Nation faces economic woes, political gridlock, and decline. | (Economic malaise, dysfunctional politics and a broken country)

It is just over two years since the manuscript of my book India is Broken went to the printer. Multiple strands of India’s post-Independence history, the book’s narrative says, have broken the country’s economy and democracy. On current trends, a social revolution looms.

I am aware that the book’s message and narrative are at dramatic odds with widely held rosy perceptions about India. Indeed, so intense is the “India hype” that some analysts project India as an emerging economic superpower. Indian democracy too seems to be in good health. In April-May 2024, the world witnessed India’s general election with awe. Of the 970 million eligible citizens, 642 million cast their votes. Voters expressed their displeasure with Prime Minister Narendra Modi’s 10 years of rule, and although he returned as prime minister, he did so as the head of a weakened government.

Despite this cheerful assessment of a vibrant Indian economy and polity, I read the evidence as suggesting an India more broken than two years ago.

On the economic situation, Indian authorities and international commentators use misleading statistics to portray a flattering picture. Many numbers are downright wrong, others are unimportant. In fact, the story remains grim on everything that matters to people’s lives. On the critical issue of jobs – a central thread of my book – the crisis has deepened, and truth be told, no solution lies ahead. India’s so-called demographic dividend is turning into a demographic disaster. Agricultural and environmental distress are increasing relentlessly, and the already woeful education system and status of women – two key prerequisites of economic development – seem to be only getting worse.

There is more reason to cheer the April-May 2024 elections, which gave hope for a renewal of Indian democracy. But the election also underscored the persisting pathologies in Indian democracy. Money and religious and caste divisions, rather than credible strategies for improving people’s lives, dominate the political dialogue. The share of legislators with serious criminal charges continues to rise. A superficial vibrancy in politics masks democracy’s fraying fabric. The 2024 election might well be remembered as a blip in the long-term erosion of Indian democracy rather than a new beginning.

Underlying the worsening of economic conditions and dysfunction in politics is a fundamental moral failure: the absence of a public ethic that values collective progress, one in which everyone believes that societies advance only when all advance together. The lack of public morality isn’t just an idle philosophical concern, it has tangible consequences. Social norms and political accountability keep eroding. Hyper-individualism is entrenched, collective goals suffer. Economic policy is crippled by rampant self-interest, distrust is endemic in social and business relations, and politics has descended into divisive tactics rather than meaningful reform. This breakdown is evident in the continued degradation of the education system, violence against women, a broken judiciary, and rampant environmental degradation, all of which portend ill. When everyone worries they might be cheated, the instinct to cheat others becomes a survival strategy, and India falls deeper into a cycle of distrust and dysfunction.

India’s “bad equilibrium,” refuses to let up. As economic and democratic foundations weaken, they drag each other down. The path ahead is fraught with daunting obstacles.

Debunking the India hype

India’s recent gross domestic product growth is frequently cited as an indicator of the country’s economic dynamism. However, a closer examination of the data reveals severe cracks in the story. The flaw, at first, was in representing a brief bounce back from the steep Covid-induced fall as long-term growth. More troublingly, a mysterious “discrepancy” in the data is driving recent headline growth.

Covid-19 was brutal to India. The death toll in per capita terms was among the highest in the world, and would have been even greater if India did not have such a young population more naturally resistant to the disease. Although the Indian government disputes the high death counts (as it does every unfavorable statistic), independent researchers and the World Health Organization confirm India’s high Covid death rates. Moreover, women, children and economically vulnerable groups suffered particularly severely.

The economy suffered a heart attack. GDP declined sharply during the first Covid wave and received another setback during the second wave. There is no dispute that Indian GDP was one of the worst performers among major global economies during the Covid years. This GDP fall is crucial to bear in mind when assessing what happened next.

A bounce back often follows a sharp economic decline as consumers and businesses resume postponed consumption and investment. India experienced a modest bounce back in 2022 and 2023. This recovery, to be clear, was not an indicator of long-term economic health. Indeed, the country was struggling to recover. When averaged across the Covid fall and subsequent recovery, GDP grew at about 4% a year, which was almost exactly the pace to which it slowed down in the immediate pre-Covid phase. This pace was a substantial slowdown from the 6%-7% a year GDP growth in the early 2010s.

Thus, the first conclusion is that Indian GDP has grown at about 4% annually from just before Covid to the present. This is a relatively poor performance compared to its own past and that of high-performing countries. And that brings us to the second, more serious concern, one that questions the very foundation of the growth narrative: has India correctly estimated and represented its GDP growth in the past year, by when the bounce back was likely over?

National statistical agencies estimate GDP as the income people earn when they produce the country’s goods and services and also as the expenditure by domestic and foreign buyers on those goods and services. In principle, these two numbers should be identical: people earn incomes only when someone spends money on buying their goods and services. In practice, national income and expenditure figures differ slightly due to statistical issues, but they are typically close, with one usually a bit higher than the other.

Indian statistics in the past year show a startlingly large and persisting discrepancy: GDP measured as income growth is apparently increasing at 8% a year but expenditure is increasing at only 3% a year. The India hype is based on the much higher income growth, which Indian authorities present as their measure of GDP growth. Analysts and commentators recognise the virtually unprecedented discrepancy in recent Indian data; indeed, the International Monetary Fund reports it in its publications but ignores its serious implications. The mantra of India as a rapidly growing economy continues.

This is a problem because all the components of expenditure show a weak and poorly performing Indian economy. In particular, private consumption (the consumption by Indian households) is increasing at about 3.5% a year and is, if anything, showing signs of slowdown and a wider economic malaise. People are hurting – they do not have the money to spend. Despite the government’s obfuscation with sketchy statistics, poverty rates remain virtually unchanged over the past decade, principally because living costs for the poor have risen much faster than average prices. In urban areas, sky-high housing costs place a dreadful burden on the poor; and everywhere, they pay more for the smaller quantities they buy from local monopolists. Data obfuscation has not changed the political reality, which has forced the government to provide free food grains to 800 million people on a long-term basis.

As if to confirm the consumer’s weakness, businesses have been investing at an ever-slower pace. The private investment-GDP ratio has come down along with the decline in GDP growth rates over the last 15 years or so. Businesses are, in effect, saying they have little incentive to invest because their buyers have limited capacity to buy more goods and services. Foreign investors have also slowed their investment into India in the last year or so, presumably because they too see a limited market despite the India hype. And, not least, Indian exports are barely crawling ahead.

Armies of analysts – on the Left and Right ends of the ideological spectrum – have been torturing themselves with the puzzle, why if GDP is growing rapidly are wages not growing (the left-leaning ask) and why is foreign investment so anaemic (the right-leaning ask). All the while, the stark answer is that the GDP growth is fake. There is no puzzle.

Government investment expenditure is rising rapidly, but since it constitutes a small share of the economy, it doesn’t bridge the large gap between total expenditure and income growth. And, to the extent that the government has justified its investment in bridges, roads, trains, and digital highways as a means to stimulate the overall economy, the mystery deepens: why is such stimulus not working?

To understand why government infrastructure projects are not stimulating the economy, we must turn to the history of economic development. That history is clear: mass education and efforts at greater gender equality were central to every successful development experience since the industrial revolution in the late 18th century. East Asian economies – Japan, Taiwan, Korea, China, and Vietnam – learned this lesson well. In contrast, infrastructure in the form of bridges and roads typically came several decades after the foundations of mass education and more gender equality took root – only then was the physical infrastructure productive.

This was true, for example, with the United States, where the interstate highway investment occurred in the 1950s, well after the United States was a major industrial nation, with the world’s best educated population at the time and considerable (though regrettably inadequate) advances in female labour force participation. Japan followed the same pattern. The Tokyo-Nagoya corridor was built after World War II, again well after the foundations of education and female labour force participation were laid. And the Seoul-Busan highway was constructed in 1970, after Korea had established a strong mass education foundation, started bringing women into the workforce, and established itself as an important player in world market for labour-intensive exports. And expansion of the Seoul-Busan highway into six lanes began only in the mid-1980s.

India is trying to rewrite development history. As I have documented at length in the book, Indian authorities have failed in fostering the fundamentals of long-term growth. They have neglected mass education for the entire post-independence period. While the number of schools has increased in the last two decades and almost all children are enrolled in schools, the children have woeful basic reading and arithmetic skills. And, India’s female labour force participation remains among the lowest in the world. Indian authorities tout a recent increase in female labour force participation. But this has occurred mainly because many women previously not in the workforce now report themselves as “unpaid household labour”.

Each child without basic reading and arithmetic skills is an opportunity squandered, a personal tragedy that collectively stifles the nation’s growth. Every woman relegated to unpaid household labour is not just a loss of agency; it’s a failure to harness half of the nation’s talent.

As long as India lacks mass education and greater gender equality, the government’s investment in transportation infrastructure – even where it alleviates bottlenecks in commerce – will do little to stimulate economic development. In particular, the productivity of Indian workers will remain low and India’s signature failure, that of job creation, will continue. As one shoe manufacturer in the southern state of Tamil Nadu – often considered one of India’s most advanced industrial states – recently said, Indian companies produce only 100 units with the same resources that the Chinese use to make 150 units. Indian authorities have never come to grips with the reality that even low-tech, labour-intensive production requires workers with basic reading and arithmetic skills along with a professional work ethic imparted by good education.

Thus, the India hype misses – perhaps, deliberately ignores – the country’s miserable performance in world trade for manufactured products. After the start of the Ukraine war in 2022, India’s sharply increased imports of Russian oil helped step up its exports of petroleum products. But India’s share of labour-intensive world exports (all goods minus the capital-intensive petrochemicals and chemicals) is stuck at a paltry 1.3%. For comparison, Vietnam, a country with a population of 100 million people (compared to India’s 1.4 billion), has a slightly higher export share of labour-intensive products than India does.

A part of the India hype during 2022 and 2023 relied on the expectation that India would benefit from the so-called China-plus-one opening. This was the opportunity created by protectionist barriers against Chinese products erected by the United States and Europe. Sadly, that opportunity has all but closed for India, despite the often-cited investment by Apple’s subcontractors. To be clear, the Apple-related investment might blossom into a broader manufacturing surge, but that has not yet happened. In the meanwhile, Mexico, with its strategic location, has taken advantage of America’s “friend-shoring” policy (in part, by drawing Chinese investors and experts to its factories). Vietnam, with its outstanding human capital and excellent location in the supply chains of East Asia, has been the other major beneficiary.

A final piece of the India hype is also losing its shine. This relates to the surge in Indian businesses using digital technologies during the Covid years. The most glamorous of these were the so-called “start-ups,” many of which reached a valuation of $1 billion or more and so acquired the “unicorn” badge. In addition, businesses exporting digital services also achieved success.

The start-ups have largely imploded, leaving only a handful that can expect to make profits in the long-term. Digital export services will likely continue to increase global market shares, but their explosive Covid-driven growth has ended.

During Covid, Indian start-ups, especially in edtech and fintech, seemed poised to transform the economy. The surge was led by firms like Byju’s, which capitalised on the isolation of students and the appeal of online learning. However, the boom was short-lived. Byju’s, which reached a valuation of $22 billion in 2022, soon spiraled into bankruptcy, laying off most of its employees and failing to pay its bills. Lesson: technology cannot replace teachers and children in a classroom.

This pattern of overpromising and underdelivering extended to other start-ups, particularly in fintech, where algorithms failed to replace the human judgment crucial for sound financial services. Fraud became increasingly common, mirroring broader societal erosion of norms. Although some start-ups in e-commerce and delivery services have found profitability, their customer base remains narrow, with the broader economic impact limited.

The edtech and fintech busts underscore the central issue: just as physical infrastructure cannot bridge India’s human capital gaps, neither can technology. India cannot keep trying to dodge its fundamental human deficits.

To be sure, some start-ups have succeeded, and more will do so. E-commerce and rapid delivery services have proven they can earn a profit. But it is always wise to note that even for these services the customer base is very narrow.

Estimating the e-services customer base is challenging due to outdated and unreliable government data. That said, most services sold on the internet have no more than 35 or 40 million users. Netflix reportedly has less than 15 million paid subscribers and those same people are iPhone owners. Whether e-commerce will expand beyond this pool of users remains an open question, and if it does, a further question would arise: what would happen to those employed currently in the vast informal economy that e-commerce would disrupt? And would such disruption further hinder the already slow consumption growth.

The outlook for export of technology-related services is somewhat better. During Covid, Indian providers increased their global market share of business and information services to about 5%. Although still at the lower end of global technology, these services are more sophisticated than traditional coding and call centers, which now face increased global competition. However, the Covid surge in global demand has faded, and growth in India’s business and information services has slowed.

In reviewing the hollowness of the India hype, I have highlighted the grossly unequal nature of Indian economic development. Mass education and gender equality have long been low priorities; Covid hit the weakest and most vulnerable hardest; and consumption growth has been weak. India’s development strategy fails to recognise that greater equality drives faster growth, as seen in East Asia’s dynamic development phase. Without a broad foundation for growth, exclusion pulls down all of society, sooner or later, a lesson India seems destined to learn painfully.

The India hype, though, will linger, allowing domestic and international elites to deflect attention from real problems. This deflection is a serious moral lapse, but the greater failure lies in the continuation of unmitigated and worsening problems that hype seeks to hide.

Ashoka Mody has recently retired from Princeton University. He previously worked for the World Bank and the International Monetary Fund. He is the author of India is Broken: A People Betrayed, Independence to Today (2023).

This is the first of a two-part series.

It has been over two years since my book, India is Broken, was sent to print. The book discusses how various aspects of India’s history after Independence have harmed its economy and democracy, suggesting that a social revolution may be on the horizon.

I know that my views contrast sharply with the positive image many people have of India. Some experts even label India as an emerging economic superpower. The general belief is that Indian democracy is thriving. In April-May 2024, India’s general election was watched closely around the world. Out of 970 million eligible voters, 642 million cast their votes. Many voters were unhappy with Prime Minister Narendra Modi’s decade in power, and although he was re-elected, he leads a weakened government.

Despite this seemingly optimistic view of India, I believe the country is more troubled now than it was two years ago.

When it comes to the economy, both Indian officials and international analysts use misleading statistics to present a glowing picture. Many of the reported figures are inaccurate, and the reality is grim concerning essential issues that affect people’s lives. The employment crisis, which is a central theme of my book, has worsened, and there seems to be no solution in sight. India’s demographic advantage is turning into a demographic disaster. Problems in agriculture, the environment, education, and women’s status, all vital for economic progress, are deteriorating further.

While the April-May 2024 elections offered hope for revitalizing Indian democracy, they also highlighted ongoing problems. Political discussions are dominated by money and divisions based on religion and caste, rather than real plans to improve people’s lives. The number of politicians facing serious criminal charges is increasing, and the apparent vibrancy of politics hides deeper issues. The 2024 elections may be seen as a minor event in the long-term decline of democracy in India rather than a turning point.

The deteriorating economic conditions and political dysfunction reflect a deeper moral issue: the lack of a shared ethics that values collective progress. Many do not believe that society improves only when everyone moves forward together. This absence of public morality leads to real consequences, such as declining social norms and political accountability, rampant individualism, eroded collective goals, and a politics focused on division instead of real reform. The ongoing issues of education decline, violence against women, a failing judicial system, and continued environmental damage all warn of greater troubles ahead. When trust is lacking, the instinct to take advantage of others becomes a survival tactic, dragging India deeper into cycles of distrust and dysfunction.

India’s challenging situation seems unyielding. As economic and democratic foundations weaken, they mutually exacerbate each other. The road ahead is filled with significant challenges.

Rethinking the India hype

Recent GDP growth in India is often highlighted as proof of its economic strength. However, a closer look reveals serious flaws in this narrative. Initially, the brief recovery from the sharp decline caused by COVID-19 was incorrectly portrayed as long-term growth. More alarmingly, there are inconsistencies in recent GDP data.

The COVID-19 pandemic hit India hard, leading to one of the highest per capita death rates globally, and the actual toll would have been even worse without a young population that was more resilient. While the Indian government disputes death toll statistics, independent studies confirm the high figures, especially for vulnerable groups like women and children.

The economy experienced a severe downturn during the pandemic, with GDP significantly declining in both the first and second waves. India performed poorly compared to other major economies during this period, a context vital for understanding the following recovery.

Typically, after a sharp decline, economies rebound as consumers and businesses resume spending. India saw a partial recovery in 2022 and 2023, but this should not be seen as a sign of long-term health. Overall, when looking at both the COVID fall and the subsequent recovery, GDP growth averaged around 4% annually—similar to the pre-COVID slowdown and significantly lower than the 6%-7% growth of earlier years.

In conclusion, India’s GDP has actually grown at an average of around 4% per year since before COVID. This is quite poor compared to its past performance and compared to fast-growing countries. The second major concern is whether India’s recent GDP growth is correctly measured and reported, particularly since the expected recovery period is over.

National statistics are supposed to measure GDP as both income generated and spending on goods and services. These two figures should typically align closely, but there has been a shocking and persistent gap in India’s recent data: GDP calculated by income growth shows an increase of 8% per year, while spending increases by only 3%. This disparity is troubling; the growth hype relies on the inflated income growth figure, which Indian authorities promote as GDP growth. Analysts, including those from the International Monetary Fund, recognize this unusual discrepancy but overlook its serious implications.

The weak state of consumer spending indicates deeper issues in the economy. Private consumption is growing at only 3.5% annually and showing signs of slowing down. Many households lack sufficient money to spend. Despite attempts by the government to mask these problems with optimistic statistics, poverty rates have hardly moved over the past decade. Living costs for the poor have surged ahead of average price increases, with high housing costs and local monopolies exacerbating their financial struggles. Moreover, to address these challenges, the government has had to provide free food to 800 million people continuously.

Businesses are investing less and less. The ratio of private investment to GDP has been declining as GDP growth has slowed over the last 15 years. This trend indicates that businesses are reluctant to invest due to limited buying power among consumers. Foreign investors have also reduced their investments recently, likely sensing a limited market, and monthly exports from India continue to lag.

Analysts across the ideological spectrum are puzzled by the gap between supposedly high GDP growth and stagnant wages or low foreign investment. The answer is simple: the reported GDP growth isn’t real.

Although government spending on infrastructure projects is increasing rapidly, its impact is limited because it represents only a small share of the overall economy. This raises the question of why such investment, intended to stimulate the economy, is not achieving the desired effect.

To understand why government infrastructure projects are not boosting the economy, we need to look at how successful economies have developed in the past. Studies show that improving education access and gender equality has been key to development since the late 18th century. Countries like Japan, Taiwan, Korea, China, and Vietnam have benefited from this understanding. In contrast, building infrastructure like roads and bridges usually came much later in their development stages, meaning they were productive only after basic education and gender equality were established.

For instance, the United States invested in interstate highways in the 1950s, long after it became an industrial power with a highly educated workforce. Japan built key infrastructure after establishing a strong foundation for education and women in the workplace. Similarly, in South Korea, significant highway advancements occurred after a strong focus on education and women’s labor force participation.

India seems to be trying to rewrite the rules of economic development. As I discuss in my book, the Indian government has consistently neglected critical elements essential for long-term growth. Despite increasing the number of schools and enrolling most children, the quality of education remains poor, with students lacking basic skills in reading and arithmetic. Additionally, women’s participation in the labor force is still among the lowest globally. Although the government claims an increase in women working, this largely reflects unpaid household labor being reported as participation.

Each child lacking basic skills is a lost opportunity, creating a cycle that hinders national progress. Every woman denied the chance to work outside the home represents a loss of potential and talent.

Without widespread education and gender equality, investment in infrastructure—though potentially alleviating immediate barriers—will not lead to substantial economic growth. Worker productivity will remain low, and the ongoing issue of job creation, India’s persistent problem, will continue. For example, a shoe manufacturer in Tamil Nadu noted that Indian companies can produce only 100 units using the same resources that Chinese firms use to make 150 units. Indian leaders have not grasped that even basic, labor-intensive production demands a workforce skilled in reading and arithmetic, along with a strong work ethic fostered by proper education.

This narrative downplays India’s struggle in international manufacturing trade. After the Ukraine war began in 2022, India’s increased imports of Russian oil allowed it to boost exports of petroleum products. Yet, India’s share of labor-intensive goods in global exports remains a mere 1.3%. In comparison, Vietnam, with a much smaller population, has a similarly higher share of these exports.

Additionally, the much-discussed “China-plus-one” advantage for India has decreased, despite some investment in India by Apple’s subcontractors. This investment may lead to greater manufacturing in the future, but currently, Mexico, with its advantageous position, has benefited most from the U.S. policies aimed at reducing reliance on China. Likewise, Vietnam has excelled due to its skilled workforce and prime location in regional supply chains.

There is also a fading shine on the boost to Indian businesses from digital technologies during the pandemic. Start-ups, many of which became billion-dollar companies, thrived initially, as did businesses offering digital services.

However, many start-ups have since collapsed, with only a few able to achieve long-term profitability. The growth spurt in digital services, although likely to continue to rise, is less explosive than during the pandemic.

During COVID, companies like edtech giant Byju’s seemed set to change the landscape. However, that boom ended quickly. Byju’s, valued at $22 billion in 2022, soon faced bankruptcy, leading to mass layoffs and unpaid obligations. This illustrates that technology cannot replace the fundamental role of teachers and human interaction in education.

This trend of making grand promises and failing to deliver extended to many start-ups, especially in fintech, where technology could not replace essential human judgment. Fraudulence also increased, reflecting a broader societal decline in trust. While some businesses in e-commerce and delivery have achieved profitability, their market reach remains limited, and the overall economic influence stays minor.

The busts in edtech and fintech highlight a critical issue: just as physical infrastructure cannot tackle India’s skill shortages, technology also cannot compensate for human capital deficits. India must confront its fundamental issues rather than avoid them.

Some start-ups have found success, particularly in e-commerce and delivery services. However, even these sectors generally serve a small customer base.

Estimating the consumer base for online services can be difficult due to unreliable government data. Most online services may have only about 35-40 million users. For instance, Netflix reportedly has fewer than 15 million paid subscribers, many of whom are iPhone users. It remains to be seen if e-commerce can grow beyond this limited set of consumers, and what impact this growth would have on those currently part of the vast informal economy.

On a brighter note, technology-related service exports have improved slightly. During COVID, India gained market share in business and information services, now reaching about 5%. While these services are still less advanced compared to global standards, they are more sophisticated than traditional coding jobs or call centers, which now face intense international competition. Nevertheless, the post-COVID demand surge has decreased, leading to slower growth in these areas.

In reviewing the weaknesses behind the so-called India hype, I focus on the enormous inequality in India’s economic development. Priorities like mass education and gender equality have long been sidelined; the effects of the pandemic hit the weakest the hardest; and consumer growth is still sluggish. India’s development strategy fails to recognize that equal opportunities drive quicker economic growth—something seen in East Asia’s successful development. Without a solid foundation for growth, inequalities can drag down the entire society, a painful lesson India may have to face.

Despite ongoing issues, the hype around India will persist, allowing elites domestically and internationally to divert attention away from real problems. This avoidance not only reflects a significant moral failing but also allows serious and worsening problems to go unaddressed.

Ashoka Mody has recently retired from Princeton University. He previously worked for the World Bank and the International Monetary Fund. He is the author of India is Broken: A People Betrayed, Independence to Today (2023).

This is the first part of a two-part series.