Terms of Trade: A five-point political economy problem for India
This edition of weekly political economy column outlines five key points that could anchor a thesis on India’s challenges
A weekly political economy column about to complete its fourth year is bound to struggle for ideas every once in a while. This is more likely to be the case during the end of the year when the news cycle slows and there is nothing immediate to cannibalize upon. This is the year-ender edition of the column and what it intends to do is lay down five broad points which can become a starting point for a political economy thesis when it comes to understanding the challenges facing India.
Inequality is only a necessary and not a sufficient condition for political instability
Every once in a while, we see an animated debate around how bad or not bad inequality in India is. There are claims such as it is the worst since the days of the British Raj made by some very eminent economists and there are numbers cited, sometimes selectively, to argue that things are actually not so bad and India has lower inequality than many major economies. The academics can continue to debate these things ad nauseum, but the politics of it is more important. The fact is that India has not had large-scale political unrest because of economic misery since the 1970s which eventually culminated in the Emergency. The reason for this cannot be found in Gini coefficients or other such statistical measures of inequality. What has kept the political temperature on inequality down is a three-fold palliative in post-reform India. First is a gradual expansion of the welfare net in terms of covering basic requirements such as food grains. The second is an increase in income for the underclass via migration, which although far from enough, is still higher than what they would be earning in their village farms. The third is a bipartisan political consensus against regulating migration (such as China) which among other things is also responsible for a lot of chaos in our cities.
But peace is not necessarily prudence on the political economy front
The angry young man who should have been fighting India’s inequality is not to be found at the barricades because he is busy delivering our biryani in the gig economy. The only rule-breaking he is willing to indulge in is vis-à-vis traffic rules rather than against the powers that be. Mundane as the job is, it is still enabling the gig worker to earn enough money to send something in the ballpark of ₹10,000-20,000 back home to the village. This is far from an insignificant amount even today in large parts of India and can make a difference as to whether your child goes to a private school and can you pay off a small loan which you took for doing up your government provided house or avoid taking a loan for getting your sister married. This would have been a perfect arrangement if it were sustainable for the entire working life of the representative migrant worker. But chances are, a decade of doing this kind of a job will take away the physical ability of the body to survive what can only be called India’s version of electric scooter mounted sweatshops. This physical ability window will close at a time which will coincide with our shrinking demographic dividend window. Our problem is we are not doing enough to handle this day of reckoning. If one were to use Marxist jargon and marry it with market jargon, India is kicking the can of social reproduction cost of labour down the road. This is a dangerous game to play.
Friend-shoring, both retrospective and prospective, will increasingly run aground
Sometime between the pandemic and before Donald Trump recaptured power, Indians were smug about the fact that we were going to get rich by default as the rich world wanted to pivot away from China. China plus one, friend-shoring etc. were words which entered the geo-economic lexicon during this period. Fast forward to today and this sounds like a fantasy. India is now the country with the highest tariff in the US export market, and even its service sector advantage is facing headwinds from a nativist backlash against immigration in the US. Trump’s flip-flops on the H-1B visa programme are currently in India’s favour but we should now know better than to trust him as India’s benefactor. If the political sentiment in other countries of West Europe is any example, the migration backlash is only beginning in the advanced capitalist world. Very few people in this author’s generation (the early 40s) would know someone who has made a fortune for themselves in manufacturing in India. But almost all of them beyond a certain level of material privilege know more than one person who made their fortune exporting services. Chances are, AI and migration will drag this down going forward. Not only does this mean slower growth (more on this later) it also entails fewer patrons for the biryani delivery person and his cousin who has an odd driving or cleaning job. To be sure, there are definitely some opportunities to be exploited in areas such as AI and GCCs, but it will take a lot for India to retain its leadership status like it did in pre-AI IT.
If you think this is all unnecessary doomsday scenario building, look at the subdued performance of the Indian stock markets this year. Financial Times reported last week that “the MSCI India index has returned 2.5 per cent in dollar terms this year compared with 27.7 per cent for the MSCI Emerging Markets index, India’s weakest relative performance since 1993”. The world has been going berserk on AI stocks this year and there is very little AI in the India portfolio. AI Bubble or when it will burst aside, this also poses serious questions about future drivers to India’s corporate growth and harvesting its fruits.
Growing protectionism does not mean India can’t harvest growth-boosters
This is the most important lesson to be learnt from 2025. I am writing this column on a day when China’s merchandise trade surplus crossed the $ 1 trillion threshold for the period between January-November 2025. A trillion-dollar annual merchandise trade surplus in a year was unprecedented in history until today. That China’s export surplus should have increased in a year when Donald Trump promised to up his economic war against the country speaks volumes about what drives trade: competitiveness not friendship. That Trump had to roll back tariffs on Brazil – he clearly hates the Brazilian government much more than his reservations vis-à-vis the Modi government in India – was an admission of cost-of-living difficulties in the US than his ideological change of heart. If India can make things cheaper than and better than other countries, it will still see a growth in its exports (and fall in imports) even if global trade does not grow at the same pace as earlier. Some of this is just a question of bringing the sweat shop workers on electric scooters to factories and also nudging their women counterparts into doing this work. This is not an original argument on my part, and has been made eloquently by economists such as Sajjid Chinoy. Things are moving on this front, but far too slowly.
India’s problem is an asymmetry of political economy incentives
This is the most difficult piece of the puzzle. India, today, is caught in a political economy quagmire. Democratic competition is pushing governments to offer more and more welfare measures to the underclass. While they are far from enough to make India an ideal welfare state like, say, the Nordic countries, they seem to be enough for turning political sentiment. This growing spending is coming at the cost of investment in areas which would boost future growth and structural drivers of poverty (think public health for example). While such palliatives are being used to perpetuate a centralised political regime at the level of both centre and states, our parliamentary form of elections still requires fielding intermediaries at the constituency level. The persons filling (and funding) these ranks across the political divide are more and more likely to come from a stable of capital which is either predatory in nature (taking too much to offer to little) or has vested interests in putting sands in the wheels of creative destruction without which the Indian economy cannot become genuinely competitive at the global level. If you are checking your Indigo flight or refund status while reading this column, you will get what I am trying to say. While we hear a lot about the big capital’s pervasive grip on the economy from the opposition in India, their silence on the local predatory capitalists is a tacit admission of their partial complicity in the perverted manner in which capitalism operates in India.
Conclusion
There are many who believe that reforms are the silver bullet for India’s material concerns. While reforms are indeed important, any argument which celebrates them without appreciating the extra-legal political economy disincentives to structural transformation is bound to end up on the side of disappointment. The question to ask, and answer honestly, is does India have a similar hunger for de facto rather than de jure reforms and are politics and democracy contributing to driving this appetite or killing it. Does India run the risk of becoming democratically defunct? This is a provoking question to ask, but worth asking in this author’s opinion, and a good one to close the year with.
(Roshan Kishore, HT’s Data and Political Economy Editor, writes a weekly column on the state of the country’s economy and its political fall out, and vice-versa)
