandably, caught on the wrong foot.

What makes India’s growth story worrying is that the slowdown began much before the COVID-19 pandemic. It began in 2016, after which, for four consecutive years, the growth rate each year was lower than in the previous year. Growth in 2016-17 was 8.3%. After that it was, respectively, 6.9%, 6.6%, 4.8%, and minus 6.6%. This downward spiral stretching over four years has never happened before in India since its independence in 1947.

Why is this happening? If we look at India’s policy interventions over the last six or seven years, there have been good and bad moves. India needed to make it easier for bankrupt firms to close down and move on. Without this, business was sluggish. Hence, it was good to see the new Insolvency and Bankruptcy Code the nation adopted in 2016. On the other hand, the demonetisation of 2016 was a big mistake. Much has been written about this. Let me not expend more time on it.

India’s investment rate

I want to instead turn to one reason behind India’s poor growth performance over the last six years that has been largely overlooked. We know from textbook economics models that one of the most important drivers of growth is the investment rate, that is, the fraction of the national income that is spent on investment — roads, bridges, factories, even human capital. For long years, India used to have a low investment rate, and, in keeping with textbook economics, India had slow growth.

Then the investment rate began a slow rise and crossed the 30% mark for the first time in 2004-05. By 2007-08, it had reached 39.1%. India was, for the first time, looking like an East Asian super-performer; and it was growing faster than the super performers. The investment rate remained just short of 40% for six years and then began to fall. By 2019-20, it had fallen to 32.2%.

No one fully understands what determines the investment rate. It has many drivers. Monetary policy matters, as does fiscal policy. In addition, how much people invest depends on social and political factors.

It is arguable that trust is a major driver of investment. As the level of trust erodes in a society, investment tends to fall.

We will need more research to know what is causing India’s investment rate to fall. However, given the rise of political polarisation and the policy of divide and rule, it is likely that societal trust is eroding and this is reducing the investment rate. In turn, the falling investment rate is adversely impacting growth and hurting job creation.

Needed, a policy refocus

Given India’s strong fundamentals and abundance of talent, there is no reason why such a vast expanse of the economy should be languishing, with so many people witnessing a contraction in their incomes. We do need to shift the policy focus from a few rich corporations to the larger segments of population — small businesses, farmers and ordinary labourers. There is a need for fiscal policy interventions to transfer income from the super-rich to these segments. There is ample space for this since inequality in India has risen disproportionately over the last few years. Finally, even though a divided society is easier to rule, we have to pull back from this and create an ethos of inclusion and trust, the erosion of which is slowing down investment and adversely impacting job creation and growth.

Kaushik Basu is Professor of Economics and Carl Marks Professor of International Studies, Department of Economics and SC Johnson College of Business, Cornell University, Ithaca and New York

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