India can’t become a developed country without a course correction in economic policy
The general consensus seems to be that the budget for 2026-27 was not bad, but not good enough. It’s a safe budget. It didn’t rock the boat. It tried to keep the ship on course to India’s goal of increasing GDP and achieving ‘Viksit Bharat’ by 2047. However, it did not address the strategic vulnerabilities of the Indian economy highlighted in the Economic Survey.
India is caught in the pincer grip of a US-China geopolitical standoff. We rely on trade with China, with which we have boundary disputes, and on Russia for oil and arms, while the US continues to support Pakistan. We cannot afford to annoy the US, China or Russia, as our industrial capabilities are not strong yet. We must build these to recover ground lost to China by our premature abandonment of industrial policies in 1991.
No doubt, India’s GDP has grown since 1991 and poverty has also reduced. But over the same period, China’s GDP and per capita income grew much faster. The employment elasticity of India’s GDP growth (i.e., good jobs generated per unit of GDP) is among the world’s lowest.
Estimates show that since 2001, India has been converting GDP to jobs at only two-thirds the rate of other Asian countries. GDP will have to grow at a rate of 12% annually to produce enough jobs if this pattern of growth persists. This is well beyond the 6.5-7.5% that economists say is feasible.
Debates on India’s economy have degenerated into whether GDP and employment did better under Congress or BJP-led governments, but the truth is there is no difference. GDP grew at 7.2% annually in 10 years of the former (excluding 2008-09 when the global financial crisis hit) and at 7.2% in the next 10 years of the latter (excluding the 2020-21 pandemic shock).
The structural conditions that cause inequitable growth have not changed either. The employment elasticity of GDP growth has been declining since the 1990s. Between 1983-84 and 1992-93, jobs increased by a little over 2% per annum. Then from 1993-94 to 2004-05, though the economy grew faster, this rate decreased to 1.85%.
After 2004-05, matters became worse. Employment elasticity, which had been 0.44 from 1999-2000 to 2004-05, decreased to only 0.01 from 2004-05 to 2009-10. This was an ominous sign. If employment and incomes do not increase faster for the masses, investments are not sustainable for businesses counting on rapid economic growth.
Advocates of the 1991 reform agenda want land and labour markets opened up to make it easier for businesses to profit, reduced trade barriers and the privatization of public sector units even though these have social objectives.
What we need is honest reflection. The paradigm of liberal economic reforms we adopted in 1991 may be the cause of our vulnerabilities. We thus need reformers with the courage to break out of that paradigm, as India cannot become a developed country on this path even if our GDP grows. Wealth and incomes must grow for all citizens.
Two basic reforms are required in the process of reforms.
First, to monitor progress, apart from GDP growth, two more gauges are essential on the dashboard. GDP measures only the speed of growth. As with a car, we also need a ‘fuel’ gauge; in the economy’s case, we must measure how fast environmental resources are running out (clean water, productive soil, air quality, etc.). An ‘RPM’ meter is also necessary to alert us to social and political tensions that could stall growth.
Second, we must reframe economic development as a process of learning: of enterprises acquiring capabilities they do not have yet; people climbing a skill development ladder; and policymakers learning to do what they have not done before.
China’s leaders have proven to be faster and better learners than India’s. While we adopted the US model of liberal-market capitalism in 1991, China stayed on its course of “socialism with Chinese characteristics.” It experimented, learnt and made course corrections: “Crossing the stream by feeling the stones underfoot,” in Deng Xiao Ping’s memorable expression.
International surveys show that each unit of India’s GDP growth is creating fewer jobs than the growth of other economies; and each unit of growth is also damaging the environment more than in other countries.
We cannot carry on this way. It is time for a bipartisan reflection on our experiment of liberal market reforms. Our agenda must take a new form and direction now. India’s pattern of growth must change. Incomes at the bottom must increase much faster and ecological destruction must stop before it’s too late.
The author is the author of ‘Reimagining India’s Economy: The Road to a More Equitable Society’
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