7106 words in this article
Estimated reading time: 18 minutes
Author | Anupam Manur
Translated by | Yu Wanlin
Translation Reviewer | Mao Keji
Editor of this issue | Lin Xila
Reviewer of this issue | Jiang Yi
Editor's Note
Recently, the Indian government and media have vigorously promoted the idea that "India has replaced Japan as the fourth-largest economy." Domestic expectations for economic prospects are rising, and there is a lot of high-profile promotion of the country's strong economic growth. Behind this hype, however, some scholars in India have spoken out, saying that "India's economic growth should be viewed with caution." As an advisor who has participated in many of Modi's major policy planning efforts, Professor Manur offers a rare "insider" perspective. He addresses twelve key questions on topics such as "the relationship between India's demographic endowment and market potential," "limitations of Indian companies expanding into overseas markets," "the real status of India's economic integration," "the structural contradiction between India's participation in global value chains and its protectionist policies," and "the origin of the paradox of high unemployment and high vacancy rates." These answers provide a clearer picture of India's economic development. Overall, India's economy is certainly not to be underestimated, but its actual situation seems not as unstoppable as it is loudly promoted. South Asia Research Communication specially translates this article for your critical reference.
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➤ Question 1: Please introduce yourself and share your recent areas of focus.
➤ Answer 1: My name is Anupam Manur, and I am an economics professor. I am passionate about two things: making economics lively and interesting so more people can access it, and promoting economic freedom. Most of my writing results from the combination of these two ideas. Currently, my research interests lie in better understanding the economics of platforms and finding regulatory methods that cause the least distortion, advocating for more open trade policies, and identifying policy solutions in India that are more conducive to job creation. However, I also often comment on government policies that infringe on personal freedoms, especially in the economic field, where such interventions occur far more frequently than I would like.
➤ Question 2: India has become one of the most exciting economic legends globally. What do you think has changed in India, leading to a significant improvement in its international standing? Or is India still in transition, and has it gained more attention from the media and investors against the backdrop of Sino-US geopolitical rivalry and China's slowing growth and weak stock markets?
➤ Answer 2: India's achievements and economic transformation have not happened overnight. Since India initiated economic liberalization reforms in 1991, it has been on an upward trajectory, and each new initiative of liberalization has brought new growth dividends. When the global environment was favorable, India's growth momentum was stronger. In the early 2000s, the Federal Reserve's expansionary monetary policy created a large amount of market liquidity, and India received a large influx of foreign investment, achieving economic growth of over 9% for several consecutive years. Currently, as China's economic growth slows down, combined with the US-China trade friction and geopolitical rivalry, global capital is actively seeking alternatives, and India is an important candidate.
Despite the slowdown in the global economy and the Russia-Ukraine conflict, India's economy rebounded strongly after the COVID-19 pandemic, with a GDP growth rate of 9.1% in the 2021-22 fiscal year and 7.2% in the 2022-23 fiscal year. The Indian central bank predicts that the growth rate for the 2023-24 fiscal year will reach 7%.
Due to its size comparable to China and a democratic government system, India receives more attention than other countries. This does not suppress the excitement about India. India's current economy and future development prospects have many highlights worth being excited about. On the macro level, even after implementing expansionary fiscal policies post-pandemic, India's debt levels remain manageable; the rupee exchange rate is stable; service exports and capital inflows can balance the trade deficit in goods; the foreign exchange balance is good; and inflation stabilized quickly after the pandemic.
At the same time, people cannot help but feel regret about India's untapped potential. As Ruchir Sharma, chairman of Rockefeller International and former chief strategist at Morgan Stanley, said, "India always disappoints both optimists and pessimists."
➤ Question 3: Setting aside the hype, which industries and states in India can foreign investors truly find opportunities? What strategic ambitions do Indian policymakers have, and how should foreign enterprises and investors consider these ambitions? For participants rushing into the Indian market, what misunderstandings and miscalculations are they most likely to make?
➤ Answer 3: The rhetoric at the national level in India reflects the priority agenda set by the central government. The current Modi government has clearly stated that India aims to become a $5 trillion economy by 2027 and a developed economy by 2047, known as the "Developed India" vision, which is also the BJP's campaign slogan. To achieve the "Developed India" vision, India's per capita income needs to increase fivefold, meaning the annual growth rate must rise from the current 6-7% to around 9%.
If no major structural economic reforms support this goal, it may be difficult to achieve: agricultural productivity and related fields need to significantly improve; the vast labor force must acquire higher skills; manufacturing must become a basic industry for job creation; and investments in both public and private sectors must continue to grow.
Beneath the hype, there is an important point to consider: although India is now the world's most populous country, this does not mean it has a similarly vast consumer market, a fact that many foreign enterprises that have come to India have deeply experienced. The number of affluent individuals is small; the disposable income of the middle class is limited, and many people, although they have escaped poverty, are still unable to become potential customers for foreign enterprises. Although the potential market size is indeed considerable in absolute terms, optimism should still be cautious. Though the management may seem a bit outdated, the analysis of The Economist on this topic remains applicable.
➤ Question 4: How integrated is India's domestic economy? Can businesses operate smoothly across the entire country? The Modi government has invested heavily in infrastructure, but what is the real development status of the logistics system? What aspects need further improvement in the future?
➤ Answer 4: I once commented that India has performed well as a political community since independence, but there is still much room for improvement as an economic community. EU citizens can freely reside, purchase property, and engage in business in any member state and conduct any form of economic activity. However, Indian citizens still face restrictions when purchasing land across states, transporting goods, or working and living in different states, and even buying a car in one state and driving it through another can encounter significant resistance.
However, the introduction of the Goods and Services Tax (GST) unified the tax structure across India, eliminating a large amount of regional additional taxes. Over the past decade, infrastructure development has been astonishingly fast (an increase of 300%), reducing freight times and lowering logistics costs. The newly introduced National Logistics Policy aims to reduce the logistics cost as a percentage of GDP from about 14% to below 10%.
➤ Question 5: Do you think India's economic growth is essentially inward-looking? Apart from some well-known tech companies, Indian companies mostly focus on the domestic market and rarely expand overseas. Is this approach reasonable, or is it a mistake of missing external opportunities? Is the Indian market really large enough? How should we view the market opportunities represented by the "middle class"?
➤ Answer 5: Except for a few companies such as Tata Motors, Infosys, and TCS, few Indian companies have established global influence or genuine international competitiveness. For convenience, many people attribute this phenomenon to the fact that the Indian domestic market is large and complex, thus consuming most of the operating efforts of Indian companies. However, this is at best a partial reason.
The reason why Indian companies have not found opportunities in overseas markets is also due to insufficient investment in research and innovation. All of India's innovation indicators (patents, academic papers, etc.) rank low, and the proportion of R&D spending by Indian companies is extremely low. Additionally, the policy environment in India does not particularly encourage R&D investment.
In addition, I have found a particularly convincing explanation: Indian companies often fall into the "low-level equilibrium" trap. The official policy in India tends to be more pro-business than pro-market, which inevitably leads to corresponding consequences: many companies find it easier to influence government policies and shape a special market environment where they can manipulate the market, set entry barriers, and isolate foreign competition. Market access issues that often hinder cross-border trade are not the main obstacles for Indian companies in expanding their overseas markets. Indian companies enjoy investment and trade freedom in target markets such as Europe, the Middle East, Japan, South Korea, and Southeast Asia, except for certain restrictions in the Chinese market.
➤ Question 6: China has become an economic and trade power by opening up its market to foreign enterprises, investing in infrastructure, absorbing best practices, embracing its core position in low-cost manufacturing, and continuously moving up the value chain. The Chinese government has studied and learned from other development models and adapted them to its own circumstances. This is a very successful strategy. So, do you think India will also develop in this direction? Will the Modi government (or the opposition) lower import restrictions and relax regulations? If India's business magnates and elites prioritize developing local enterprises under conditions that exclude foreign competition, will they still welcome such open policies?
➤ Answer 6: India has gone through multiple rounds of liberalization and protectionism. Since 1991, India's economy has generally moved toward liberalization, with the average effective tariff rate decreasing from 46% in 1991 to 13% in 2023, although there have been some government interventions opposing this trend of liberalization. From 2014 to 2017, India implemented several trade liberalization reforms and reduced tariffs. However, due to the demonetization policy, the implementation of the Goods and Services Tax caused a slowdown in the domestic economy, and the impact of the US-China trade friction led India to gradually increase tariffs on certain goods. During the pandemic, the official policy rhetoric shifted toward "Make in India," "self-reliance," and "speak for the domestic," which are clearly protectionist terms.
The steady increase in protectionism can be seen from the simple average tariff changes: the simple average tariff was 8.9% in the 2010-11 fiscal year, and it had risen to 11.1% in the 2020-21 fiscal year. The proportion of goods with tariffs exceeding 15% increased from 11.9% in the 2010-11 fiscal year to 25.4% in the 2020-21 fiscal year.
However, in the 2023-24 fiscal year, the Modi government showed a slightly more open attitude towards trade, including reducing consumption taxes on electronic products and actively promoting India's position in the global value chain. The establishment of manufacturing centers by Foxconn and Apple in India is a milestone event—India removed regulatory obstacles and relaxed import restrictions for this. This provides a model for other companies to invest and establish factories in India under the "China+1" (China+1) strategy.
➤ Question 7: How has the concept of capitalism and the role of the market evolved in India in recent years? In China, there is a delicate balance between the market economy and Marxist-Leninist and Maoist ideologies. Does India face unique challenges when integrating the market economy with its political, cultural, and historical heritage? Is economic freedom taking root in Indian society? What does this mean?
➤ Answer 7: This question requires a complex and nuanced answer. India joyfully bid farewell to the "socialist" economy in 1991, and this liberalization reform is still widely praised today. However, economic freedom has not received the same level of importance as political freedom or freedom of speech. On the contrary, the government often brazenly tramples on the economic freedom of Indian citizens without facing any punishment. Government control over production, distribution, and sales through licenses remains strong.
Public often supports price ceilings or bans, indicating that government intervention in the market is still popular. Education, medicines, heart stents, medical devices, movie tickets, air tickets, taxi fares, and agricultural products across the country are subject to price controls, and classic rent control and minimum wage standards continue to exist.
This trend of economic interventionism is exacerbated by the "Make in India" initiative, the "self-reliance" ideology (roughly meaning self-sufficiency or self-reliance), production-linked incentive programs, and increasingly harmful trade interventions, along with various subtle forms of favoring domestic enterprises and discriminating against foreign enterprises. Prime Minister Modi's call for people to "speak for domestic products" exemplifies a typical inward-oriented policy stance. The rules in the e-commerce sector are a clear example—industrial policies under the Department of Industry and Internal Trade (DIPP) revised foreign direct investment rules, prohibiting e-commerce companies from using vertical integration inventory models. This makes it difficult for multinational retail giants like Amazon and Walmart to implement vertical integration, while domestic conglomerates like Reliance Industries and Tata Group can do the same thing.
Another notable trend is the increasing rise of economic nationalism. Although the socialism of the 1970s has been replaced by soft economic nationalism or "self-reliance" ("Atmanirbharta") in the 2020s of the 21st century, sometimes they produce very similar results. This economic nationalism is reflected in strengthening subsidies, state support, and discriminatory policies against foreign investors, aiming to boost domestic production and emphasizing the concept that "the market serves the nation's interests".
➤ Question 8: What role does the state play in India's economy? Is government intervention itself a problem, or is it the solution to the problem? Can the government truly select "winners" in the market? Do the risks of strong intervention outweigh the benefits? Will the boundary between the public and private sectors change over time, or can they coexist and play a positive role together?
➤ Answer 8: The Indian government is both "too big" and "too small." In areas where the government should provide basic public services, such as police, fire departments, and the judiciary, there are serious problems with insufficient personnel and low capacity. At the same time, the government is involved in many areas it should not enter, including producing soap, running hotels, and monopolizing the national railway network. The paradox of the Indian government lies in "having grand aspirations but lacking capability," unable to implement even the laws it has enacted. This contradiction is also evident in the market domain. Instead of investing limited resources in cultivating the market, including improving contract enforcement mechanisms, promoting judicial fairness, and protecting property rights, the government intervenes in price controls, implements trade protection, and subsidizes specific products and services.
Industrial policies have emerged worldwide, and India is no exception. Currently, India's industrial policies mainly include three aspects: first, focusing on selecting advantageous industries with global potential in India; second, implementing subsidy measures linked to output; and third, protecting specific industries through trade barriers. However, this approach has inherent flaws, as it may distort the market and greatly depends on the government's ability to bet on "winners."
➤ Question 9: Give a specific example, how do you view the national railway network? What challenges does this sector face, and what possible updates or improvements could be made? Can China's model of rapid high-speed rail development offer any lessons?
➤ Answer 9: Yes, we should learn from China's experience in upgrading the railway network. Currently, the Indian railway department is stagnant or even regressing. In 2022, the share of freight transport by railways was only 20%, far below 60% in the 1980s. For many years, the average speed of freight trains has remained stagnant at 25 km/h. To make railway transportation a viable option, it must be significantly accelerated. While improving the cargo handling process, the punctuality of train schedules must also be improved. In addition, the freight capacity of trains needs to double, including doubling the number of freight cars. The cost of transporting goods via the railway network is relatively high because of cross-subsidies between passenger and freight railways. To improve efficiency, private capital needs to be introduced to participate in railway network operations. This is because although the government can and will make some minor adjustments to existing infrastructure, major changes require the introduction of private capital and expertise.
➤ Question 10: Foreign investors are generally concerned about contract enforcement, property protection, judicial remedies, and other law enforcement issues in India. For example, the 2015 Bankruptcy Act (The Insolvency and Bankruptcy Code) once generated expectations, but its implementation faced obstacles. Do you think these areas have made progress? What is expected in the coming years?
➤ Answer 10: The Bankruptcy Act was a landmark legislation that changed the rules, but it failed to be implemented, which is very disappointing. The implementation of the Bankruptcy Act faces two major obstacles: one is the severe delay in the bankruptcy resolution process, and the other is that creditors must bear significant losses. Between March 2019 and September 2023, the recovery rate (the amount recovered when loans default) decreased from 43% to 32%, while the average bankruptcy resolution time increased from 324 days to 653 days, but the stipulated time was only 330 days.
According to CRISIL, an Indian credit rating agency, the reasons behind this situation are twofold: first, the limited number of judicial personnel leads to severe delays in the identification and confirmation of defaults. Second, the severe delays that existed before the enactment of the Bankruptcy Act (increasing from 450 days in the 2019-20 fiscal year to 650 days in the 2022-23 fiscal year) further lowered the recovery rate. This reflects deeper problems within India's judicial system or more broadly. The Supreme Court currently has 80,000 cases pending, and the total number of unresolved cases in all courts across the country is approximately 50 million, causing unreasonable delays in judgments. Arbitration procedures in India are also slow and costly. In the World Bank's previous "Doing Business Report," India has long ranked low in the dimension of contract enforcement (without considering the problems with the report and its assessment methods).
➤ Question 11: A topic currently receiving a lot of attention is India's youth population and demographic dividend. Can India's education system support young people to take on professional positions? India is also facing a dilemma of high unemployment and a shortage of skilled jobs. What is the key to solving this problem?
➤ Answer 11: India's education system has solved the issue of "quantity": the gross enrollment rate in primary education (the ratio of students enrolled to the total population of the relevant age group) exceeds 95%, but this proportion decreases in higher education. The bigger problem with India's education is "quality." According to the Annual Status of Education Report (ASER), 50% of fifth-grade students cannot read or understand first-grade textbooks (note: the report does not specify the year). Therefore, despite having a demographic advantage, the majority of the working-age population lacks the educational level and skills required to effectively participate in organized manufacturing and service industries. This is the reason for the coexistence of high unemployment and high vacancy rates in India.
In higher education fields such as engineering, the quality of teaching is also worrying. Although many graduates can handle daily tasks, companies engaged in high-end precision work and cutting-edge research and innovation find it difficult to hire technically skilled employees. The Indian software industry also needs large-scale skill upgrades to maintain its comparative advantage. The Indian government has already and will continue to invest in education at all levels, focusing on skill training, re-skilling, and upskilling. However, India also needs more sweeping reforms: allowing for-profit entities to enter the basic education sector, refocusing on subsidies for private education rather than establishing schools themselves (public schools have poor teaching outcomes), and stepping back from curriculum setting and regulation in higher education.
➤ Question 12: India has produced world-class technology companies and is an important international participant in information technology services and software development. The Modi government is pushing for the development of the electronics manufacturing sector, hoping to integrate into the global value chain. Is this strategy feasible? What policies and regulatory support are needed? This may also require cooperation and integration with China, bringing additional geopolitical considerations. More broadly, data is an important component of future technology and the digital economy. Has the Indian government established a guiding philosophy or policy orientation regarding data collection, use, and protection?
➤ Answer 12: The Modi government is strategically betting on the electronics manufacturing sector, aiming to occupy a more important position in the global value chain, and has formulated an "industrial policy for the information age." This aligns with the trend of other countries introducing industrial policies, such as the United States' "Chip Act." This strategy takes a dual approach—subsidizing domestic industries and implementing trade protection. The state mainly implements subsidies through the "Production Linked Incentive (PLI)" program, but the effect has not met expectations. For example, in the mobile phone manufacturing industry, companies have used PLI subsidies only for assembly rather than manufacturing.
This new type of industrial policy has fundamental contradictions in its goals and purposes. To integrate into the global value chain, India must open up its economy and allow free imports. A country cannot adopt a protectionist stance while expecting to integrate into the global value chain. Therefore, a major problem with the PLI is that many companies ultimately obtain subsidies from the government, which they then use to pay for high import tariffs on components. To become part of the global value chain, India needs to formulate open trade policies, including importing the necessary components from China.
In the field of data governance, India has recently introduced a relatively new Data Protection Law. Positive changes are evident in the Modi government's relaxation of strict data localization requirements, which will benefit potential investors. The industry generally believes that the newly introduced privacy law is simple, understandable, and enforceable in protecting personal data, and it strengthens privacy protection. This law applies to businesses, but it is insufficient in protecting personal data from government abuse.
➤ Question 13: Please share some books, blogs, podcasts, or other content that you enjoy and that can deepen readers' understanding of India and the Indian economy.
➤ Answer 13: Podcasts: "The Seen and the Unseen," "All Things Policy" Daily Podcast, "Ideas of India"
Briefing: "Anticipating the Unintended"
Books: "The Third Way and Privacy 3.0," "When the Chips are Down," "In Service of the Republic"
Blogs: "Urbanomics," "Mostly Economics"
Journals: "Indian Public Policy Review"
About the Author: Anupam Manur is an assistant professor at the Takshashila Institution, an Indian think tank, specializing in interdisciplinary research on economics, technology, and public policy. His recent focus has been on platform economies (economic and social activities facilitated by digital platforms), India's employment crisis, international trade, and economic policies. Additionally, he co-authored the book "We, the Citizens: Strengthening the Indian Republic," published in January 2024.
Original: https://www.toutiao.com/article/7562229843933331968/
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