Commentary: India’s economy is experiencing a crisis. It just doesn’t know it yet

NEW DELHI: With India now in its 75th year of independence, perhaps the biggest disappointment has been the country’s failure to become an economic powerhouse.

In more confident times, back in 2019, Prime Minister Narendra Modi had spoken of building a US$5 trillion Indian economy by 2025.

But with three years to go, and India’s GDP currently US$3.1 trillion, it is difficult to find anyone who still believes he can achieve this goal. 

India was supposed to benefit economically from what Modi called the country’s “3D” advantage – demographics, democracy, and demand.

In particular, India would reap a “demographic dividend” owing to its youthful population: The median age in India is 28, compared to 37 in China and the United States and 49 in Japan, and more than two-thirds of its 1.4 billion people are of working age.

Instead, the economy has been stumbling, with GDP growth decelerating each year from 2017 to 2020, inflation rising, and unemployment reaching a record 23.5 per cent in April 2020. India currently has 53 million unemployed people, and its labour force participation rate has declined from 58 per cent in 2005 to just 40 per cent in 2021 – one of the lowest levels in the world.

A STRUGGLING ECONOMY

After more than a decade as chief minister of Gujarat, one of India’s most developed and industrialised states, Modi had sold himself to voters as a leader who would transform the economy and fulfil the hopes of the 11 million to 12 million young and poorly skilled Indians who enter the labour force each year. 

Almost eight years later, the hopes of young and old alike lie in tatters. Although COVID-19 and associated lockdowns caused the economy to contract by 7.3 per cent in 2020, problems were apparent well before the pandemic.

Battered by Modi’s disastrous demonetisation of large-denomination banknotes in late 2016, all of the economy’s major growth engines – consumption, private investment and exports – remained subdued, and the government failed to provide a significant fiscal stimulus to end the slowdown.

On Feb 1, the government responded with a budget that finally offers public-sector stimulus, increasing spending to 39.45 trillion rupees (US$528 billion) in the coming fiscal year to boost infrastructure investment.

But this will entail a projected fiscal deficit of 6.4 per cent of GDP – almost certain to be exceeded – and record borrowing.