Don’t Believe Modi’s Economic Success Story

Contrary to reputation, India’s current government has made it worse off.

While campaigning for the U.S. presidency, Joe Biden sharply criticized the Modi government’s human rights record, writing how two of its landmark laws are “inconsistent with the country’s long tradition of secularism and with sustaining a multi-ethnic and multi-religious democracy.” Today, Indian Prime Minister Narendra Modi leads a country that is suddenly at the center of U.S. strategy in Asia. And Biden has changed his tune, inviting the prime minister to a state visit this week.

It’s widely understood that when U.S. elites refer to India having a functional free press, judiciary, and democracy, they are either dishonest or in denial about how the country’s political system has developed under Modi. But the same is true when they praise India’s economy. The U.S. government seems to be operating under the assumption that Modi’s India can sustain the country as it decouples from Chinese manufacturing. There is little reason to believe that is true.

Modi’s “Gujarat model” shot him to the prime ministry in 2014. As chief minister in Gujarat, he had led a developmentalist state: midwifing new industries, repairing bureaucracies, and making huge electricity and infrastructure investments. The state’s growth rate boomed as subsidies were given to politically connected conglomerates and to state-owned players.

But the model has failed when extended to the national stage. While Modi has succeeded in selling himself to his constituents and the world as India’s great modernizer, builder, and attractor of capital, the country’s growth under Modi has flagged. Heaps of praise from foreign India watchers might lead one to think otherwise. India’s boosters point to Modi’s “Make in India” 2014 electoral pledge to boost manufacturing to 25 percent of Indian GDP and his government’s all-in bet on capital investments in airports, along with roads and rail—11 percent of its 2023 budget—to create a larger internal market.

On these counts, however, Modi has either failed to fulfill his promises or made the wrong bet.

Though Modi promised to add 100 million manufacturing jobs, India actually lost 24 million of those jobs between 2017 and 2021. COVID-19 was only the last straw: 11 million jobs had already been lost before the pandemic hit, as state banks clogged with nonperforming assets followed by a shadow bank crisis led to a crunch in construction. In India, more people are out of work now than in 2011. Job prospects in cities are so dismal that agriculture now employs a greater share of workers than it did 5 years ago. In 2019, 12.5 million people applied for 35,000 railway jobs.

The failure to add manufacturing jobs is especially stark when India is compared with similar economies in Vietnam and Bangladesh. Both nations doubled their share of manufacturing employment between 2000 and 2020, while India’s share barely rose 2 percent. Now, Vietnam exports approximately the same value in manufactured goods with its 100 million people as does India with its 1.4 billion.

As for Modi’s bet on logistics and transport, it has largely failed to inspire domestic investment. Finance Minister Nirmala Sitharaman has pleaded with Indian capitalists to invest in India, saying, “I want to hear from India Inc: what’s stopping you when countries and industries abroad think this is the place to be now?” Instead, they tend to offshore their profits and show a preference for financial assets.

Indian capitalists blame lack of demand for their refusal to invest. Modi’s crony capitalism has produced a massive upward distribution of wealth while failing to generate a middle-class consumer base large enough to entice investors to expand. Every index of private consumption of India’s vast working and middle class—sales of fast-moving consumer goods, two-wheelers, entry-level cars, even rail travel—has stagnated over the last decade, as Vivek Kaul has documented.

As the Economist reported, private investment in 2019-20 was only 22 percent of GDP, down from 31 percent in 2010-11. Investors also privately admitted to fearing Modi’s unstable and capricious use of tax authorities, which his government uses to punish political foes.

This is a development model that privileges huge, politically connected Indian incumbents—foreign firms have to seek partnerships with them to succeed. And contrary to its image of global economic openness, the government has also hiked tariffs on various goods—including goods from the United States, as highlighted by arguments over Harley Davidson during the courtship between Modi and the Trump administration.

A further obstacle to investment is India’s profoundly unequal society. Modi’s economic strategy puts wealth before health—at the cost of wealth for everyone.

Sickness knocks millions out of the workplace, including some members of the middle class. The Modi government’s refusal to prioritize investments in primary health care means that tens of millions workers are laid up for large parts of the year, unable to contribute productively to the economy because they cannot access treatment or nutrition which countries poorer than India have long been able to provide.

Pollution also shortens life expectancy for 248 million residents of northern India by an estimated eight years. Cleaning up pollution reduces morbidity and increases people’s productivity, making it a vital investment in economic growth. In 2019, the Modi government declared a so-called war on pollution but allocated a scant $42 million to the effort. Modi simply will not take steps employed in countries around the world to fight pollution by taking on powerful opponents. In contrast, China’s war on pollution, launched in 2014, has significantly cleaned up its air. The Indian government has even gone so far as to label environmental activists in Greta Thunberg’s Fridays For Future organization as terrorists, arresting them under India’s draconian sedition laws.

Institutionalized sexism also severely hampers Indian economic growth. Female employment rates (ranging from formal work to self-employment to informal labor) have been dropping for over three decades, with only 7 out of 100 urban women now employed, placing the nation behind even Saudi Arabia in terms of female labor participation. The Modi government’s low funding of the Mahatma Gandhi National Rural Employment Guarantee Act in 2023 further hurts working women; conversely, boosting rural employment and creating urban employment guarantee schemes would be an easy growth (and electoral) win.

Modi’s deft use of direct benefit programs—such as the installation of toilets in homes, electricity hookups, and distribution of cooking gas—has certainly improved his citizen’s lives. While these programs do little to redistribute wealth or change India’s economic trajectory, the tangibility of these home-based benefits has redounded to Modi’s personal popularity and helps to explain his slight electoral edge with women.

But these programs, together with Modi’s Hindu nationalist stunts—such as the construction of a massive Hindu temple on the remains of an ancient mosque, which was destroyed by Hindu nationalist mobs in 1992—also help to distract his supporters from his government’s myriad failures. This combination of institutionalized anti-minority violence, authoritarian crackdowns on free press and critics, youth unemployment, and soaring inequality, is explosive in Modi’s India.

Modi’s Gujarat model of using capital-intensive infrastructure as a primary engine for growth has derailed—even for Gujarat. India is now stuck in a jobless growth trap that prioritizes capital but generates low labor participation and low human capital. As the economist R. Nagaraj concludes, “Never in the past seven decades has India witnessed such an economic reversal, and the gravity of the problem is perhaps yet to sink into the minds of policymakers and the public.”

Tim Sahay is the senior policy manager at Green New Deal Network and a co-editor of the Polycrisis, a publication focusing on macroeconomics, security and climate change.

Source: Foreign Policy Magazine