The Reality and Illusion of the Indian Economy

Ladies and gentlemen, India’s economic data has always been baffling. According to official figures, with a GDP of $4 trillion, it maintains high growth—second only to China’s at its peak—and is reportedly on track to grow by 7.7 percent this year. But can these figures really be trusted? Think about it: if even the American Enterprise Institute (AEI) doesn’t buy into them, what does that tell us? Mr. Derek Scissors of the AEI—an expert with an in-depth understanding of China’s global investment strategy—wrote an article that directly debunks the inflated nature of India’s economic growth. He raised well-founded questions regarding statistics, employment, and policy. First, let’s look at the macroeconomy. Last year, India reported a real economic growth rate of 7.1%. This year, amid the tariff war, India has been complaining bitterly—yet despite the complaints, its reported growth rate has actually increased rather than decreased. The issue of inflation is even more of a headache. Nominal GDP growth stands at 8.9 percent—lower than last year’s 9.1 percent and the lowest since the end of the pandemic. The gap between real and nominal GDP requires adjusting for the GDP deflator. But the calculation method for this difference is nothing short of magic. In fact, India’s GDP calculation methods have fluctuated in recent years—shifting from first calculating real growth and then deriving the nominal value, to first calculating nominal growth and then using a deflator to derive real growth. This statistical approach misinterprets falling raw material prices as increased output. Furthermore, India lacks a Producer Price Index (PPI) and relies instead on the Wholesale Price Index (WPI). When international commodity prices fall, India’s WPI turns negative, which is interpreted as deflation. Consequently, prominent economists such as Arvind Subramanian argue that India has chronically underestimated inflation, leading to an overestimation of real growth by at least 2 percentage points. Even electricity generation figures show that growth in fiscal year 2026 was only 1 percent, falling below GDP growth for several consecutive years. Political motives behind this cannot be overlooked. To maintain its legitimacy in power, the Modi administration has no choice but to make empty promises, hyping India as a “cheaper alternative to China” to attract foreign investment. Yet the gap is undeniable. From 2012 to 2024, India’s GDP doubled, whereas China’s grew by 600% over the same 12-year period when per capita levels were comparable. When measured in rupees, the picture is even bleaker, given the currency’s long-term depreciation. Now, let’s talk about employment. India’s greatest source of pride is its so-called “demographic dividend.” As long as everyone has a job, there is hope for the future. Consequently, the official unemployment rate is very low: last year, the unemployment rate for those aged 15 and older was reported to be as low as 3.1 percent, and in rural areas, as low as 2.4 percent—a picture of a thriving job market. But the devil is in the details. The Indian government has redefined “employment”: anyone who works more than one hour on any single day of the week is considered employed. This statistical threshold is absurdly low—just a few dozen hours a year is enough to be counted as employed for the entire year. In fact, in 2024, Indian women worked an average of 71 minutes per day; by India’s standards, they are all considered employed. Yet this meager income is nowhere near enough to support themselves. During the pandemic, when people were theoretically unable to go to work, the unemployment rate should have risen—yet India’s actually fell. Many lost their formal sources of income and returned to rural areas, took on household chores, started their own small businesses, or set up street stalls—all of which were counted as employment. The World Bank estimates that last year, India’s agricultural population accounted for 42% of the total labor force—the same as in 2017, before the pandemic. In reality, this is a warning sign for India’s economy, as the country is unable to create 8 million non-agricultural jobs annually to absorb its growing young population. With large numbers of people unable to find work in cities, they are forced to return to rural areas. This should be seen as a setback for industrialization, yet in employment statistics, it is instead interpreted as a success. The demographic dividend has a limited timeframe; only by completing industrial upgrading before it disappears will India have a chance to achieve leapfrog development. India’s median age is projected to rise from 21.2 years in 2000 to 28.8 years in 2025—the ideal peak level. Over the next 25 years, as birth rates decline, the median age will rise to 38.3 years, essentially reaching U.S. levels. In other words, the window of opportunity for India to leverage its demographic dividend to boost productivity will gradually close. The problem now is that those who scrape by on odd jobs—lacking a steady salary and excluded from the social security system—will eventually grow old, creating a heavy burden. Why has this problem arisen? This brings us to the third point mentioned in the report: the challenges facing industrialization. India’s trade deficit is projected to reach its second-highest level on record in 2026, while the surplus in trade in services continues to expand—clearly indicating a major problem in trade in goods, specifically manufacturing. As a population superpower, India accounts for nearly 18% of the global population, yet its share of global manufacturing exports stands at only 1.8%. The depreciation of the rupee should have benefited exports, but India has failed to capitalize on this trade opportunity. Very few foreign companies have been newly registered—fewer than 150 in total over the past two years. A key reason for this is overly stringent labor regulations. The law mandates that 35% of low-income employees’ wages be set aside for social security contributions. Since their incomes are already meager, many prefer to receive cash payments and are therefore reluctant to become formally contracted employees. On the corporate side, the law requires large companies to obtain government approval before laying off employees, which lacks flexibility. Consequently, companies are clearly unwilling to expand and are content to remain modest in scale. Consequently, the report points out that India’s support for rural areas is also problematic. Eight hundred million people—primarily from rural areas—receive so-called welfare grain subsidies for the poor. India’s agricultural output is low, and a large number of farmers have little or no land, forcing them to rely on government grain distributions. To secure the votes of the lower classes, the Modi administration has no choice but to borrow money to distribute grain, placing immense fiscal pressure on the government. This high-deficit model has persisted for many years, resulting in a heavy interest burden. In fiscal year 2026, credit growth approached 16 percent; more than a quarter of government spending had to be financed through borrowing, and interest payments accounted for over one-fifth of the total—a situation comparable to the U.S. federal budget. But the United States is one kind of country, and India is another—it’s “Americanizing” prematurely before it has even become wealthy. In summary, India’s growth figures have been inflated, and a false illusion of success has been created through spin. In reality, the country hasn’t built much of a financial foundation, has spent heavily, and may remain trapped in the middle-income trap for the long term. Amid the chorus of Western voices touting India’s prospects, this view still strikes a relatively sober note. After all, hoping for India to succeed geopolitically does not mean it can actually succeed according to economic principles.