Indian economic prospects may require a more realistic analysis

Walking through a Delhi bazaar last week, chatting with friendly shopkeepers and roadside merchants and revelling in the warm glow of traditional India, it was impossible not to feel optimistic about the country’s prospects. This is not a place where one turns to their mobile phone to answer a question or guide them to their desired destination. Simply ask for the information you need, and several locals rush to provide it.

In my case, that exercise led me down a narrow lane lined by buildings bearing torn posters and peeling paint—the impression was that of a Raoul Dufy sketch—toward a local photo studio to get a new headshot. When I stepped through the door, the ample store-owner—who, with two assistants and no work, had been listening to melodious Vedic chants—gave a broad grin and asked if I wanted to have a “lovely" photograph taken. Before I could respond, his assistants were preparing the scene: setting up the camera, arranging the lights, adjusting the screen behind me, and tilting my head by my chin “to get the best angle."

A few clicks later, the three gathered to scrutinize the results, and kept looking at my face and the photograph. “I think we can make it better looking," one assistant said (presumably referring to the photograph). “Perhaps I should put in more hair," the other assistant suggested. “Do you want to replace the plain white backdrop with the skyline of New York or London?" the owner asked me. I explained, to their disappointment, that the passport office would throw me out if I handed them a photograph of me standing in front of the Statue of Liberty with a head full of fake hair. A basic headshot would do just fine.

It was a brief encounter, but one that brought me back to the time when I lived and worked in India. To me, in that photo studio—and, indeed, throughout my visit—there was a sense that time had stood still, in the best possible way. At the same time, however, there was something just a bit off about it—a current of anxiety beneath the surface.

India is at a crossroads. There are undoubtedly factors working in its favour. In some areas, India’s economy has performed well. This is reflected in strong economic growth in 2022-23. As a large emerging economy, India is well placed to capitalize on fraying relations between the US and China.

But the true picture is not as rosy as it might seem. Recall that, in 2020-21, India’s economy, still recovering from an unwarranted demonetization, contracted by 7% as a result of a poorly executed pandemic lockdown, making it one of the world’s worst-performing economies. As a result, from 2020 to 2023, India’s average annual growth turned out to be less than 4%, which is not bad for a phase of global economic turmoil, but far less impressive than recent figures suggests, let alone slogans and headlines.

Furthermore, the benefits of this growth are going almost entirely to the rich. Young people are struggling to earn a decent income, and youth unemployment exceeded 23% last year. That is worse than 120 of the 176 countries for which the World Bank provides data.

Jobs in the Indian manufacturing sector are disappearing, leaving the country’s agricultural sector employing a growing share of the workforce. Small businesses are struggling. High food-price inflation is further squeezing the middle and lower-middle classes. And private investment, as measured by gross fixed capital formation by the private sector, has declined significantly, from consistently more than 25% of GDP in 2005-13 to less than 20% in 2020-21. Confidence of the future is clearly waning.

But India’s biggest cause for concern is its deteriorating political environment: an erosion of democracy, a rise of cronyism, and a heightened sense of insecurity among minority groups. These trends fly in the face of the values and principles on which Independent India was founded and globally admired. While the country did occasionally slip up, its commitment to inclusion and democracy had few parallels in the developing world.

Cronyism, in particular, is self-reinforcing. In countries where it is rampant, international actors realize that they can cut some of their best deals (from their point of view), because they must please only the wealthiest and a few leaders. Whether a deal is good—or even neutral—for the rest of society is irrelevant.

Add religious discrimination to this and you have a formula for long-run economic decline. Pakistan had a higher per capita income than India until 2004. But a combination of cronyism and religious fundamentalism weakened the Pakistani economy’s fundamentals, and India quickly pulled far ahead.

In Indian bazaars and beyond, a sense of unease is palpable. But conversations with a cross-section of people—from market sellers to university students and even government bureaucrats—suggest a growing awareness of the harm that religious bigotry and cronyism can do to a country.

That provides grounds for hope. A more stable, prosperous future depends on the choices India makes today. ©2023/Project Syndicate

Kaushik Basu is a professor of economics at Cornell University and a former chief economic adviser to the Government of India.