Economy under Modi Raj: structural retrogression, loss of dynamism

Social cohesion, vital pre-requisite of economic vigour, is under attack from sectarian politics, and domestic investment languishes, even as Indians invest massively abroad

Structural retrogression, loss of dynamism

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 digitized fact, fiction and fantasy and their assorted combinations into instrumentalities of power and influence, has played a considerable role in the ongoing degradation of the political culture.

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.

Growth Slowdown

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 led the country. The compound average growth rate during the UPA’s 10 years was 6.7%. The CAGR starting 2014-15 has been 5.7%.

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%. 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. 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. The growth rate had come down from 8% in 2016-17 to 6.2%, 5.8% and 3.9% respectively in the three subsequent years.

A major reason is the failure of investment – Gross Fixed Capital Formation — to reach anywhere close to the 34%-35% of GDP that used to be routine during the UPA years. This has hit the growth of manufacturing and services.

Structural Retrogression in the Indian economy

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% or so during the period of fast growth over 2003/04-2013/14. The share of agricultural employment came down to 42% or so. Now, agriculture accounts for some 18% of GDP, and nearly 48% of workers toil on the farm. This marks structural retrogression.

The mass return migration triggered by Covid 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 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.

Free food made sense during Covid. Continuing with the policy of giving free food to nearly 60% 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. India is the largest importer of edible oil, besides of weapons. The sensible thing would be to institute incentives for farmers to switch from foodgrains to oilseeds.

India grows water-guzzling sugarcane in the arid Deccan, lavishing power subsidy for lift irrigation that depletes the ground water, 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 before being crushed, 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.

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. The government 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% of GDP in 1950-51. The arduous climb of this crucial, growth-determining ratio to 30% took 50 years. Actually, in 2001-02, the ratio hit 29.9%. It crossed 30% in 2004-05, and kept climbing to hit a peak of 35.8% of GDP in 2007-08. It started climbing down thereafter, but was still 31.3% in the UPA’s final year in office of 2013-14.

The ratio stayed above 30% in 2014-15, dipped below that level thereafter, and stayed there for eight years, till 2022-23, when it rose to 31.2%, only to dwindle to 30.4% in 2023-24 and 29.9% in 2024-25.

In China, the ratio crossed 33% sustainably in 1998, touched a high of 45% in 2013, and has stayed above 40% since, still at 41% in 2023 when a crisis in its property markets had stunted growth and investment.

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.

The employed and the jobless employed

This has its impact on employment. India’s official employment figures are not compatible with the definition adopted by the International Labour Organization, 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.

Politics to divide and destroy or to unite and revive

Economic activity calls for, as a pre-requisite, 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 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.

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.