Why Is the Indian Economy Tanking? What Went Wrong?

Mukesh Devrari

The problem of the lack of capital in third-world countries is not new. The science of economic development is not very difficult to understand. Economic activity requires a high level of consumption. It is a loop that feeds on itself. The more people demand various consumer goods, the more industries will work to produce them. The more people are involved in the production process, the more jobs are created in those industries. Those workers also earn income and demand many more goods and services.

Let us say five million people are directly involved in the manufacturing of internal combustion engines for various vehicles. They will all consume clothes, food, entertainment, and other products. Many more people will gain employment in those industries. It is not a perfect structure. Some people at the bottom of the pyramid will always struggle. However, much also depends on governance.

Iran, despite many sanctions, is a relatively well-managed country. People generally have access to food, shelter, and other basic necessities of life, although their capacity to purchase various consumer products is lower compared to many other countries.

Now the question is: why is the Indian economy tanking? The reason, according to this argument, is simple. There is not enough investment taking place in India, either in the service sector or in manufacturing. China made remarkable progress, but it is also a fact that Japanese, European, and American companies invested billions of dollars in China to establish manufacturing plants. China reaped the benefits of globalisation for nearly three decades.

Western companies viewed investment in China as a win-win situation. They expected access to a market of 1.4 billion consumers while also benefiting from low-cost labour and relatively business-friendly regulations. Companies believed they would operate under a government more focused on maintaining a favourable business environment than on protecting the interests of factory workers. They also knew that the Chinese Communist Party would manage labour unrest and would not allow industrial disputes to disrupt business decisions driven by market demand.

If demand increased, factories hired more workers. If demand declined, workers could be made redundant. Like many developing countries, China lacked domestic capital, and foreign direct investment helped provide the resources needed to build factories. More FDI meant more factories, more jobs, more exports, and rising demand for consumer products within China.

The people employed in these factories required food, shelter, transport, and public infrastructure. The Chinese government ensured that infrastructure was developed rapidly to meet rising demand. The Chinese story does not end there. The government collected substantial tax revenues. Although tax rates were not excessively high, the scale of economic activity generated enormous revenue.

The government invested heavily in education and research. Chinese universities and research institutions now compete with some of the world's leading institutions. Credit should be given where it is due. Following the collapse of the Soviet Union, the United States did not view China as a long-term strategic threat. China was considered too weak to challenge American dominance. Many in the West believed that their global leadership rested on their ability to generate new ideas, technologies, medicines, engineering innovations, software, and scientific discoveries. Western dominance, led by the United States, appeared unassailable.

The Chinese Communist Party and the Chinese people decided to achieve what had seemed impossible only a few decades earlier.

However, this article is about India and its difficulties in attracting FDI. The United States is increasingly concerned about China's rise and no longer appears willing to allow capital to flow as freely to developing countries as it once did. President Trump has repeatedly advocated bringing manufacturing back to the United States.

It is interesting to note that electricity consumption in the United States has remained relatively stable over the past two decades, while China's electricity consumption has increased dramatically. Today, China consumes substantially more electricity than the United States.

In short, the current American policy environment is encouraging manufacturers to invest in the United States. It is also true that increasing automation and the use of robots in manufacturing have reduced some of the cost disadvantages associated with producing goods in high-wage countries. This is not necessarily good news for countries such as India.

India has largely surrendered its information technology market to American technology companies. In return, the United States has allowed significant outsourcing of software and IT-enabled services to India. American policymakers rarely discuss service trade because the United States remains a major beneficiary of the existing arrangement. India depends heavily on American-owned digital platforms and internet infrastructure, while the United States can outsource labour-intensive technology work to India.

American social media and technology companies enjoy enormous influence in India. Gmail, YouTube, WhatsApp, Instagram, and other American platforms dominate the digital landscape. Large quantities of public and private data are stored on cloud infrastructure owned by foreign companies. This raises important questions about data sovereignty and national security.

It would be fair to say that if YouTube were suddenly banned in India, many young people would strongly oppose such a move. Recently, social media accounts critical of the government have attracted audiences larger than some major political parties. Technology platforms possess vast amounts of information about users, their interests, and their behaviour.

After opening its economy and digital space, India hoped that American and other foreign companies would invest heavily in manufacturing and create jobs on a scale similar to what occurred in China. Those investments would generate employment, increase consumption, and create a self-reinforcing cycle of economic growth. However, the geopolitical environment has changed.

If it is indeed American policy to prevent the emergence of another China, then India must rethink its economic strategy and learn from China's experience. The world no longer operates according to the rules of the twentieth century. Just as Indian policymakers began to understand the old formula of growth through globalisation, the formula itself began to change.

Collectively, India has struggled to adapt to this changing environment. For many years, people continued to hope that economic progress would eventually improve their lives. Even when little changed on the ground, successive governments maintained public optimism that prosperity was just around the corner.

Today, however, many Indians feel that even this hope is fading. The belief that each generation would live better than the previous one is becoming increasingly difficult to sustain. When hope disappears, social frustration and political instability become much harder to contain.

(The author is an independent commentator.)