Almost) all headline news about the Indian economy is superlative — GDP growth above 7.4 per cent for the last three years, inflation at an all-time low, manufacturing growth above 8 per cent. Add to this the fact that politically, the BJP has never been in a more comfortable position. The 2024 miss of a majority is a distant memory. India and the BJP are in a stable position. The political opposition is an insult to the meaning of opposition — it is rudderless, leaderless and energy-less. Until that changes, the BJP will likely not want to risk reforms.
And that’s the problem. The leaders are stuck in a comfort zone, reminiscent of Jawaharlal Nehru’s luxury position post-Independence. Or the beginning of UPA-II, post an impressive first UPA term. Comfort kills the hunger for risk, and perpetuates the stranglehold of the Deep State, that is, senior IAS officials managing the economy at the directions of the oligarchs. Look at FDI for clues about the angst. Unless policies change, the promise of Viksit Bharat is likely to go the way of the unexpected 2024 political loss.
We boast about the fastest-growing major economy in the world; about the whole world waiting to enter our markets. We dream about India being the fourth-largest economy. We are not there yet, and if California were a nation, we would have to have a higher GDP than its. At present, the GDP of California is $4.1 trillion; India will likely be marginally ahead of Japan in 2025, but behind California! In other words, nobody (except our policymakers) seems to be enamoured of the size of the Indian market.
Even Indians are not in awe of the “large” and inviting Indian market. There is one constant about GDP determinants — investment. Closely associated with increasing investment is the necessity of increasing FDI. This is the other growth constant — FDI is critically important, especially for countries like India, because apart from investment, it brings in much-needed technology.
In 2024, net FDI in India reached a record low of 0.09 per cent of GDP. No typo there; we received $27.6 billion in 2024 and $24 billion flew out of India — the largest ever. The previous “high” was $19 billion at the height of the 2008 financial crisis. As far back as 1972, Professor Harberger reminded his students that money that comes in is “goood”; money that goes out is “baaad”. A pity this home-truth is not obvious to our self-reliant policy-makers.
Investor sentiment is also at a low. Stock-market returns are only 3 per cent in USD terms, and sliding. The rupee has just crossed 90, and is a major depressant ahead of the important RBI policy announcement today. At a nominal rate of 5.5 per cent, the real repo rate is upwards of 3.5 per cent — close to the highest ever observed in India. Remember two facts: CPI inflation is less than 0.5 per cent , WPI inflation is negative, and the GDP deflator at a near record low of 0.5 per cent — an important reason for recent celebratory news of “high” GDP growth of 8.2 per cent.
For steady constructive investments and growth, the real repo rate for countries like India should not be above 1 per cent. India needs a repo cut of at least 200 basis points with almost immediate effect. The major banks (part of the Deep State) make easy money via deposits with the RBI and investing in G-secs, rather than investing. Hence, their advice to governments (and to the RBI) is to keep repo rates high. Now with the rupee sliding, the RBI will be advised to let the repo rate remain at 5.5 per cent! Not desirable for Viksit Bharat.
We have a confused, and confusing, foreign policy. We have been talking about an imminent trade deal with the US for the last year. How imminent is imminent?
I want to conclude on an optimistic note. Deep deregulation may finally be happening if the all-important recommendations of the Rajiv Gauba-led Niti Aayog report are accepted. Unlike the recent labour market reforms, this will be reform extending the spirit of 1991. If in addition we do get a meaningful trade deal with the US, all pessimism about the Indian economy will be forgiven and forgotten, and Viksit Bharat 2047 will be a real possibility.
The writer is chairperson of the Technical Expert Group for the first official Household Income Survey for India. Views are personal
