The Crisis of Indian Capitalism

On the morning of June 4, many Indians were glued to their television screens awaiting the results of the 2024 general elections. But far away from that public glare, 2.4 million aspiring doctors who had sat for an intensely competitive government-administered exam were also impatiently refreshing their screens, anticipating the results that would shape their futures. By the end of the day, both the elections and the medical school entrance exams raised enormous uncertainties. Prime Minister Narendra Modi’s Bharatiya Janata Party (BJP) emerged as the single largest party but were humbled after they failed to win a majority in Parliament and could form a government only with the help of coalition partners. But Modi’s disappointment paled in comparison with the misery and worry inflicted on the 2.4 million aspiring doctors. The medical exam was wracked by scandal.

An unusual number of students had secured perfect scores, suggesting irregularities in marking, the possibility of exam papers having been leaked in advance, and even the operation of a cheating mafia. The scandal did not stop there. Since 2017, India’s high-stakes entrance exams to higher education have been centralized and run by a government agency in New Delhi. As concerns mounted, the testing agency panicked and began canceling other scheduled exams, throwing the fate of millions of other young students into limbo.

The testing debacle revealed not just gross ineptitude and malfeasance but the skewed nature of the Indian economy. Such examinations in India are the gateway to higher education and the eventual holy grail, government jobs, the enduring source of social mobility for many Indians. But India’s colossal failure to invest in education, coupled with an economic growth model that has failed to produce quality jobs, has resulted in extreme scarcity, which has intensified competition. In the medical school entrance exam, 2.4 million candidates were jostling for only 100,000 seats. After completing their degrees, these students join millions of graduates in trying to win government jobs. Here, too, positions are scarce. Between 2014 and 2022, for instance, over 22 million candidates competed for seven million vacant posts in the central government. Such competition and scarcity are a toxic cocktail, and cheating is routine.

According to surveys, dissatisfaction with the Indian economy over issues such as unemployment hurt Modi and his party at the polls. The election has brought into focus the flaws of the Indian economy and the credibility crisis that capitalism faces in the country after three decades of economic liberalization. With good reason, many Indians are skeptical about market-oriented reforms, and opposition to them remains a powerful force in Indian politics. The challenge lies deep in India’s political economy. The country’s chosen path of market reforms runs up against the state’s unbridled embrace of big capital, which has fueled mistrust and agitation. Although this pushback can help build democratic guardrails against capitalism’s more pernicious aspects, it has also locked the bulk of the Indian economy in a low-level equilibrium, with insufficient competition and job creation. Much depends not just on how the Modi government responds to this wake-up call but also on how a revivified opposition, led by the Congress Party, can push the debate about the economy forward.

CAPITALISM’S CREDIBILITY DEFICIT

The liberalization of India’s economy in the last three decades successfully lifted the bulk of the population out of extreme poverty. It resolutely failed, however, to provide sustainable pathways of economic opportunity for many people. Over 80 percent of India’s workforce is employed in the informal economy, mostly in subsistence-level self-employment or in jobs with no contracts or social security benefits. Nearly half remain trapped in low-productivity agricultural work and the trades associated with it. And yet Indians now expect more from their lives. Between 2000 and 2022, the proportion of young people with secondary or higher levels of (often poor quality) education doubled. That surge in ostensibly credentialed workers has crashed into an economy that cannot soak them up. In 2022, unemployment among young graduates under the age of 25 was as high as 42 percent.

Part of the explanation for this deficit lies in India’s unique economic trajectory. In stark contrast with a country such as China, India has not developed a broad base of low-skilled manufacturing work. Instead, its economic growth has relied on the far smaller high-skill service sector, breaking the link between growth and mass job creation. It is fashionable in policy circles to argue that the obduracy of politicians has been the barrier to deepening market reforms, particularly when it comes to liberalizing regulations regarding land, labor, and agricultural markets. But that resistance is not simply the fault of a stubborn and hidebound political class; it stems in large part from the failure of capitalism in India to win the trust of the public, a consequence of what Arvind Subramanian, an economist and the former chief economic adviser to the Indian government, has termed “stigmatized capitalism.”

The rapid growth that followed the advent of liberalization in 1990 did not produce competitive markets across the economy. Instead, a somewhat dynamic service sector, led by the boom in information technology, has coexisted with increasingly visible rent-seeking cronyism in infrastructure and natural resource allocation and staggering inequality. Between the 1980s and 2010s, the share of income of the top one percent in India grew from ten percent to 22 percent; in China, by contrast, it rose from seven percent to 13 percent. In India, this rise in income share of the top one percent was matched by a corresponding decline in the share of the bottom half. Moreover, although liberalization dismantled conventional rent-seeking via licensing—when bureaucrats would extract bribes to grant permits to businesses and individuals, in what was colloquially known as the license raj—it also opened new sites of rent-seeking, such as payments for speeding up land and environmental clearances and access to easy credit for high-risk ventures via public-sector banks.

Opposition to economic reforms remains a powerful force in Indian politics.

As the boundaries between state and business blurred, business entered politics in insidious ways. In 1991, businesspeople and industrialists accounted for 14 percent of elected parliamentarians. By 2014, this proportion had increased to 26 percent. Several of these lawmakers participated in legislative decisions directly linked to their business interests. Crucially, this trend coincided with the rise of provincial parties at the national level, allowing small-time regional capitalists to expand their businesses at the national scale. The system allowed for a wide range of emerging big capitalists to engage in large-scale corrupt practices.

As the nexus between the state and capital deepened, its trickle-down impact in the economy was largely felt in construction, which generated the bulk of employment outside agriculture. Jobs in this sector were often precarious and informal. The public and private sectors invested little in building human capital, and the state did little to encourage competition among small and medium enterprises, where the bulk of low-skilled manufacturing takes place.

Big business interests pushing for unbridled deregulation of land and labor markets dominated the policy discourse, fueling opposition in the arena of mass politics. The establishment of special economic zones, for instance, to attract foreign investment would often get entangled in protests and political agitation. Although this resistance served as a partial check against capitalism’s excesses, political incentives simply did not align to promote a more inclusive growth strategy that could build genuinely competitive markets, especially in the informal economy. Visible corruption stirred public anger, eventually resulting in the fall of the Congress-led government in 2014 and the concomitant rise of Modi’s BJP. But it also encouraged skepticism about the credibility of India’s version of capitalism. In the arena of mass politics, market reforms became synonymous with cronyism and big business interests.

Capitalism’s credibility crisis exacerbated another malaise. India has long placed on the state the burden of providing secure, dignified employment and social mobility. As the economy liberalized, the private sector should have shared this burden, but this has not come to pass. Weak investments in human capital created a shoddily educated but aspirational pool of young people, whose capabilities could not meet the demands of the high-skill, job-producing parts of the formal economy. Government jobs remain prized, and it is routine, even today, for graduate-degree holders, including those who have Ph.D.s, to chase after clerical posts in the public sector. The overweening presence of the state in the dreams of India’s young remains a serious challenge. It has made it easy for politicians to pledge to expand government jobs and caste quotas rather than to address the structural weaknesses in the economy that created the problem in the first place.

THE MODI YEARS

Modi swept into the prime minister’s office in 2014 on the promise of strong leadership that could restore capitalism’s credibility. To private capitalists, he positioned himself as a pro-business, free-market reformer. For the masses, he promised to clean up the maze of corruption and deliver jobs through good governance. A decade later, these promises remain unfulfilled. Indeed, capitalism’s credibility crisis has only deepened.

Rather than a cleanup, India has witnessed unprecedented levels of corporate consolidation and economic centralization. In 2021, the top 20 firms accrued over 62 percent of all profits, compared with a profit share of less than 50 percent in 2011. Much of this is concentrated in a few large corporations. The 2024 Forbes’ list of India’s ten richest people best illustrates this dynamic. The owners of India’s two largest conglomerates—Mukesh Ambani and Gautam Adani—have a combined wealth of about $200 billion, just shy of the combined total wealth of the other eight richest Indians.

The government legitimizes this consolidation by casting it as India’s version of state-controlled capitalism akin to the South Korean chaebols (large, family-ran business conglomerates), a bet on “national champions” to drive development. But that is not the Indian reality. The state’s ties to these two massive conglomerates have driven out many companies. There is no level playing field. Several regional players of recent decades have gone bust while the favored few survived and thrived, scooping up the assets of bankrupt businesses and the state (Adani, for example, purchased six state-controlled airports in 2019). New entrepreneurs emerged primarily in digital startups, e-commerce, and the financial-technology sector. But Modi’s champions dominated in the infrastructure, telecommunications, and natural resource sectors, key areas of the economy that are now controlled by two or three conglomerates.

Modi’s tenure has seen tremendous corporate consolidation and economic centralization.

Some of Modi’s signature economic policies—such as the 2016 demonetization that sought to push invisible “black money” into the open and the implementation in 2017 of a long overdue but poorly designed goods and services tax—hurt local capitalists and smaller firms, and aided this consolidation. These policies rocked the informal economy. A hastily announced and draconian lockdown during the COVID-19 pandemic created a deep wedge between the small formal economy and the vast informal one. Between 2020 and 2023, corporate profits nearly quadrupled. But growth in manufacturing enterprises slowed down and employment in manufacturing dropped considerably to 11.4 percent of total jobs in 2023, a lower share than in 2018. As another sign of deepening distress, agriculture now employs more workers than it did five years ago while real wages have stagnated.

It is against this backdrop that the public response of the last decade to market reforms needs to be understood. One of the less debated consequences of economic centralization is the distance it has created between local capital and business interests and policymaking. That makes reform harder: in India’s federal system, state governments have to lead in policy on many matters since their ears are closest to the ground and they can be held accountable. Centralization weakens the role of provincial governance and lessens the influence of states over decision-making. As a result, reforms have neither reflected local concerns nor generated support from constituencies affected by them.

The failure of the government’s attempt to liberalize agricultural markets is a case in point. It proposed in 2020 major (and necessary) reforms to the operation of these markets. But the reforms were poorly designed and did not reassure farmers that the necessary protection they received from the government in certain areas would be maintained. Unsurprisingly, farmers feared they would lose bargaining power to big companies, and the laws sparked widespread demonstrations. Protesters set up camp on the outskirts of New Delhi, frequently invoking Adani and Ambani as bêtes noires and warning that the laws would weaken farmers to the benefit of the giant corporations. According to one nationwide survey, 85 percent of respondents supported the farmers’ protests. That agitation compelled the government to repeal the laws. But it does not seem likely that the government has learned the key lesson of this episode: building genuinely competitive markets cannot be achieved through a centralized model of reform that promotes cronyism. In the process, the door has closed on any further effort to address structural failures in the economy.

A TICKING TIME BOMB

Modi faced the electorate in 2024 in this context. The consequences of India’s economic trajectory of the last decade—high unemployment, inequality, and price rises—were on voters’ minds. The opposition parties, particularly the Congress Party, tapped into these frustrations and crafted a political narrative around social justice, economic inequality, and employment that placed Modi on the back foot in key states, such as Uttar Pradesh. At the same time, they relentlessly attacked the government for its close relationship with Adani and Ambani.

The prime minister returns to power humbled, and for the first time after a decadelong reign of total dominance, he confronts a revved-up opposition. Several weeks into his third term, his government presented its annual budget in July. The budget emphasized job creation through the announcement of an employment incentive scheme and internship program in the corporate sector. These initiatives are limited; the stated goal is to create 41 million jobs in five years in the formal sector. Estimates suggest that India needs to create at least 12 million jobs per year to absorb new entrants into the labor market. More problematically, these policy ideas have little to do with the structural realities of the Indian economy and do not suggest a road map toward enabling genuinely competitive markets across the economy.

The door seems to have closed on efforts to address structural failures in the economy.

The buoyed opposition now has an opportunity. For the moment, these parties have pinned their political narrative on social justice and inequality within the framework of caste politics, demanding a caste census and quotas. But if the opposition seriously wishes to challenge the economic policy framework of the BJP and address the structural flaws in Indian capitalism, it needs to broaden that narrative. The Congress Party and its allies are not untainted by cronyism, but they still have slammed the government for its ties with Ambani and Adani. They have stressed the problem of unemployment. This rhetoric needs to be accompanied by a constructive, credible alternative economic vision around which the opposition can mobilize electoral constituencies.

Crafting that vision is not easy. Since 1991, India has reached a social and political consensus on the broad direction of the economy toward greater liberalization. This conceit remains unchallenged, and all thinking about future economic policy must take place within this framework. The opposition may struggle to find a way to really differentiate its economic agenda from that of the government. Its own complicity in the rise of cronyism in Indian politics—and the ubiquity of corruption—may make presenting a novel, dynamic face of capitalism more difficult.

Many analysts have asked the BJP to craft an industrial policy that rebalances India’s economic growth model toward job creation. Perhaps the opposition can get this process started by drafting a “shadow policy,” going where the BJP has feared to. If not, India will remain stuck in its current low-level equilibrium, in which a booming but small formal sector and rampant corporate consolidation deliver some modicum of growth but exclude the bulk of the country and stoke widening inequality. For such a young, aspirational, but frustrated country, that combination can fast become a ticking time bomb—if it hasn’t already.