On a recent visit to India after a COVID-inspired gap of five years, my wife and I were impressed by the continuing upgrades to India’s infrastructure by the Bharatiya Janata Party (BJP) led by Prime Minister Modi.
Swanky new airport terminals, an expanded railway network including several fast trains, and many wide new expressways are connecting India like never before. The country’s longest sea bridge, the Mumbai Trans Harbour link, is a showcase connecting Mumbai to the satellite city of Navi Mumbai, considerably shortening the travel time between them.
There is widespread public appreciation for the much-needed improvements in infrastructure.
Politicians would prefer to invest in infrastructure where voters can see and appreciate the end-result rather than invest in say, the quality of education in government-run schools where the progress and payoffs are not readily apparent.
While India’s investment in education has gradually risen to 14.6% of government expenditures, data compiled by the World Bank show that as of 2021, the low and middle-income cohort of countries still invests more (at 15.4% of their expenditures).
Meanwhile, despite the increasing investment in infrastructure, national accounts data reported by India to the IMF show that total investment to GDP has been declining since the BJP came to power in 2014.
Mindful of these trends, finance minister Nirmala Sitharaman recently called upon Indian businesses to invest more in manufacturing to help the country realise its goal of becoming a developed country by 2047.
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The question is, can India attain that goal at the rate it has been going? In order to answer this question, we focus on what the data on economic growth, total investment and per capita income show for the past two decades – 2004-2013 and 2014-2023, which roughly coincide with the Congress-led and BJP governments (Table 1).
In the next section, we will consider the pace at which improvements in governance have been achieved, because it is clear that developed countries not only have a much higher standard of living but are also governed far better.
● The average rate of growth of GDP has declined from 6.81% per annum under the Congress-led government to 5.95% per annum under the BJP. It can be argued that an important factor underlying the decline in average economic growth under the BJP is the pandemic, which led to a sharp contraction in economic output in 2020 with a low-base rebound effect the following year. So, there is a strong case for excluding the pandemic-impacted years.
● However, the average annual rate of growth of the economy under the BJP before the pandemic (2014-2019) at 6.8% is almost the same as the average annual rate of growth (6.81%) under the Congress (2004-2013).
While the IMF is right that India is growing much faster than other major economies, there has been no paradigm shift in India’s growth trajectory under the BJP. So, all that hoopla about India taking off is like the proverbial storm in a teacup.
● Some prominent economists have argued that the 2015 revision to the national accounts methodology has probably led to an overstatement of the rate of growth of GDP in recent years.
In fact, Arvind Subramanian, the former chief economic adviser to the Government of India, published a study showing that the annual average growth rate between 2011-12 and 2016-17 may have been overestimated by about 2.5% due to a methodological change affecting the measurement of the manufacturing sector.
Additionally, based on my experience working on national accounts in the IMF statistics department, I found that their compilation was far more challenging in developing countries like India where the informal sector employs the vast majority of the workforce, compared to advanced countries where the informal sector is small.
A large informal sector makes it extremely difficult to verify GDP estimates by the popular production method against estimates using the expenditure and income approaches (if they can at all be done).
Theoretically, all three methods must produce GDP estimates which converge within acceptable margins of error. On the other hand, large errors in measurement obtained through the triangulation of these methods reveal interesting insights for national accounts compilers.
These could indicate the systematic under-reporting of income (e.g., where the underground economy is large), outdated sampling frames (e.g., due to an outdated census), difficulty of estimating private consumption in an economy dominated by the informal sector, and a host of other problematic areas.
● Living standards measured by per capita income growth were improving faster under the Congress than they have been under the BJP.
In terms of US dollars, the average annual increase in per capita income declined from 10.62% under the Congress to 5.88% under the BJP, while in inflation-adjusted rupee terms the decline in income growth was more modest, from 5.28% to 4.88% per annum.
The larger difference in the growth in incomes in US dollar terms under the Congress is probably due to the fact that the dollar was undervalued (i.e., the exchange rate was managed).
Personal income grew slightly faster in the pre-pandemic BJP period (2014-2019) compared to the Congress era, but the difference is not much (5.58% versus 4.88%). In any case, the overstated rate of growth of GDP under the BJP probably swings the income increase in the Congress’s favour.
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● The decline in the average rate of growth in GDP and per capita income is consistent with the fact that the total investment has also declined from an average of 38.29% of GDP under the Congress to just 31.7% of GDP under the BJP.
Businesses have been reluctant to invest due to the sluggishness of private consumption. They do not invest to boost India’s economic growth out of a sense of patriotism. They invest to make money. But, the economic growth that has occurred has been highly skewed.
In fact, Piketty et al have found that income inequality in India is now worse than under British rule, meaning that the vast majority of Indians have actually seen their real incomes decline or stagnate.
Under the circumstances, economic growth does not lead to a commensurate rise in private consumption because an increase in the consumption of the rich cannot make up for the decline in consumption of the vast majority. After all, there are limits to how much the rich can consume.
● In turn, the lack of growth in private investment has inhibited private sector job creation, forcing more than 90% of the Indian labour force to seek gainful employment in the informal sector.
These workers are largely outside the tax net. In fact, only about 4% of the Indian workforce pay income taxes, leading to much higher tax burden on those who do. The end result of this has been tax fatigue, tax evasion and capital flight, as overburdened taxpayers do not feel they are getting their money’s worth given the poor quality of public services.
Thus, without sustained economic reforms and good governance, Modi’s decision in November 2016 to demonetise certain denominations of the Indian rupee to curb “black money” was doomed to fail from the start (see An Empirical Study on the Transfer of Black Money from India: 1948-2008, pp. 191-208, Note Bandi: Demonetisation and India’s Elusive Chase for Black Money, edited by R. Ramakumar, Oxford University Press, 2018).
Expecting demonetisation to curb black money is like expecting a band-aid to treat a tumour.
Let us now consider how various aspects of governance have evolved using scores compiled by the World Bank (Table 2).
The data show that relative to the Congress-led government, the BJP made some improvements in terms of controlling corruption, government effectiveness, political stability and absence of violence, and regulatory quality.
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However, under the BJP, the rule of law and voice and accountability scores have declined by several percentile points so that overall governance (average of the percentile scores in six dimensions) has only improved slightly (from 43.81 percentile to 45.68 percentile).
In other words, despite these improvements, India still lags behind more than half the countries in the world when it comes to overall governance.
In fact, there has essentially been very little improvement (just 3.31 percentiles) in overall governance since the World Bank started compiling the governance indicators in 1996 (last column, Table 2). Going by the trends related to the rule of law and voice and accountability, matters have actually worsened today compared to the condition prevailing in 1996!
The significant deterioration in voice and accountability is consistent with the widespread perception of Modi as an autocratic leader not given to seeking consensus or owning up to his mistakes. It is also consistent with the fact that the media and institutions have been muzzled into supporting the government’s position without dissension or criticism.
Concluding observations
Given India’s size and population relative to Germany and Japan, the Indian economy will outgrow them in the near future. However, contrary to the hype about a resurgent India, the real competition in the GDP game will only begin when India joins its rightful weight-class consisting of China and the United States.
Thus far, India has been punching way below its potential.
The oft-repeated narrative of India becoming a developed country by 2047 seems far-fetched given the country’s low income (US$2,500 in 2023), which is highly skewed anyway (meaning most Indians do not even make that much).
Trends in GDP growth, per capita income and investment have continued to lag behind those under the Congress, which are at odds with the narrative that good times are just around the corner.
Moreover, India’s governance has been poor and absent fundamental reforms that are sustained, improvements can only come at a glacial pace, if at all. In fact, there has actually been a deterioration in the rule of law and voice and accountability relative to the situation prevailing under the Congress.
That is not how “achhe din”, or good days, are supposed to unfold. The sombre economic developments on multiple fronts along with weak governance, including Modi’s bungling of the COVID-19 response, portends a darker electoral outcome for the BJP relative to its 2019 performance.
But then, Indian elections with shifting political alliances and myriad regional parties are notoriously difficult to predict. Voters may continue to be swayed by the BJP’s narrative of a rising India rather than the money in their wallets or the likelihood of actually seeing some “acche din” come their way.
Dev Kar, a fellow at the Global Justice Program, Yale University, is chief economist emeritus at Global Financial Integrity, a think tank based in Washington DC. Prior to joining GFI, he was a senior economist at the International Monetary Fund. His book, India: Still A Shackled Giant, was published by Penguin Random House India in October 2019.
