Why the Economic Slowdown Is Neither Surprising Nor Inexplicable
Many people seem bewildered by the sudden slowdown in India's economic growth. But, had you kept your gaze firmly fixed on India's policy-making, the slowdown would hardly be surprising, let alone inexplicable. Since public memory is short, here is a quick recap. For the first few years of prime minister (PM) Narendra Modi's tenure, India's economic policy was largely incoherent. India went through two governors of the Reserve Bank of India (RBI) and a finance minister who didn't exactly set the Yamuna on fire. 
 
The Union government's main focus was on a bunch of social schemes: Swacch Bharat, Jan Dhan, Digital India, Beti Bachao Beti Padao, Suraksha Bima, Jeevan Jyoti Bima, Atal Pension, Namami Gange and Soil Health Card. These, and the ‘economic’ schemes of that period like Make in India, Skills India, MUDRA loans and Startup India, were all heavy on slogans and propaganda but the impact on the ground was not game-changing.
 
With the economy continuing to hobble along (from the previous regime's missteps), the coup de grace was the demonetisation of high-value currency notes in November 2016 which devastated millions of small businesses and 1.5 million jobs. Then came the poorly planned and hastily implemented goods and services tax (GST). 
 
These two moves wrecked supply chains and hollowed out the economy in the adjustment period. By 2019, every economic indicator was flashing red: rising unemployment, poor export growth, punitive tax rates, tax terrorism, imploding public sector, and collapse in the gross domestic product (GDP) growth rate to 5% (effectively 3.5% under the old calculations). 
 
Dr Manmohan Singh, who had been the constant butt of Modi's jokes, gently pointed out that nominal GDP growth was at a 15-year low, household consumption at a four-decade low, unemployment at a 45-year high, bad loans of banks at an all-time high, growth in electricity generation at a 15-year low and so on. 
 
Businessmen were restless. TV Mohandas Pai, a vocal advocate for nearly every policy of the current administration, did not mince words when he sounded the alarm. "Tax terrorism has gone rampant. The compliance burden has increased massively. There is a fear psychosis," he lamented. "There's a prevailing belief among government officials that all businessmen are crooks and must be pursued."
 
His grim assessment of the business climate echoed across India's corporate corridors: "I have never seen mood and morale so down... Businessmen have given up hope." 
 
The late Rahul Bajaj, a titan of industry, was blunt: "There is no demand, and no private investment. So where will growth come from? It doesn't fall from the heavens." 
 
AM Naik, the head of Larsen & Toubro (L&T), suggested that India would be fortunate to achieve even 6.5% GDP growth. More tellingly, Mr Naik cast doubt on the reliability of official data, remarking that the "situation is challenging on data credibility."
 
A panicky government enacted a drastic corporate tax cut in September 2019, hoping to spark investment and job creation. Grateful businessmen held on to their tax savings rather than reinvesting them because of weak demand. And then came the pandemic which dealt a further blow to a weak economy. 
 
Data shows that growth between 2014 and 2022 — a period marked by the same PM and two finance ministers (barring interim stints by Piyush Goyal) — was driven almost entirely by government borrowing and spending. Indian households and businesses contributed a negligible share of this growth.
 
The economic rebound following the demand compression was sharp and, with the stabilisation of the GST system and improved tax compliance, government revenues surged. Capitalising on this windfall and adding massive borrowings to the pot, the government decided to go all-in. 
 
Budget 2023-24 announced a massive capital outlay of Rs10 lakh crore which was increased to Rs11 lakh crore in 2024-25, to be spent on railways, roads, urban transport, waterworks, energy transformation and defence production. The heavy hand of the state has rolled the dice of growth with a tax-and-spend model for two years now. 
 
Yet, in a society where the rule of law is weak, corruption is rampant, and red tape is entrenched, limitations to this strategy are obvious. Also, if tax-and-spend was expected to trickle down, it has failed; India's rural wages are stagnant which has wrecked consumption growth. 
 
Given that government expenditure has been the sole driver of growth—with neither private capital expenditure nor household consumption contributing meaningfully—when the government spending slowed down in FY25, the inevitable deceleration in GDP followed. As I said, the slowdown is neither surprising nor inexplicable. 
 
This, then, is the summary of Indian policy-making over the past 11 years and its impact. After the knee-jerk income-tax cuts of 2019, continuous increase in other kinds of taxes, and a flood of government capex since 2023, here is the report card:  the economy has ‘normalised’ to 5%-6% growth, exports and the rupee are weak, inflation and interest rates will not drop much and taxes will remain high. 
 
In other words, every single feature of India's lower middle-income status remains intact. On 1st February, we will have another Budget session. I have no idea what it will contain. What I do know is that it will not move the needle much. Fiscal deficit (states and centre put together) is high, limiting the scope of a further increase in government spending. Taxes will only be tinkered with, disappointing an already frustrated populace. 
 
We are likely to get more of the same as in the previous years, with exactly the same outcome.
 
(This article first appeared in Business Standard newspaper)
 
Comments
balakrishnanr
1 week ago
Our obsession with rate of growth. No one wants lower income disparity. No one talks of reducing government expenditure, reducing subsidies. Every politician is busy distributing freebies as if it is his father's jagir. Inflation measures are fake. The ruling cabal is busy helping their cronies. The Fin Min lacks any kind of independent thinking. Everything comes from a Mr Know All's office. But then we have a great Mahakumbh.
Meenal Mamdani
Replied to balakrishnanr comment 1 week ago
So true. As Marx said, Religion is the opium of the masses.
But I must commend the sagacity of our electorate which cut down the Mr Know All down to size. He was claiming to be an "avatar" sent by gods to rule India.
Unfortunately, the far richer and better educated American citizens were taken in by the bombast and outright lies and elected a rapist, convicted felon to become President of the US.
srini.kumaresan
2 weeks ago
People and main stream media are hyping/expecting some relief on personal taxes imposed. But in my opinion, it is funny to have such expectations on our FM. Because we had already seen the budgets in the recent years. And the questions raised will just be ignored by them.
akumarsingh1
2 weeks ago
A perfect analysis, and data misrepresentation has been an ongoing activity but seems there is an end point to how much can you play with the data to show a negative outcome as positive
Meenal Mamdani
2 weeks ago
Astute analysis as we readers have come to expect from this duo, Ms Dalal and Mr Basu.

I am surprised that this deceleration is happening on the watch of Gujaratis who are astute business people.

I think the answer lies in 2 things, twisted and harmful ideology and laziness.

Hindutva ideology is the primary driver of this govt's plans. So rather than paying attention to helping MSME, the govt is busy finding ways to crush the minorities, particularly the Muslims. Every effort is made to drive the Muslim out of business whether as hotel owners, or petty traders, etc. GoI should encourage all MSME as they are the job creators.

Laziness comes from having an assured vote bank among the upper caste and upper class Hindus as well as those in classes below who want to ape the rich. As long as the ministers keep creating diversions by tearing down a mosque to build a temple, lynching Muslim men on suspicion of cow slaughter, preventing Muslims from participating in economy of the nation, the populace keeps electing BJP candidates. Why should a politician do the hard work of improving the economy as long as she/he gets elected by maligning the Muslims?

I don't think BJP is capable of changing its behavior. In America, the South was and remains to an extent racist, but even there the Republicans who dominate the South have made efforts to tamp down their hateful rhetoric against colored people so that economic progress occurs in the country.

It is funny but sad to see the Indian diaspora appealing to the govt for protection from racism and become rabid anti-Muslim ideologues when they visit India.
Budget 2025: Ease of Living or More Disappointment?
Sucheta Dalal, 24 January 2025
As India gears up for the Union Budget on 1st February, the lofty slogans and promises of ‘Viksit Bharat’ (developed India) are looking increasingly hollow. After a decade of ‘rapid progress,’ the middle class, considered the backbone...
2025: The New Normal Returns
Debashis Basu, 03 January 2025
In early November, I wrote a piece suggesting that the Indian economy is functioning as expected: muddling along. It rarely falls into a full-blown recession, but it also struggles to achieve sustained acceleration. This observation...
Route to Viksit Bharat: Make in India for the World
Debashis Basu, 20 December 2024
In the mid-1990s, when Indian corporates were struggling to handle an economic slowdown and high interest rates, I had developed a simple rule of thumb to filter high-quality companies: Does the company earn a significant part of its...
Array
Free Helpline
Legal Credit
Feedback