The government’s completion of one year has led to a surge in evaluations of its performance. But for an economy finally on a sustainable growth path, one year is not critical, although the recovery as government investment resumed and liquidity was injected does underline again that the demand-side cannot be neglected.

It is important, however, to understand why we are on such a path. Else with every slowdown critics and special interests come up with suggestions on major reforms that they say are a pre-requisite for Indian growth. But why create disturbances if the current formula is working?

The issue is that the formula is not understood well. It is not the typical East Asian FDI and export-led success story. Despite having many contributors, it has evolved accidentally.

Evolution-path

The Narasimha Rao government has to be credited for the liberalization that began the reversal of the incorrect post-independence choices discussed in the last op-ed. Opening the closed economy was essential as was their emphasis on a middle-path.

But there was still too much faith in market delivery. The government retreated towards rights-based social welfare with markets even expected to provide infrastructure. When this did not happen, public sector banks (PSBs) were pushed to lend to private infrastructure providers despite the asset-liability mismatches involved.

In the high growth 2000s, the government overspent on re-distributive schemes instead of building buffers. Indiscriminate opening led to an influx of cheap Chinese goods that decimated small firms. As unviable projects folded-up and inflation rose, macroeconomic fragility led to monetary, fiscal and financial tightening in the 2010s. Growth plunged.

The NDA continued many positive UPA reforms including tech-harnessing, such as through Aadhaar, but execution was much better. The long-promised but delayed GST, the Indian Bankruptcy Code and real estate regulation was implemented. PSB boards were freed but corporate governance strengthened.

A big difference was fiscal conservatism and movement to a better composition of government expenditure. Public spending on infrastructure expanded.

Social welfare continued, but now the emphasis was more on empowerment. Multiple insurance schemes created a safety net to encourage risk-taking.

The statistics are telling. Many estimates, including from the World Bank, show pervasive poverty is finally behind us. An initial measure gives 64.3 per cent of population as covered by a social welfare scheme compared to only 19 per cent in 2014. A 16-fold expansion of direct benefit transfers was achieved between 2009 and 2024 while reducing leakages by ₹3.48 lakh crore. The share of subsidies fell from 16 per cent to 9 per cent of government expenditure. Thus much better coverage came at lower cost, releasing funds for other uses.

There are policies to encourage trade as well as for domestic production in all three sectors —services, agriculture and manufacturing. There are schemes for innovation, skilling, employment, especially targeting women, youth, farmers and backward castes. But is there a coherent strategy these multiple government schemes add-up to?

Factors affecting growth

They amount to continuously increasing potential output while enabling greater participation in growth. As a result, inflation stays low. This enables monetary policy to smooth growth near a rising potential.

Given a huge population and relatively high government debt, productivity enhancing empowerment with targeted welfare transfers to the shrinking set of poor, is the only fiscally sustainable strategy.

Needs are many and it is easy to spend more as funds rise with growth. But then buffers deplete and borrowing costs rise. A disciplined growth-raising allocation releases more and more over time for productive spending. Stable high growth brings down debt and deficit ratios if the temptation to spend carelessly is avoided.

A billion plus population cannot all do the same thing. There is also safety in diversity. The standard development path sees the share of agriculture shrinking. But a stagnant and shock-prone agriculture had often put the brakes on growth as inflation rose.

At last, there are signs of modernisation and diversification in agriculture. As the food-basket expanded, the cereal-centricity of policy contributed to vegetable price spikes that delayed the necessary easing of interest rates. But change is happening and quietly reaching a critical mass.

Horticultural production has expanded from 60 million tonnes in the 1980s to 367.72 million tonnes by 2024-25, reaching 33 per cent of agricultural gross value added. These multiple production cycles sustain livelihoods for dense smallholder populations.

High tech start-ups are improving supply-chains and reducing waste. Drones and drip irrigation are making inroads. Biotech has promise. Many States have reached an advanced stage in liberalising marketing.

While technology, youth and skills give a natural advantage in service exports, manufacturing is necessary to move up value chains and reach middle income status. Various types of regulatory simplifications and policy support are showing results.

While R&D expenditure is much lower than that of developed nations with high per capita income, it is increasing. There is a sharp jump in patents. Innovation has created many start-ups. Successes in space and in defence production, with private participation, are creating large spillovers.

Just as outsourcing started with body-shopping, but has evolved to high value addition. Many kinds of global capability centres, including in R&D, are being set up here.

Green initiatives are prospects that also reduce oil dependence. India has large trade deficits with the East and surpluses with the West. The current rebalancing of FTAs towards the West may help a balanced expansion of trade. Protection against dumping is taken seriously.

Growing diversity and well-designed prudential regulation in finance makes for stability and the ability to absorb external shocks even while utilizing openness. Household savings have more avenues and are better allocated. There are alternative institutions and instruments for infrastructure finance. Banks can focus on retail and MSME lending.

MNCs who bought into the rising inequality story and focused on premiumization strategies targeting top income brackets lost out to local rivals who gave value propositions to burgeoning middle-classes in tier II cities.

High stable growth is finally expanding private jobs and investment, even as lower risk raises entrepreneurship. As jobs become more feasible and aspirations rise, people are more willing to invest in skills.

Rising domestic incomes are a reliable demand-source. Exports contribute but are inadequate as the only source. A large country has to develop its own strengths, especially in current geo-economic uncertainties.

Raising productivity requires good infrastructure and public services. All these, as well as regulatory simplification, have to percolate to State and local governments. Tech-based coordination and Central schemes are temporary stop gaps and should in time lead to true local capacity building and better governance.

The in-step dance of supply improvements supported by multiple demand-sources can continue to deliver. (The first part of this article was carried on June 3, 2025)

The writer is Emeritus Professor, IGIDR

Published on July 1, 2025