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

Panagariya (2025) provides a cogent summary of the performance of India's economy and the policies that shaped them and concludes with an optimist prognosis of India's future prospects despite some enduring challenges. These comments focus on three issues highlighted in the paper, continuing versus change, from socialism to statism, and future prospects, focusing particularly on the past quarter century.

There is broad agreement that 1991 was a decisive break point in Indian economic policy. Subsequently, however, and especially after 1998 when the Vajpayee-led National Democratic Alliance (NDA) government came to power, while each new government advanced new programs and projects, changes in economic policies writ large, have been more incremental. Indeed even many programs have seen continuity although the pace of change has varied. Thus, the Vajpayee-led NDA government launched a countrywide rural roads and highway construction program, which expanded over the next decade under successive governments. Indeed many public programs, be it housing, village electrification, drinking water, and sanitation, have been in existence for decades, but progress was lethargic. What changed under the Modi government was the ambition—universal coverage—and the rapid pace of implementation.

Similarly, the United Progressive Alliance (UPA) government launched the National Rural Employment Guarantee Scheme (NREGS). While much critiqued at the time, the program continued under its successor NDA government and had large positive externalities on rural wages and poverty, besides providing a safety net during the COVID years.

The continuity is also reflected in two major achievements of the Modi government—digital public infrastructure (DPI) and Goods and Services Tax (GST). The foundation of DPI—the universal biometric ID, Aadhaar, as well as the intellectual groundwork of the GST—were initiated by the predecessor government. Indeed continuity rather than disjuncture has also been the hallmark of India's economic growth in the past quarter century, which has not been especially different across different governments (and was probably strongest in the first post-2000 decade).

On policies, while there has been steady liberalization in a wide range of sectors that were hitherto taboo (including defense), the now chronic high fiscal deficits are emblematic of both an entrenched political economy and a tenacious dirigisme that is the DNA of the Indian state, no matter which government is in power. General government final consumption expenditure as percent of gross domestic product (GDP) was 10.4% in 2004 and 10.3% in 2013 (the last years of the Vajpayee and Manmohan Singh government's, respectively) and 10.3% in 2022. Capital employed in central public sector enterprises (CPSEs) expanded from ₹5 trillion to ₹17.7 trillion and then ₹38.2 trillion over the same period. Six of 10 largest Indian companies (by market cap) in 2023 were CPSEs. Between 2014/2015 and 2020/2021, the government infused ₹3.37 trillion (more than $50 billion) to shore up the balance sheets of public sector banks. While the UPA government stopped privatization initiated by the Vajpayee government, progress under the Modi-led NDA has also been tepid. If we add to this mix the revival of industrial policy, more interventionist trade policies, and regulatory unpredictability, statism continues to thrive in India.

The endemic statism—and its costs—are even more evident in agriculture, which even today employs the largest fraction of the labor force. Over the past three decades agriculture sectors which have less government intervention—horticulture and livestock (which are also more nutritious)—have grown substantially faster with a growing share in Indian diets. Yet public policy in India—across all governments—has been obsessed with the principal cereals (wheat and rice), which are lavished with subsidies, both on a range of inputs as well as outputs, even as their share in household consumption has been declining and mounting ecological damage.

Panagariya is somewhat sanguine about the India's growth prospects. As multinational corporations geared for a China+1 strategy, India should have been the logical top option. While some shift has occurred, smaller economies like Vietnam have done much better, with foreign direct investment (FDI) into India declining substantially in the last few years. Concurrently, domestic private investment has also declined (as share of GDP) in the last decade and, contrary to expectations, the large increase in public investment in infrastructure has not “crowded in” private investment.

Darkening geopolitical clouds can short-circuit exports, which have been an important engine of India's growth. India is not part key free trade agreements (FTAs) that would include it in global supply chains. It is also poorly equipped to cope with the medium- to long-term uncertainties due to climate changes.

India's most abundant resource is its people and through the rest of this century, it will remain the world's largest country by population. Yet it has done a singularly poor job in substantially improving its human capital, evident in poor learning outcomes at all stages of education and high morbidity rates.

Despite rapid growth, structural transformation been tepid, a consequence of entrenched problems rooted in the country's political economy. Many of these—agriculture, urbanization, electricity, water, education, health, environment—require coordinated actions by both the central and state governments. But the manner in which India's political economy has been evolving, with greater centralization at both the federal and subnational levels, have weakened the institutional mechanisms to bring this about.