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FT editor Roula Khalaf selects her favorite stories in this weekly newsletter.
The writer is co-author with Rohit Lamba of ‘Breaking the Mould: India’s Untraveled Path to Prosperity’ and a former governor of India’s central bank.
Are Indian voters ignoring the growing authoritarianism of Prime Minister Narendra Modi’s government because of the economic prosperity it has brought? A close look at the data suggests a different story.
India’s economy suffered during the pandemic. Apart from the terrible loss of life, the pandemic decimated small and medium businesses, which were already reeling as their cash sales were hurt by earlier demonetisation and the mismanaged implementation of a goods and services tax. Labor-intensive sectors, such as leather and textiles, have been disproportionately affected. Of the 23 components of the industrial production index, 11 labor-intensive sectors were lower in March 2023 than in 2016-17. Worryingly, India’s share in global garment trade has declined by more than 20 percent since 2015, while that of Bangladesh and Vietnam is increasing.
The consequences are manifested in growing urban unemployment. The share of agricultural jobs has been increasing, an aberration for a growing developing country. Of course, some segments are doing well, given that overall GDP growth is above 6 percent. The government’s infrastructure push helps capital-intensive sectors such as steel. The wealthy and upper middle class have taken advantage of the growth in these sectors and in skilled service exports, as well as in the stock and real estate markets.
However, a two-paced economy ends up affecting the flourishing side. With few new jobs, income growth has been weak for many people. Household debt is rising and consumption of mass goods, such as motorized two-wheelers, is still below pre-pandemic levels. Young people are anxious about their prospects but don’t know who to blame: a recent white paper on the economy doesn’t even mention the word “unemployment,” while the government-influenced mainstream media trumpets widespread prosperity.
A government that does not recognize the central economic problem cannot propose useful solutions. The ruling party’s employment strategy has been to attract manufacturing to India through subsidies. The options are bewildering. Nearly $10 billion in subsidies is being allocated to chip manufacturing, which will create only a few jobs for the highly skilled in an industry where India has little comparative advantage. Meanwhile, labor-intensive sectors are shrinking due to lack of investment.
Why then is the Modi government so popular? It has certainly improved the delivery of benefits such as free food grains (to around 60 per cent of the population). These benefits, presented as coming directly from the prime minister, contribute greatly to his popularity. So does the perception of India’s standing in the world, as its growing economy and the need to keep it on the side of industrial democracies draw effusive dignitaries to New Delhi. But most critical is its ability to influence perceptions by promoting good economic news and suppressing criticism. The government is popular despite the economic experience of the people, not because of it.
Will the erosion of democracy, if it continues, affect India’s growth? Modi’s supporters emphasize the advantages that authoritarian countries have. They may ignore subtleties like careful environmental studies when building infrastructure. They can support manufacturing, acquire land for industry despite household protests, and suppress unions and wage growth. This is the path China once followed. But India has two problems that Beijing did not have when it embarked on its export-led path. First, China got there first and is competing for profits in the manufacturing sector. Second, the industrial world is not prepared for another China, which eats up what is left of its manufacturing and expands the production of goods to the detriment of the climate.
India should leverage its strengths, including service exports and democracy. For example, it already has 300,000 engineers working on chip design for companies around the world. Why not repurpose chip subsidies to improve the quality of your schools, colleges and universities, so you can have more chip designers and eventually your own Nvidia or Qualcomm?
An Indian road will involve risks and the government will make mistakes. A strong opposition and a free press will help point them out and allow him to correct course. A stronger democracy will also make India a more reliable destination for foreign investors and a more reliable provider of data-intensive services. The factors voters must weigh in Indian elections are not as simple as giving up democracy for prosperity. Indeed, the terrifying possibility is that India will give up both.