Is India Broken?

An endangered democracy produces GDP growth but is short 200 million jobs.

In November Morgan Stanley called the 2020’s “India’s decade”. The world’s largest country, they said, is poised for a boom that will double the size of its economy and stock market. 

Perhaps sensing it might be out-sloganed, in December McKinsey said “I’ll see your decade and raise it a century”. They published a 140-page blueprint for India to become a “talent factory to the world”, using the URL “india-century.com”.

These reports caught my attention because one of my goals for 2023 was to learn more about India. Would “the world’s largest democracy” side with the West in terms of valuing political freedom over autocracy? Could its vast, young labor force integrate into the global economy and create the same deflationary forces as Chinese workers had over the past decades? 

So when Indian economist Ashoka Mody published a new book about the country’s history and prospects, I was pumped. Then I saw the title - India Is Broken - and I was like, oh no that doesn’t fit the narrative!

I filed it in my “maybe” folder and moved on.

Then, over the next few weeks, nagging anxiety. The kind I’d experienced in the past when coming up with reasons to skip my kids’ parent-teacher conferences. You know, avoiding something because the message wasn’t going to be pleasant.

Eventually I bit the bullet and read Mody’s book. I’m glad I did.  We discussed it on this Top Traders Unplugged podcast.

Two Indias

Mody’s message is that there are two Indias. There is the Morgan Stanley/McKinsey India of ambitious, bright and well-educated professionals successfully competing in the global market. They are backed by a business-friendly government investing in a world-leading digital infrastructure. This is the India driving GDP growth.

GDP measures income, but says nothing about how it is distributed. This is where the second India - something like one billion people - appears. As the graph below shows, amongst large countries only South Africa is more unequal in terms of income share accruing to the wealthy.

In 2011, around 22% of Indians lived below the poverty line of $1.90 per day. Another 40% lived on less than $3.20, not “technically” impoverished but, as Mody says, just one illness away from it. 

The second India is so poor because the economy can’t create enough jobs for its expanding population. Other large Asian countries, starting with Japan and moving through to China and Vietnam, have gone from poverty to prosperity through an educate and export model.

But India chose a different path and, once on this path, the power and rewards accruing to the first India were so large that it has proved impossible to shift. Mody calls India’s approach a “temples” development strategy. The “temples” were initially a small group of high-quality universities and large industrial projects. They produced world-class scientists and engineers, but nowhere near enough jobs to generate universal prosperity. 

This created a jobs deficit that has grown and grown. How difficult is to secure a decent job? In 2019, 12.5 million Indians, almost all with college degrees, applied for a range of mundane railway positions.  The acceptance rate?  0.3%.  In case you’re wondering, Harvard’s acceptance rate is 4%. Mody calculates that India’s economy will need to generate 200 million new jobs in the next decade to employ all working-age Indians, a task that he calls “nearly impossible”.

World’s Largest Democracy?

The jobs gap has consequences for India’s democracy as well. Like in all countries, young men with too little money and too much time are susceptible to blaming their situation on others. Mody describes a world where rather than hold politicians responsible for the failure to create jobs, they instead become foot soldiers in the Hindutva nationalist movement. 

The current prime minister, Narendra Modi, has been part of this movement from a very young age and in 2005 he was denied a U.S. visa for his role in religious persecution. Modi came to prominence by promoting a modernized version of the “temples” strategy which pushed large-scale infrastructure projects run by conglomerates with close financial ties to state-owned banks. This strategy produced growth and plenty of favorable press in the FT and The Economist. But its top-heavy focus failed again to generate many jobs and, Mody claims, it also led to vast environmental degradation - what he calls “marauding development on steroids”. 

The lack of good paying, urban jobs has a darker side. Underemployed young men face overwhelming incentives to work for criminal gangs to make ends meet. Criminal organizations accrue power and wealth, allowing them to influence and even control politicians. This graph from the book paints a stark picture - by 2019, 25% of India’s elected parliament faced “serious” criminal charges. 

The result has been a downgrading of India’s democratic status. The Economist Intelligence Unit labels India as a “flawed democracy” and Sweden’s Varieties of Democracy Institute now considers it to be an “elected autocracy” - regular elections are held but individual rights are not protected. The World Press Freedom index ranks India’s press as less open than Hong Kong and only marginally more free than Russia. Just today Adam Tooze posted about the Indian government’s campaign to close the Center For Policy Research, which he says is akin to our government forcibly closing the Brookings Institute.

Mody claims that government interference has infiltrated economic statistics as well, with both published GDP and employment growth rising inexplicably. The government rejected its own report that showed poverty rising beyond 2011 statistics I quoted earlier and the 2021 census was postponed with no replacement date.

I don’t know enough to offer any meaningful critique of Mody’s story. Listen, read, make up your own mind and let me know what you think. I’m keen to hear your comments.

Globally, one out of every five people under the age of 25 lives in India. In that sense McKinsey is surely right that this is the Indian century, and all of us have a stake in making sure its democracy’s century as well.

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