In 1979, Deng Xiaoping announced China’s intention to “open up” to the world’s economy. It has been a pariah state to the west since its Communist revolution in 1949, and its later “Cultural Revolution”. The reforms, which involved opening Special Economic Zones (SEZs) in harbour areas like Shenzhen, dividing up collectivised farmland and allowing private businesses to operate, saw China’s GDP grow by over 9% annually for 30 years, making use of the long period of globalisation to develop highly competitive Chinese export industries. 

India, meanwhile, took longer to begin its reforms. Throughout the 20th century, India maintained a sizeable and often unaccountable bureaucracy dubbed the “License Raj” (whose oppressiveness was compared to earlier British rule). Its reforms in 1991 under the economic tutelage of Manmohan Singh (who would later become India’s prime minister) were spurred by a series of crises: first, the Gulf war led to a spike in oil prices which increased India’s import bill and hurt remittances; the dissolution of the Soviet Union also lead to a collapse in trade with the former Eastern bloc countries whom India had aligned itself with during the Cold War. Unlike China, India’s economic reforms were driven by desperation, not strategy, in the face of a collapsing balance of payments. 

As a result, economists have noted that India’s economy is underutilising its immense potential – in the 1990s, India only managed an annualised GDP growth rate of 5.5%, which increased to 7.1% in the 2000s, leaving it behind China. The spurt of reforms in the 1990s has yet to be matched as the Indian economy has performed “well enough” to warrant new packages of reforms which would undoubtedly be politically contentious. 

India: A History of Populist Economics 

The preamble to India’s constitution describes India as a “sovereign, socialist, secular democratic republic”. While the word “socialist” was only added in the 1970s, it captures the direction of early Indian economic management, which was dictated in Soviet-style 5-year plans. As Indian political parties became reliant on vote-bank politics and generous state handouts to stay in power, economically disastrous policies were implemented. 

The ”freight equalisation” policy of 1952 sought to promote equitable regional development by subsidising the transport of raw materials around the country. This meant that a steel factory set up in the agricultural heartland of Punjab would have the same input prices as a steel factory located in the coalfields of Bihar. Consequently, this promoted excessive economic inefficiencies, leading to heavy industry being developed away from India’s resource deposits, the costs of which India’s central government shouldered. The deindustrialisation of resource-rich states like Chhattisgarh also contributed to significant social unrest, seen in the 60-year-long Naxalite insurgency and warranted huge security expenses to tackle. Freight equalisation is an illustrative example of how India’s populist economics, justified by socialism, have led to repeated instances of government failure. While the policy’s flaws were recognised early on, interest groups in India’s parliament became vested in continuing the policy, which meant that it was only abolished in the 1990s after 40 years of failure. Other policies like the nationalisation of the Tata Air Service (which became Air India) created a hugely unprofitable company due to government mismanagement, forcing Air India to be reprivatised and sold back to the Tata Group after incurring huge losses for the Indian taxpayer. 

Overregulation through the License Raj also hurt India’s economic prospects: huge bribes had to be paid to receive the required permits, with agonisingly long wait times that turned off many investors. When the Tata Group – one of India’s premier conglomerates – tried to branch out into computer manufacturing in the 1970s, a “Letter of Intent” was only granted in September 1979, over 5 years after their first application, effectively killing the proposal. A highly entrenched bureaucracy which still exists to this day plagues Indian government efficiency everywhere – from the Tejas fighter jet (with a 40-year development time) to redeveloping Mumbai’s iconic Dharavi slum which took 26 years from the first proposals in 1997 to finally parcel off the land to the Adani Group, another Indian conglomerate. 

Indian state governments also regularly issue farm loan waivers, which forgive huge debts that small farmers accrued to earn votes. Uttar Pradesh – India’s most populous state – spent over £3 billion in 2017 to pay off farmers’ debts, which was part of an earlier campaign promise. This creates a moral hazard as small farmers become accustomed to government bailouts, hurting productivity and disincentivising responsible business practice. 

Who is actually growing? 

As India goes through its “demographic dividend” and benefits from a shrinking dependency ratio due to a relative bulge of working-age people, over 1 million Indians will enter the workforce monthly. However, 90% of new jobs created are in the informal sector, which offers few opportunities for taxation while giving low and volatile incomes, despite rising qualifications and literacy in the Indian population. Meanwhile, companies like the construction giant L&T report shortages of tens of thousands of skilled workers, reflecting a broader mismatch between demand and supply in the Indian labour market. This has resulted in a high unemployment rate of up to 8.5% per some surveys, as regional inequality, such as the South/North income gap, continues to grow.  

The phenomenon of “jobless growth”, where select industries like IT have become the driving force of India’s economy, means that much of the benefits of India’s growing economy accrue in a tiny proportion of its population. There are only 5.4 million of the coveted high-paying jobs in Indian firms like TCS. A lack of jobs thus represents a failure of India to mobilise an export-driven job creation as seen in China; this is due to another failure of Indian bureaucracy with its outdated and opaque taxation system, where vast sums of money are demanded from companies seemingly at random, such as Volkswagen India’s $1.4 billion tax bill which threatens to close its operations in the country over suspected import misclassifications. The bad publicity stories like this create hesitance from investors looking for stable markets to invest in, thus driving away major export firms like smartphone maker Foxconn. As India looks set to benefit from the “China-plus-one” investment strategy in light of recent geopolitical tensions, unpredictable taxation will hold the country back unless reformed. 

India’s historical underinvestment into broad but accessible basic education and literacy as opposed to creating elite institutions for higher education such as the cut-throat competition for entrance to the Indian Institutes of Technology (IITs) means that 25% of the population cannot read in a country with the technological prowess to launch satellites to Mars and build a nuclear arsenal. This has severely inhibited India’s capacity to break through into low-cost manufacturing industries, which require basic levels of education such as assembly lines, further drawing the benefits of India’s economic growth upwards. Furthermore, India’s extensive business regulations only kick in after 10 workers are hired, which ensures that most companies operate as 9-worker microenterprises, which limits the ability of Indian firms to attain economies of scale and become globally competitive. Instead, the few Indian companies with sufficient expertise or connections to navigate India’s extensive bureaucracy become major conglomerates and monopolise certain sectors, such as India’s Tata Group, Reliance Industries, and the Adani Group, each worth hundreds of billions. 

A way forward? 

Despite these challenges, India looks set to leave the 2020s as the 3rd largest economy in the world, maintaining high growth rates above 6% for the next several years, making it the fastest growing major economy. However, India’s lack of basic education, its reputation as a difficult place to do business in, populist economic policies, and the market dominance of a select few conglomerates will restrain a country that has the potential to become a major economic player of the 21st century.  

India’s government response to these has included a vocational training programme for 10 million young workers, major investments in infrastructure like highways such as the Delhi-Mumbai expressway, major expansions in the country’s airport and seaport network as well as a new PLI (production linked incentive) scheme which will attempt to reduce India’s current account deficit by encouraging domestic manufacturing. While these are important first steps, India must also continue to streamline its bureaucracy and educate a responsible civil society that can push back on populist economic policies. Furthermore, India should seek to calibrate its foreign policy to minimise geopolitical tensions, as maintaining an appearance of a peaceful country in a more violent world has the potential to become an important selling point of India’s domestic economy.