India’s Lost Decade – and How It Can Be Reversed

Thursday, October 3, 2019

India’s economic slowdown is structural rather than cyclical. Its leaders failed to "repair the roof" when the sun was shining, writes Vasuki Shastry of Chatham House. To avoid another lost decade of complacency, the country needs to implement meaningful reforms that will bring benefits over the long term instead of short-sighted remedies.

India’s Lost Decade – and How It Can Be Reversed
In need of a pull-up: With the recent economic downturn, India could be settling into a structural slowdown - can its leaders implement necessary reforms such as meaningful measures to promote manufacturing? (Credit: Hari Mahidhar /

At first glance, it might be absurd to suggest that India has witnessed a lost decade in terms of economic opportunity and outcomes. India has routinely featured in global rankings as the world’s fastest-growing large economy. Surely India’s growth outcomes cannot possibly be compared with Japan’s lost decade of the 1990s, when the economy was stagnant for more than ten years.

A country’s success, however, cannot be measured by GDP growth alone, and India’s recent economic travails serve as a prime exhibit of complacency and a political class not attune to the shifting tides in the global economy. This is not just an indictment of Prime Minister Narendra Modi and his ruling Bharatiya Janata Party (BJP) government, which won two successive election victories in 2014 and 2019. In 2009, the opposition Congress Party had also secured a record second mandate from the electorate.

There are striking similarities to the ways the Congress- and BJP-led governments frittered away their mandates. In its second term to 2014, the Congress government was consumed with scandal and very little was achieved in terms of substantial economic reforms. It is therefore ironic for Modi’s predecessor Manmohan Singh to wade into the public debate, as he did recently, and castigate the government for its poor economic management. There is plenty of blame to go around.

With an ill-advised demonetization of the currency in 2015 and a botched introduction of a value-added tax as its signature achievements, the BJP’s own economic record has been patchy. While the economy has been chugging away since 2009 at a robust GDP growth of 7 percent or more, a dangerous complacency set in.

India is now paying the price. The most recent quarterly data, released on August 30, shows GDP growth shrinking to 5 percent and key economic indicators are under stress – automobile sales have plummeted, consumer demand is weak, and the financial sector is virtually non-functioning, with a sharp rise in non-performing loans and tightening liquidity conditions. The Modi government has also diminished – and damaged – the credibility of the Reserve Bank of India (RBI) with two abrupt exits by governors under its watch, confirming fears that the central bank could become the financing arm of the government.

India used its recent run of strong economic growth to delay economic reforms and to stall a restoration of its broken financial system. The government ignored the appeal in 2017 by then-managing director of the International Monetary Fund (IMF) Christine Lagarde for countries enjoying good times to “repair the roof” while the sun was shining. In failing to secure its roof during the boom since 2009, India has endangered the stability of the entire house.

India’s defenders point out that even 5 percent growth is decidedly superior to outcomes in most other large nations. This misses the point. High growth matters to a large, developing economy like India where an estimated 20 percent of the 1.5 billion population still live in chronic poverty. There are alarming indicators of stalled social mobility, a sharp fall in female participation in the workforce, and the concentration of wealth in a tiny unaccountable business elite.

The gravity of the economic slowdown appears finally to have shaken up the Modi government. Recent announced remedies include consolidating the number of state-owned banks, a promised relaxation of rules allowing greater foreign investor participation in closed sectors such as aviation and media, and fiscal measures to kick-start economic growth. The most notable measure is a reduction in the corporate tax rate from about 35 percent to an effective 25 percent, making India as competitive as many of its ASEAN neighbors. The finance minister has promised other reforms but details are sketchy.

Actions by the Modi government will determine the pace and trajectory of economic growth for the next decade

The Indian government seems to treat the current slowdown as cyclical in nature rather than structural. They are counting on a recovery in time rather than accept that a more fundamental fix is essential. Yet it has become abundantly clear that India is in the midst of a structural economic slowdown and policymakers need to address policy deficits for long-term benefit rather pursue short-term band-aid solutions. There are three areas requiring attention:

  • India needs a radical overhaul of its financial system. Tinkering with the absolute number of state-owned banks will not resolve the issue. Credit is misallocated, there are serious governance lapses as evidenced by recent scandals, and state-owned banks need a massive infusion of capital to remain compliant with global standards. Liquidity has also seized up at India’s non-bank financial sector, setting in motion a tightening in credit conditions. After similar mis-steps, Chinese policymakers have recognized that the country needs a diverse group of financial players in the economy, including foreign entities. India is unlikely to follow that prescription, suggesting that the financial system will remain in limbo, unable to support economic recovery.
  • India is trailing behind in frontier areas such as artificial intelligence (AI), machine learning and robotics. A generation ago, major Indian information technology (IT) companies Wipro, TCS and Infosys were world leaders in cutting-edge technology, positioning the country as a services superpower and global back office. That edge has narrowed as the focus has shifted to Fourth Industrial Revolution technologies and AI-related innovation, in which China and the United States excel and enjoy an impossible lead. It is a puzzle why India’s IT giants and the government have stumbled on AI and machine learning, when India’s huge population and the introduction of biometric identification could have served as a building block for innovation.
  • In 2014, Modi positioned India as a major manufacturing destination through his Make in India campaign. No country has made the journey from low- and middle-income to high-income economy without a strong manufacturing sector that generates a significant number of jobs and is a major driver of growth. India was hoping to be an exception by making the vault through its services prowess. While Modi made a wise course correction, Make in India has remained a slogan. For example: an early effort to allow foreign and Indian private-sector participation in the defense industry has been mired in a scandal involving the acquisition of French fighter aircraft.

It is no exaggeration that the Indian economy is at an important crossroads and actions by the Modi government in the months ahead will determine the pace and trajectory of economic growth for the next decade. India has a lot going for it – a small but rising middle class, a significant demographic edge over China, and a population under-served in terms of access to goods and services. By these yardsticks alone, the economy should be expanding at a more robust pace. Instead the economy has slowed down, showing that deeper, structural obstacles are at play. Modi sees himself as being India’s most transformative leader, perhaps even surpassing the record of the country’s first leader, Jawaharlal Nehru. But if Modi continues to stumble on the economy, that aspiration will be out of reach.


Further reading:

Gill, Indermit. (January 22, 2019) “Joyless growth in China, India, and the United States”, Brookings Institution, USA.

Jaishankar, Dhruva. (May 17, 2019) “India 2024: A global India”, Brookings Institution, USA.

Kapoor, Amit. (September 9, 2019) “The dynamics of India’s growth slowdown”, The Economic Times, India.

Opinions expressed in articles published by AsiaGlobal Online reflect only those of the authors and do not necessarily represent the views of AsiaGlobal Online or the Asia Global Institute


Vasuki Shastry

Vasuki Shastry

Chatham House (The Royal Institute of International Affairs)

Vasuki Shastry is associate fellow in the Asia-Pacific Programme of Chatham House, The Royal Institute of International Affairs. He is the author of Has Asia Lost It? Dynamic Past, Turbulent Future, published in March 2021 by World Scientific. He began his professional career as a journalist in his native India and then in Singapore and Southeast Asia. He has since held senior positions in communications and public affairs at the International Monetary Fund (IMF), the Monetary Authority of Singapore (MAS), and Standard Chartered Bank, where he was global head of public affairs and sustainability until November 2018. His book Resurgent Indonesia: From Crisis to Confidence was published by Straits Times Press in 2018. His next book, which will be on the ESG (environmental, social and governance) movement, its promise, potential and pitfalls, will be published by Emerald Publishing in June 2023.

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