Comment on “Indian Economy: Performance, Policies, Politics, Prospects and Challenges”

Abstract

The Panagariya (2025) paper on India's economy is structured around four key areas: performance, policies, politics, and future prospects. These comments follow the same structure.

The discussion on India's economic performance in Panagariya (2024) largely revolves around economic growth. However, an alternative periodization of India's economic growth phases since 1951 can offer a different perspective (Datt and Swamy, 2024). Particularly notable is the economy's slowdown prior to the COVID-19 pandemic, with growth in Gross Value Added (GVA) declining over seven successive quarters from 7.1% in Q1 2018-19 to 3.4% in Q3 2019-20. Alongside this, private consumption growth and investment also fell, indicating a broader economic slowdown.

There are also concerns about the accuracy of recent official growth statistics, especially for the post-pandemic period, where the gross domestic product (GDP) deflator's inflation rate seems out of sync with the consumer price index (CPI). The discrepancy suggests that actual economic growth may be slower than reported, a hypothesis supported by sluggish private consumption growth.

Furthermore, GDP/GVA growth alone is an insufficient metric to assess economic performance. Rising inequality since the 1990s implies that the growth rate for the bottom 50% of the population is well below that of GDP. Real rural wages and earnings for regular and self-employed workers have stagnated or declined, contrasting with the supposed “V-shaped” recovery in GDP/GVA.

Most of the discussion on economic reforms and political economy in Panagariya (2025) spans the tenures of six prime ministers since the early 1990s, four prominent ones being: P.V. Narasimha Rao, Atal Bihari Vajpayee, Manmohan Singh, and Narendra Modi. In a nutshell, Panagariya gives high credit to Narasimha Rao, a high distinction to Vajpayee, an unsatisfactory grade to Manmohan Singh, and a distinction to Modi though with a slap on the wrist for recent backsliding on trade openness. He also laments the enduring influence of Nehru's socialist policies on current economic policymaking, though judgements may differ on how socialist and enduring this influence has been.

While there are points of agreement with this analysis, some differences are notable. For instance, Panagariya's unsatisfactory assessment of Manmohan Singh's tenure (2004–14) seems somewhat unfair. While there were missteps, such as the 2012 retroactive amendment to the Income Tax Act, significant progress was made on economic reforms, particularly in the first 7 years. The Right to Education Act (2009) and the Land Acquisition Act (2013) as examples of “backsliding” of reforms seems incorrect.

Additionally, several reforms enacted in later regimes had their foundations laid earlier. The Goods and Services Tax (GST) and Aadhaar are prime examples. Although initially opposed by the Bharatiya Janata Party (BJP), both reforms were eventually implemented and became central to India's economic policy.

The discussion on future prospects and challenges in Panagariya (2025) is less comprehensive than expected. It posits that India, having grown at an annual average rate of about 10% in current dollar terms from 2003–4 to 2022–3, “can sustain this level of growth for several decades.” The optimistic scenario is tempered by the fact that 45% of the workforce is still in the agricultural sector, and urbanization has been slow. Contrasting it with the experience of South Korea and China, Panagariya locates the cause for this in India's growth process being dominated by capital- and skill-intensive sectors. The solution proposed is to make growth more inclusive by better integrating labor and capital, leading to “more effective use of the abundant factor, labor.”

Three observations can be made in relation to this discussion. First, on growth measurement, it is unclear why growth in current dollar terms is emphasized over growth in real rupees, which is more relevant for the standard of living. Given India's growth slowdown since 2017–18, the prospect of sustaining near double-digit real growth remains uncertain. Second, on lessons from other countries, drawing comparisons with China or South Korea on low-skill labor-intensive export-oriented industrialization may be misguided, as global supply chains have changed dramatically, with margins in the pure manufacturing segment decimated by the early movers. India may have missed the manufacturing bus, and, as recently argued by Rajan and Lamba (2023), future growth may need to pivot from “brawn to brain” by focusing on high-value direct service exports and new manufacturing-embedded-service products for both domestic and foreign markets that leverage emerging technologies. Third, Panagariya's discussion omits several critical challenges that are instrumentally or intrinsically important, such as environmental degradation, climate change adaptation, energy transition, rising inequality, governance issues, quality of human capital formation (education and health care), and transparency of reliable data. Each of these opens up a large reform agenda, without addressing which it is difficult to see how the optimistic visions for India's economic future could be realized.