Martin Wolf talks to Arvind Subramanian: India, the next economic superpower?

Episode Summary

Executive Summary: Martin Wolf and Arvind Subramanian assess India’s slowing growth, weakened investment climate, and a risky de facto exchange-rate peg. Subramanian argues India’s long-run potential is lower than widely assumed, that developed-country status by 2047 is implausible without export-led growth, and that political centralization, protectionism, and arbitrary state behavior are undermining private investment and India’s global ambitions.

Main Topics: India’s recent growth slowdown and weak demand (Priority: 5/5): Subramanian says India has decelerated sharply after a strong post-pandemic rebound, with private investment, FDI, and consumption all softening and investor confidence fading. Structural limits on long-run potential growth (Priority: 5/5): He argues India’s per-capita potential growth is only about 3-4%, lower than earlier boom-era performance and far below what would be needed to reach developed-country status by 2047. Export-led growth and the China+1 opportunity (Priority: 5/5): To reach very high growth, India must exploit manufacturing relocation from China and expand labor-intensive exports, since services-led growth is too narrow and not inclusive. Exchange-rate policy and foreign-currency balance-sheet risk (Priority: 5/5): Wolf and Subramanian discuss the RBI’s de facto peg, heavy FX intervention, and the risk that eventual rupee depreciation could hurt firms that borrowed in foreign currency. Government strategy, national champions, and investment deterrence (Priority: 4/5): Subramanian says the government understands returns but not risk, relying on favored national champions, protectionism, and regulatory arbitrariness that chill broader private investment. Modi’s political record and institutional strain (Priority: 4/5): He argues Modi’s India is more illiberal, nativist, and centralized, with minorities, regions, civil society, media, and institutions feeling pressured or marginalized. India’s rising global significance (Priority: 4/5): Even without developed-country status, India’s sheer size means it will become one of the world’s most important powers across trade, finance, climate, and talent.

Key Arguments: India’s economy has slowed materially after the post-COVID rebound, and the main immediate concern is exchange-rate and monetary policy rather than only cyclical weakness. India’s long-run per-capita growth potential is closer to 3-4%, not the much higher rates often assumed by commentators and policymakers. The 2047 developed-country target would require sustained 5.5% real per-capita growth for 25 years, which is historically unprecedented for India. Only an export-led strategy can deliver the growth India needs; domestic-demand-led expansion is insufficient at the required scale. Services exports alone cannot generate inclusive employment because they benefit only a small, highly skilled share of the labor force. India must seize the China+1 manufacturing opportunity, especially in labor-intensive sectors such as clothing, footwear, toys, and garments. The RBI’s currency defense has created a de facto peg, tightened liquidity, and built up foreign-currency balance-sheet exposure in infrastructure sectors. The government’s preference for national champions, protectionism, and discretionary enforcement deters competition and private investment. Political illiberalism and centralization are eroding institutional confidence and social cohesion, which also matters for economic performance. Despite these weaknesses, India’s size ensures it will become a major global power even without achieving developed-country income levels.

Data Points: RBI FX intervention: $200 billion to $220 billion - Estimated amount spent defending the currency during the de facto peg period. Rupee appreciation: About 10% - Average appreciation relative to the period before the exchange-rate defense episode. Foreign borrowings: Up by about one-third - Increase in foreign borrowing over the last two years, encouraged by the policy environment. Potential per-capita growth: 3% to 4% - Subramanian’s estimate of India’s current long-run per-capita growth potential. Potential total GDP growth: 4% to 5% - Implied aggregate growth corresponding to his per-capita estimate. Historical boom per-capita growth: About 4.5% to 5% - India’s stronger performance between roughly 1980 and 2010, aided by reforms and the global boom. Developed-country target growth need: About 5.5% real per-capita GDP growth for 25 years - Growth rate required for India to reach developed-country status by 2047/2050. Needed total GDP growth for target: About 7% to 8% - Aggregate growth implied by the per-capita target needed for developed-country status. China’s share of global labor-intensive exports: Roughly 40% at its peak - Used to illustrate the scale of China’s former dominance in labor-intensive trade. India’s share of global labor-intensive exports: 4% - Current share, indicating room for expansion through China+1 relocation. Desired India export share: 12% to 14% - Approximate share Subramanian says India would need to reach in labor-intensive exports for the strategy to matter materially. Share of labor force potentially helped by services exports: 3% to 5% - Subramanian’s estimate of how many workers high-skilled services-led growth might materially benefit.

Pivotal Quotes: "the economy is not in great shape" — Arvind Subramanian: His summary of India’s current macroeconomic condition, citing slowing investment and consumption. "going from now to developed country status by 2047 or 2050 requires about 5.5% real per capita GDP growth for the next 25 years" — Arvind Subramanian: He explains why India’s developed-country ambitions are highly demanding and likely unrealistic without major reform. "The DNA of this government, the instincts as you call them, are not sensitive to what needs to be done" — Arvind Subramanian: His critique of the Modi সরকারের approach to openness, risk, and investment.

Implications: India’s future will likely be shaped less by headline growth goals than by whether it can restore investor confidence, avoid exchange-rate mismanagement, and pivot toward export-led manufacturing. Even if it falls short of developed-country status, India will still be a major global power.