The year 2025 started with a release of the government’s first advance estimates of a slowdown in the country’s GDP growth to 6.4% in the FY24 against a projected 7% +. Despite the best efforts of the government to grow at 8-10%, we are stuck at 7% average annual growth for the last three decades except for brief periods when the growth inched closer to double digits. Why is the economic growth stuck at this level? Let us look at the trajectory of India’s economic growth since independence to understand this stagnation. India grew at a pedestrian pace of 2-4% for the first four decades after independence till the economic reforms were introduced in 1991. The mixed economy model followed after the liberalisation of the economy since then, produced desired results and the growth jumped to an average of 7%.
Given the conditions when the Britishers left, India had a 70% illiterate population with 80% living below the poverty line. There was no constitution, no parliament, no judiciary, and no state governments, and the masses were like gunpowder, after a traumatic partition and violence needing just a spark to burn everything to ashes. With such a dubious inheritance, India started well by keeping the nation united by drafting a constitution, conducting the first general elections, and laying the foundations for institutions like ISRO, HAL, DRDO, LIC, IIMs, IITs, IOC, HP, BP, FCI, BHEL and others. Power, steel, oil, transport, railways, education, and health were the priorities. The economic growth was very slow. However, due to the lack of a longtime vision of the top leadership, India missed several opportunities available at that time due to its policy blunders that kept India underdeveloped and poor for more than four decades under sluggish socialism.
This was the time when China one of the world’s poorest countries at that time with a very low GDP and a backward infrastructure laid the foundation of economic reforms in 1976 under Hua Guofeng, Mao’s successor, and adopted an open-door policy in 1978 under Deng Xiaoping. This policy allowed foreign capital and technology to achieve rapid economic growth. Similarly, Japan smarting under a similar situation with bruised wounds, post-nuclear bombing during World War II transformed itself into a free-market economy. Even, Dubai and Oman in the Middle East appeared on the global map. While these countries grabbed opportunities available due to the Cold War between USA and USSR, India was busy nationalising its key sectors like banks, airlines, and hotels, and appeasing Muslim minorities by offering doles. The mishandling of the economy and policy paralysis due to the poor leadership that kept changing like musical chairs led to the Balance of Payment (BoP) crisis in 1991 and put India under extreme pressure of possible bankruptcy. The Indian government sought assistance from the International Monetary Fund (IMF) and implemented several measures to address the crisis including, devaluation of the rupee, implementing fiscal and monetary tightening, reducing import tariffs, and even pledging gold to international banks for a hard currency loan.
“Cometh the hour, cometh the man”. Liberalization of the Indian economy in 1991 was our “Deng” moment when Prime Minister P V Narasimha Rao took apolitical Dr. Manmohan Singh under his wings as the finance minister and the duo took the first steps towards a mixed economy model. They unleashed a rare revolution of setting our house in order through several reforms and opening up Indian economy to the world. Several outdated laws were junked and Information Technology (IT) giants like IBM and other multinational companies like Coca-Cola were allowed to come in. This created a new wave of growth in stock markets, neo-banking, and IT.
This economic turnaround also had a divine intervention as the timing of liberalisation coincided with a new opportunity of the global IT outsourcing trend which was grabbed by the English-speaking Indian workforce that was well-equipped with soft skills to dominate the IT sector. The Indian soft skills met opportunity at just the right time. This created jobs for skilled middle and upper-middle class in India with higher income levels leading to more and more aspirational consumption garnering more taxes and steady Intellectual Property fuelled economic growth. But this growth was capital-light as capital was always scarce and the most important reforms that were required in critical sectors were not pursued to realise the full potential of liberalisation.
The lack of focus on manufacturing is an essential driver of the economy and the much-needed reforms in agriculture, land, retail, and labour, stymied India’s economic growth. Added to this was the saturation of high-salary IT jobs at a mass scale. These factors led to stagnation and needed course correction. After 2014, the government under Prime Minister Narendra Modi set out to address these issues with some hiccups, by initiating several ambitious programs like the skill development, make in India, Atmanirbhar Bharat, and Production Link Incentive (PLI) scheme to increase the competitiveness amongst domestic manufacturers. The proactive action of the government during telecom boom created sales and service jobs for the lower middle class in the domestic market. The government tried to bring in agricultural reforms by introducing three revolutionary farm laws that would have lowered the prices increased the production of farm produce and helped both the farmers and consumers. But this attempt was thwarted by the power-hungry dynast political leaders who supported farmer’s agitation and forced the government to abandon this reform.
The government tried every trick in its bag to boost the economy by utilising tactical opportunities that arose after the Ukraine-Russia conflict. India pushed export for refined fuel to Europe after purchasing from Russia at a discounted rate and also entering into export deals in defence sector with some developing countries. The government push in the semiconductor sector and manufacturing in general is well known, but still, these efforts did not produce the desired results. But the way the COVID-19 pandemic was handled amid the ongoing global economic slowdown speaks of our economic resilience and stability built up in the last decade.
Today, our growth is primarily driven by government spending and domestic consumption. If we have to come out of stagnation and grow at a steady 10%, we need private investments that have remained elusive. The campaign of hate against the top business houses in the country unleashed by the Leader of Opposition and other political parties in the Parliament and the vested interests outside the country does not auger well for our economic growth. There is an urgent need to increase our exports that would not be easy given a new wave of protectionism and nationalism in Europe and the USA with President-elect Donald Trump threatening a tariff war. With major global economies either stagnating or receding, the days of fast growth are over and it’s time for India to find new markets to maintain a steady growth rate.
India needs to rely on its strength and work on new initiatives rather than compete with China in manufacturing. The opportunity we missed in manufacturing to China in the 1970s will be hard to catch up with China standing at a staggering $1 trillion trade surplus that is 26% of India’s GDP, while India grapples with a $73.5 billion trade deficit. India and China were net importers until the late 1980s and China is already building next-generation exports in robotics semiconductors and AI; India should rather increase investment in research and development in key sectors to move up the value chain. In parallel, we need to think of alternatives where India can offer something unique to the world that others cannot. In my opinion, tourism holds great promise if we promote our country as the World’s Spiritual Destination. Prime Minister Narendra Modi has already popularised Yoga in the world and June 21 is celebrated as International Yoga Day. The ongoing Kumbh Mela in Prayagraj has attracted the world’s attention and more than 40 crore people including foreigners from more than 60 countries are likely to take a dip at the confluence of Ganga, Jamuna, and Saraswati. The Mela is expected to fetch a revenue of over Rs.2.0 lakh crores. Lakhs of tourists thronging to Vishwanath temple in Varanasi and Mahakaleshwar in Ujjain after the construction of temple corridors and the Ram Mandir in Ayodhya are already adding crores annually to the coffers of the government. With the upcoming of Char Dham road and rail connectivity in Uttarakhand and the temples in south India, the government should promote Temple and Spiritual tourism to attract high-value foreign tourists; the Vatican and Saudi Arabia are examples of such potential.
While all these activities will lead to steady and incremental growth, India should be ready to make a quantum jump by grabbing any big-ticket high-paying mega-sector strategic opportunities that may turn up suddenly due to the changing geopolitical situation in the world. Today, India with over 140 crore population is like an elephant known for its size, wisdom, stability, and steadiness. We should strive to be a better elephant in the future rather than a fast-moving deer that can easily collapse under a global onslaught.
