Terms of Trade: The fault in our stars

India’s much celebrated stability is not leading us anywhere closer to solving our long-term problems. It could actually be making us complacent

That India is being able to maintain more than a modicum of internal stability amidst a world that is going up in flames has become a cliché of sorts in the past year.

Barring the small continent of Australia, there isn’t one place in the world which isn’t going through extreme turbulence. (Representative photo)

The latter part is of course true. Barring the small continent of Australia, there isn’t one place in the world which isn’t going through extreme turbulence. The Americans are dealing with deeply destabilising interventions by President Donald Trump both inside and outside the US. His economic actions are, of course, sending shock waves beyond the continent. Europe would have spent four years with a war raging in the continent in February and an equally long cost of living crisis and associated political instability. South Asia, our immediate neighbourhood, continues to be turbulent, with at least two of our neighbours – Bangladesh and Pakistan – becoming more adversarial vis-à-vis India than they have been in recent history. West Asia is at the cusp of descending into anarchy, so much so, that even its traditional rivals are wary of the Iranian regime losing power after the recent unrest. At the time of writing this column, US’s west Asian allies seemed to have convinced Trump to not do a military intervention in Iran.

All of these disruptions, of course, are in addition to the now entrenched great power rivalry between the US and China where the latter seems to be sitting out territorial disputes but winning or gaining in material battles as far as physical production and strategic prowess is concerned. That China ended 2025 – a year when Donald Trump tried to escalate US tariffs on China to triple figures – with an unprecedented trade surplus of $1.2 trillion is the biggest proof of this.

Let us take a more critical look at the first part of the cliché now. India’s numbers look good, especially in a relative sense, when we examine things such as gross domestic product (GDP) growth rate, inflation, debt-GDP ratio, fiscal deficit etc. That macroeconomic balance has been preserved without precipitating political anarchy is even more commendable. To be sure, there are some signs that some of this balance is being preserved at the cost of long-term fiscal sustainability, especially at the level of the states, but this is unlikely to have a crippling impact as of now.

None of what has been described above is unknown. However, there is a more provocative question waiting to be asked. Are the achievements of this larger political-economy stability enough for India? The short answer is an unequivocal no.

A vastly unequal economy in the ballpark of 6.5% headline growth over the next couple of decades isn’t going to lead to a very different and better kind of India than we see today. It will basically entail an extremely skewed growth, both across geographies and people, along with a vast mass of economically precarious population which is seeking subsistence by balancing between drudgery and economic palliatives. This is not to say that there will be no wealth creation in the economy. But wealth creation will be more via the Stalinist dictum of quantity that has a quality of its own – you can become a billionaire delivering biryanis or getting a miniscule commission on people’s SIPs in this country – rather than unlocking global dominance or leadership for the country at large.

The lack of a cutting edge, indispensable attribute for India is one of the biggest reasons for our power asymmetry vis-à-vis Donald Trump’s US compared to what it is now between US and China. The advent of AI and its scaling up in various economies activities and the growing anti-immigrant sentiment in the West, especially the US, will only worsen this predicament as far as India is concerned.

To be sure, even this is not really unknown. The question, however, is what is to be done?

The cliched answer, once again, has been reforms, which we have been doing for the last three and a half decades and still seem to be doing. Sure, there have been benefits of economic reforms in India. This is best seen in the graph given below which shows that our five-year-moving-average GDP growth ballpark did go up a couple of percentage points in the post-reform period.

The problem, however, is a couple of percentage points higher isn’t good enough as far as solving our long-term problems is concerned. Incremental reforms will only lead to incremental gains in our quest to push up long-term growth on a sustained basis.

Here is a line of reasoning which could sound a bit harsh. We often hear that private investment is yet to see a large-scale revival in India because of demand constraints. Boosting demand in a country the size of India is not something which is easy. Even if the government were to increase its fiscal deficit by a couple of percentage points in the forthcoming budget – it would send financial markets into a frenzy – there is only so much demand boost and only for so long which would be generated.

In other words, India can only run faster on a model where the investment horse pulls the demand cart rather than the other way round. This only leaves aggressive import substitution as an avenue to channel investment in the domestic economy by creating production capacity which replaces imports with domestic production.

Imports only make sense when they are cheaper, unless they are natural resources such as crude oil or of a technological prowess which is beyond a country’s ability. Our overall import basket does have a lot of these two kinds, but there are many things which can be produced at home easily, although not as cheaply as, say, China. This kind of a policy could very well lead to some inflationary tailwinds initially. But some extra inflation in the economy would not be a bad idea if it did trigger private investment and also created some employment with a potential to unlock value creation and manufacturing prowess.

The cynics will of course argue that unless the government itself takes up these investments you cannot force private capital to do so. In an ideal world, the argument is right. But nation-states rarely become powerful in ideal circumstances.

What if the government were to issue ultimatums to capital to do what it wants to get done? The typical liberal will once again call it a vitiating of the free-market spirit and economic rationality. Such rationality talk must be confronted with the counterfactual that this so-called rationality will keep pushing capital to seek attractive returns in investment avenues which are either speculative or targeted outside the economy. Of course, it is also perfectly rational for a small clique of businessmen in the country to corner gains by purging competition in regulation heavy or high entry barrier sectors such as infrastructure rather than invest their resources in facing international competition to boost the country’s overall strategic prowess. One of India’s biggest industrial houses shelved its battery making plans because a Chinese firm did not share the technology. How much have India’s business leaders spent in R&D trying to develop such technology at home?

In many ways, this is what the Chinese state did in the recent past when it put entrepreneurs in their place who were becoming larger than life but indulged in activities which the state did not see as adding to the productive capacity of the state.

Why has the Indian state not cracked such a whip on its capital despite some musing from its highest quarters which suggest that it has not been happy with it holding back on investment or shirking from its role in boosting India’s overall manufacturing prowess?

Democratic and rule-of-law niceties aside, there is an important difference in the relationship between capital and the state (at various levels) in India and China, namely political finance. Has capital been allowed to seek easy ways for wealth creation without having to face the more difficult game of ruthless competition leading to creative destruction because it is indispensable when it comes to political finance in India? Has this vice become the key driver of our larger political economy rather than a problem of a handful of politicians and parties or so-called lack of reforms?

The global environment has only turned turbulent after the current government spent two full terms in power. It is a government which claims to be committed to radical overhaul of India’s larger political economy from day one. The fact that things have not changed drastically compared to what they were earlier, suggests that India’s problems are more structural than either of the political camps want us to believe. A lot of the debate on these reasons is more shadowboxing than taking the bull by the horns.

It is useful to end the column with a sentence from Shakespeare. “Men at some time are masters of their fates: The fault, dear Brutus, is not in our stars, But in ourselves, that we are underlings”.

Maintaining this low-level-equilibrium style stability is not going to solve India’s problems. What we need is a big and deep shake up of the system in a way which will generate urgency in the system even some might see as instability. Such a shake up will not be confined to a few basis points of change in the level of fiscal deficit.

(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)