Social cohesion, a prerequisite of economic vigour, under attack from sectarian politics; domestic investment languishes even as Indians invest massively abroad
It is now more than 11 years since Narendra Modi assumed leadership of the Indian state, effected a paradigm shift in the political culture, complete with a new sectarian vision of the nation’s future, distinct from the tryst with destiny that India’s first prime minister had envisioned at the time of Independence.
The transformation, in the interim, of the phone from an instrument of voice communication to a ubiquitous node of a global network of data that encompasses the entirety of digitised fact, fiction and fantasy and their assorted combinations into instrumentalities of power and influence, has played a considerable role in the ongoing degradation in the political culture.
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Falling growth
Where does that leave the common man? Savouring enhanced well-being, in the world’s fifth largest economy, cruising along to become the fourth-largest economy, in absolute terms, and in relation to fellow Indians and other earthlings, even as some of them prepare to colonise Mars?
Or, pretty much where RK Laxman’s common man used to be?
The answer is blowing in the climate-intensified wind.
The rate of economic growth has come down over the present government’s term, as compared to the previous 10 years, when the United Progressive Alliance (UPD) led the country. The compound average growth rate (CAGR) during the UPA’s 10 years was 6.7 per cent. The CAGR starting 2014-15 has been 5.7 per cent.
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Fair comparison
But is this not an unfair comparison? The present government’s tenure included the pandemic year of 2020, when the economy actually shrank 4.1 per cent.
There are two reasons why the comparison is not unfair. The global financial crisis struck during the UPA’s tenure. The present government says it did not affect India much.
Half of India’s workforce is above 45 years of age, and ill-suited to adapt to the AI revolution. And, of the younger half, the proportion that has received an education that makes the worker capable of critical thought is minuscule.
But that insulation from the financial crisis did not come about by some quirk of nature or act of God. The government pumped up the fiscal deficit, spent big to shield the economy, and prevented immediate damage. But the stepped-up fiscal deficit over three years resulted in high inflation.
The other reason why the comparison remains valid is that the growth rate had been crumbling even before the pandemic. It had come down from 8 per cent in 2016-17 to 6.2 per cent, 5.8 per cent and 3.9 per cent respectively in the three subsequent years.
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A major reason is the failure of investment – Gross Fixed Capital Formation — to reach anywhere close to the 34-35 per cent of GDP that used to be routine during the UPA years. This has hit the growth of manufacturing and services.
Structural retrogression
As economies prosper, the share of agricultural output and employment in total output and total employment comes down, as a rule. In the rich world, agricultural output accounts for a percentage point or even less of total GDP. Farm employment is proportionately small, in the low single digits.
In India, the share of agriculture in total economic output had come down to 13 per cent or so during the period of fast growth over 2003/04-2013/14. The share of agricultural employment came down to 42 per cent or so. Now, agriculture accounts for some 18 per cent of GDP, and nearly 48 per cent of workers toil on the farm. The share of manufacturing in total output refuses to rise to rousing calls to make in India. This marks structural retrogression.
Agriculture accounts for some 18% of GDP, and nearly 48% of workers toil on the farm. The share of manufacturing in total output refuses to rise to rousing calls to make in India. This marks structural retrogression.
The mass return migration triggered by the COVID pandemic was an immediate explanation. But four years since the retreat of the virus, people continue to linger on in rural areas, where they had taken refuge from the disease and the total lack of subsistence as a result of lockdowns unaccompanied by measures to protect workers.
Misguided policies on agriculture and welfare, loss of economic momentum and the failure of private investment to revive have inhibited the return of rural folk back to the towns.
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Poor agricultural planning
Free food made sense during COVID. Continuing with the policy of giving free food to nearly 60 per cent of the population only serves to increase the food subsidy bill and dissuade workers who fled the pandemic in the towns from returning to the towns to earn a decent livelihood.
India continues to produce way more rice and wheat than is required for food security, and way less oilseeds and pulses. It is the largest importer of edible oil, besides of weapons. The sensible thing would be to institute incentives for farmers to switch from food grains to oilseeds.
India grows water-guzzling sugarcane in the arid Deccan, lavishing power subsidy for lift irrigation that depletes the groundwater, besides fertiliser subsidy. Thanks to lawlessness and a disease called red rot, sugarcane is not grown in the floodplains of Bihar, ideal terrain for the crop.
If the cane dries, sugar recovery from the cane drops dramatically. Therefore, it is vital that sugar factories be located close to where the cane is grown. But if there is no law and order in cane-friendly floodplains, no one will set up factories, and in the absence of factories, no cane would be grown. So, India ends up growing cane in areas that should be used for growing lentils and oil seeds.
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The government tried to reform farm policy without any consultation with farmers or even discussion in the legislature. Three farm Bills were issued as ordinances. This met with stiff resistance, and the government had to give in to the agitating farmers in 2021. It has not had the political courage to attempt another round of reform, taking the farmers on board.
Missing investment
Investment has a multiplier effect on growth, far in excess of incremental consumption. Investment, specifically gross fixed capital formation, not taking into account inventories or valuables, stood at 11.4 per cent of GDP in 1950-51.
The arduous climb of this crucial, growth-determining ratio to 30 per cent took 50 years. Actually, in 2001-02, the ratio hit 29.9 per cent. It crossed 30 per cent in 2004-05, and kept climbing to hit a peak of 35.8 per cent of GDP in 2007-08. It started climbing down thereafter, but was still 31.3 per cent in the UPA’s final year in office of 2013-14.
The ratio stayed above 30 per cent in 2014-15, dipped below that level thereafter, and stayed there for eight years, till 2022-23, when it rose to 31.2 per cent, only to dwindle to 30.4 per cent in 2023-24 and 29.9 per cent in 2024-25.
In China, the ratio crossed 33 per cent sustainably in 1998, touched a high of 45 per cent in 2013, and has stayed above 40 per cent since, still at 41 per cent in 2023 when a crisis in its property markets had stunted growth and investment.
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In India, domestic capital still holds it hand when it comes to fresh investment. India Inc. invested $29 billion abroad in 2024-25.
Combined with a disinvestment and repatriation of capital by existing foreign investors in India’s real economy – we are not talking about portfolio flows – to the tune of $51 billion, this pushed India’s net foreign direct investment in 2024-25 to a meagre $350 million.
This has its impact on employment.
Employed, jobless employed
India’s official employment figures are not compatible with the definition adopted by the International Labour Organisation (ILO), which only counts paid work. In Indian figures, unpaid family labour is also counted towards employment.
While it is important to measure unpaid family labour to appreciate the economic value of such work, mostly performed by women, adding unpaid labour to employment statistics can have unexpected implications, apart from inflating employment numbers.
Consider the following exchange, in the immediate aftermath of an arranged wedding, between an elderly relative of the groom with the bride’s brother.
“We were given to understand that the girl is employed, but it turns out she has never held a job in her life,” says the elderly relative. “All we said was that the girl is employed,” comes the reply. “In which world is a girl employed but does not have a job?” – the tone is growing testy. “Sir, we follow the government’s definition of being employed.”
While you decide whether the girl’s family’s claim was a lie, a damned lie or simply statistics, let us consider the sobering fact that half of India’s workforce is above 45 years of age (this has been worked out by Prof Santosh Mehrotra of JNU), and ill-suited to adapt to the AI revolution about to sweep through the world of work. And, of the younger half, the proportion that has received an education that makes the worker capable of critical thought is minuscule.
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Unite and revive
Economic activity calls for, as a prerequisite, social cohesion and functional institutions. Sectarian politics has eroded social cohesion and trust in society. The Maharashtra government’s decision to close down animal markets ahead of and during Id-ul-zuha is the latest example of wanton harassment of the minority community.
Combined with arbitrary clampdowns on free speech by social media censors, if not always by the state, this makes India less than appealing as an investment destination, even for well-off Indians.
India has put in place a Unique Identity System that serves as the basis of an extensive digital public infrastructure, running on countrywide data networks of a reasonable speed. India’s payment system built on Aadhaar and the India Stack collection of application programming interfaces lend themselves to useful innovations.
The space and atomic energy programmes create vital capacities at the cutting edge of strategic capability. The technical and management education infrastructure yields a steady stream of talent. The humanities and the creative arts thrive, granting India soft power around the world.
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Steady improvement in transport and logistics over the last 10 years has made the economy export-ready.
The rise of Narendra Modi and the flourishing of T20 cricket both give an edge to raw talent over pedigree. This has had the redeeming effect of removing the stifling hegemony of the genteel folk over the cultural consensus on what is proper or even possible.
The energy this releases can make for an implosion or expanded creativity. Sectarian politics that divides will lead to destruction. Inclusive politics and constructive policies can prepare the nation to revive growth and move forward with greater vigour.
(The Federal seeks to present views and opinions from all sides of the spectrum. The information, ideas or opinions in the article are of the author and do not necessarily reflect the views of The Federal.)
