Ashley J. Tellis
Even before the coronavirus pandemic swept through the country, India was at a crossroads. Its sustained economic expansion, accelerated by pathbreaking reforms in 1991, slowed significantly. Convulsions around religion and citizenship roiled domestic politics under Prime Minister Narendra Modi. Meanwhile, the aspirations of international leadership that India has harbored since independence remain unrealized.
For all its recent shortcomings, however, India should not be counted out. At a time when China’s myriad pathologies have left many countries thirsting for an alternative exemplar, India could again become the world’s fastest-growing free market democracy. But it will need a new approach to revive its hopes of joining the league of great powers.
India could again become the world’s fastest-growing free market democracy.
CAN INDIA GROW FAST ENOUGH?
India’s economic growth has contracted since 2018, alongside a larger global slowdown driven by falling commodity prices, declining international trade, intensifying U.S.-China tariff wars, and decreasing manufacturing output across the developed world. If these cyclical factors alone accounted for India’s weakening performance, New Delhi could get by on provisional remedies while waiting for global conditions to improve.
The unpalatable reality, however, is that the Indian economy’s structural weaknesses intensified these cyclical headwinds. Investments slowed because heavily indebted Indian companies left India’s major public sector banks saddled with huge nonperforming loans and other Indian financial intermediaries fell victim to bad investments, thus bringing credit expansion to a halt.
The resulting contraction compressed consumer spending at a time when the global slowdown was also pushing down exports. Additional government spending could not compensate because falling revenues and the costs of debt restructuring had aggravated the government’s fiscal burden. The coronavirus pandemic only intensified this problem, forcing the Indian government to expend resources to save lives and livelihoods at immediate risk.
While all these challenges contributed to India’s recent drop-off in growth, they do not sufficiently account for it. The deepest underlying cause—one only now receiving a serious response by the government—is India’s failure to complete the program of reforms begun in 1991, which liberalized commodity prices, removed production constraints, and reopened India to international trade.
Those measures did not do enough to subject land, labor, capital, and enterprise to the rigors of a genuinely free market. The necessary follow-on reforms on this count were put off—largely out of fear that voters would penalize political leaders for the difficult decisions involved, after having come to view high growth rates produced by the initial reforms as a new birthright.
The consequences have been onerous. Acquiring land in India today, for example, remains an arduous and distasteful enterprise that deters all but the most intrepid or the most corrupt. Labor in the organized sector can be hired but not fired, because current law is indifferent to market conditions and firm needs. Labor productivity growth in the informal sector—where most Indians are employed—is abysmal. India’s public sector banks dominate the nation’s financial capital, directing it toward the wealthy and the powerful often at the government’s behest with limited regard for viability. And red tape, corruption, arbitrary taxation, and unpredictable policies continue to sap both foreign investment and domestic entrepreneurship.
Even as India struggles to reform these conditions, it has focused more resolutely on expanded distribution rather than growth. To attack inequality, the Indian state has tried to provide the disadvantaged segments of its population with subsidized food, medical services, electricity, and cooking fuel. These are commendable initiatives, but they ultimately must be paid for through accelerated economic growth. Yet this is precisely where India has faltered: without the structural changes that deepen markets, improve regulatory capacity, and expand human and physical capital through targeted investments, India will struggle to regain growth rates of 7 percent and above—the minimum level necessary to sustain its development and its great power ambitions.
Modi’s government has initiated important reforms under the pressure of the coronavirus crisis. Modi has encouraged states ruled by his party to institute land and labor reforms, even as the central government has begun to transform policies for agriculture and other industries to attract investments leaving China.
India historically has only pushed forward with reforms when its back is to the wall—and, today, it is.
Whether these efforts will produce lasting success, only time will tell. But India historically has only pushed forward with reforms when its back is to the wall—and, today, it is. Between the coronavirus pandemic and the heightened security threats from China, India needs to revive its economic growth in a hurry. The current crises may tip the balance in favor of the decisions necessary to free up the country’s substantial untapped capacity and master its myriad challenges.
CAN INDIA PLAY A MEANINGFUL GLOBAL ROLE?
India’s economic performance remains its best instrument to shape the international system. But its role in international trade, its defense investments, and its conception of the global order also affect its rise to power.
The coronavirus pandemic has unfortunately added momentum to the backlash against international trade, but jumping on the protectionist bandwagon in pursuit of self-sufficiency would provide India only illusory benefits. There is no way that India can reach its ambitious growth goals without expanded exports, which have recently been the fastest-growing slice of its economy. Those exports often depend on foreign inputs and cannot be sustained if India suppresses imports through higher tariffs, localization requirements, and other trade barriers. Rooting for trade expansion—at least among friends, if not beyond—offers the greatest opportunities for Indian leadership and revived growth. But New Delhi’s inability to conclude even a modest trade truce with the United States, let alone integrate itself into the wider Asian economic system, is not reassuring.
For more on Indian politics and life under Modi, tune in to the latest episode of Grand Tamasha hosted by senior fellow Milan Vaishnav.Learn More
Defense investment presents parallel challenges. India’s slowing economy has constrained its defense spending—especially planned expenditures on modernization—at a time when frontier security remains a major preoccupation. Any state seeking to become a great power, however, must influence outcomes beyond its immediate borders. Yet the economic downturn has left India without the necessary resources to expand its reach. Now that Chinese military assertiveness along India’s borders promises to bring new troubles, the financial constraints on India’s defense modernization could prove especially costly.
The persistent obsession with indigenizing defense production will not help matters either. The belief that a country of India’s size should not import advanced weapons extensively is driven by sentiment at the expense of rational calculations about domestic capacity and economies of scale. Instead, India should import as needed to equip its military with the best operational capabilities while nurturing the development of critical components, subsystems, and technologies that can be integrated into global defense supply chains. This strategy offers better prospects than self-reliance for both securing cutting-edge technologies and stimulating domestic manufacturing.
India’s influence continues to enlarge, making it a stronger counterweight to troublesome challengers such as China.
In recent years, India’s deepened strategic engagement with partners such as Australia, France, Israel, Japan, Singapore, and the United States has given it more room to play on the global geopolitical stage. Through better access to more advanced technology, increased exercises with highly proficient foreign militaries, and greater diplomatic coordination with other regional partners, India’s influence continues to enlarge, making it a stronger counterweight to troublesome challengers such as China.
Ironically, India’s economic weakness has diminished its capacity to control its own neighborhood even as it has fortified other global ties. And New Delhi’s policies on global issues such as data management, international trade, and sometimes even religious freedoms put it at odds with its Western partners, reminding the world more of India’s extant infirmities than of its growing strengths.
India’s own conception of global order—centered on preserving a diverse, nonviolent, nondiscriminatory, polycentric state system—is not inherently incompatible with liberal internationalism. Consequently, there is no reason why India should not defend the liberal order more vigorously, both at home and abroad, despite its colonial history and its occasional disagreements with the West on norms such as the “responsibility to protect.”
CAN INDIA REMAIN A LIBERAL DEMOCRACY?
Unlike China, India has seen its rise widely welcomed: it proved that rapid growth could occur even in a liberal democratic society marked by sharp demographic heterogeneities and severe developmental challenges. In fact, the United States and many other Western powers jumped at the prospect of aiding India’s ascent, presuming that it would not misuse its power against its own citizens or its neighbors.
Yet a recent wave of policies widely perceived to be illiberal has eroded this confidence. Critics within and outside India point to many developments such as the revocation of Jammu and Kashmir’s autonomy, the passage of the Citizenship Amendment Act, and the possibility of implementing a National Register of Citizens as evidence of a weakening commitment to liberalism. The government’s defenses of these moves have not satisfied India’s minority groups or others concerned about India’s direction. But more than government policy is at issue here: key Indian institutions are weakening dangerously, and important segments of the population appear disenchanted with their country’s liberal inheritance.
Key Indian institutions are weakening dangerously, and important segments of the population appear disenchanted with their country’s liberal inheritance.
The community of liberal democracies internationally stands to lose if domestic unrest fueled by confrontational politics stymies India’s growth or if India enlarges its material capabilities only by sacrificing its liberal character. Either outcome would dilute the West’s eagerness to partner with India.
To be sure, India’s relevance in the Indo-Pacific will survive, thanks to the exigencies of balancing China. This ensures continued engagement by the United States and other powers, but a constrained acquiescence to partnership is a poor substitute for the enthusiastic boosting of India that would otherwise occur if its liberal credentials were not contested.
For all its difficulties, India is by no means out of the great power game. It possesses vast and still largely untapped potential. But realizing that potential will require New Delhi to deepen its economic reforms in order to expand its national power, use that power to strengthen the liberal international order in partnership with its fellow democracies, and remain a credible example of how liberal politics can advance development in large, diverse countries outside of the West. On each count, India will have to meaningfully correct course if it is to achieve these ambitious aims.
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