Another Indian government budget, another set of predictions that it’s India’s turn to shine. India’s been about to shine for almost 20 years, replacing Brazil as forever “the country of the future.” Nothing in India’s current policies or performance to date suggest anything like durably fast growth leading to national prosperity. Instead, it will muddle along, with partial success marred by unwillingness to reform.

The Indian government and foreign financials hawking investment products love to talk about how big India’s economy will be, someday. And, for a generation to come, India will easily outpace much richer economies like Germany. But it will not be nearly as large as some expect, and will remain far from rich. This isn’t because of transient issues like Adani’s accounting controversy, it’s about subpar policy. 

India’s best period of sustained real GDP growth started 20 years ago but lasted only five, when it averaged 7.9 percent gains 2003–7. In contrast, China held that pace for two decades. If China is too high a bar, try the US. India surpassed $1 trillion in GDP in 2007 and in 14 years added $2 trillion to that. Over the same period, American GDP added almost $9 trillion. Where are the most opportunities emerging?

If you (wisely) think GDP is overused, consider wealth. From 2007 to 2021, Indian wealth rose from almost $5 trillion to past $14 trillion, says Credit Suisse. The Chinese wealth increase over the period is put at $70 trillion, the American increase $80 trillion. Indian wealth almost tripled, enormously larger American wealth more than doubled. A per capita comparison, of course, is much more stark.

The likely counterargument is India will outperform going forward due to its young labor force. But this “demographic dividend” exists only in theory. In practice, Indian labor force participation is painfully low, and has declined during demographic expansion to date. In September 2022, labor force participation was 48 percent (versus historically weak US labor force participation above 62 percent).

The simple reason is extremely low participation by women, at 20 percent or so and, more important, falling. Why this is occurring is a matter of important debate but, absent a shift, there is little Indian demographic dividend to be had. And without it, there is no reason to expect sustained fast growth. The government’s principle response is to cite measurement errors—a sign of having no idea what to do.

One way to draw some women into the labor force would be to change labor laws. In most states, firms with more than 100 people can’t legally fire anyone without government permission. This strongly discourages hiring past that red line. The law protects existing employees at the expense of new employees India is counting on. It inhibits the scale needed for manufacturing and keeps idle a large chunk of the workforce.

Without a dynamic labor market, land policies are paralyzed. Reforms to sharpen agriculture property rights would raise productivity and income. But they would also mean excess farm workers and, unlike when China reformed in the late 1970s, excess Indian labor has no place to go. Agriculture reform has thus languished for three decades in favor of state intervention, keeping hundreds of millions underemployed and even now earning only $200/month.

Possibly the second most-cited reason for future Indian success, after demographics, is infrastructure. But infrastructure development has been cited as a reason to expect Indian success for more than a decade. In fact, it’s impossible to correlate higher infrastructure spending with faster Indian GDP, either contemporaneously or in the longer term.

The new budget itself belies optimism. Why does a supposedly thriving economy need endless large-scale borrowing? As with labor mobilization, agricultural productivity, and infrastructure boosts, India’s fiscal “glide path” is stuck, in this case on deficits worth around 5 percent of GDP when fast growth should bring surpluses. Prime Minister Modi calls India’s fundamentals sound; it’s hard to know what he means.

With Chinese economic weakness on display in 2022 and the world slowing in 2023, India hype may intensify. And India will outperform. But it’s not on course to reach lofty long-term goals, chiefly because its politicians have long lacked the nerve for needed change.

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