Guest Post by Viren Sood

Being born in India & moving to Australia at the tender age of five has given me the gift of a national identity that transcends borders. I often tell my family, friends and peers that “I am too Indian for Australia & too Australian for India”. As I grew up in the beautiful city that is Melbourne, this identity began to grow and oftentimes I found myself pondering upon the state of progress in my birthplace, India. From my naive childhood to adolescence to the beginning of my twenties, I have had the fortune of growing up around differing viewpoints on the future of this growing country from our diverse Australian-Indian community in Melbourne. From hearing “nothing will become of this country” to “India is growing like crazy”, my curiosity towards painting a real picture indicating where my country of birth is heading only increased. This is my first article (one of many I hope!) where I look at the economic progress of India with my lens of experience across economic research and banking! Join me in my journey as I look to answer whether the Indian Growth Story is a Farce or Is It Something Brimming with Potential?

India’s march toward a $10 trillion economy by 2035 is often spoken about as an inevitability. But somewhere along the way, GDP became the holy grail of economic progress—when in reality, it’s just one piece of the puzzle. A nation of 1.4 billion people (heading towards 1.5 billion by 2030) cannot be summed up by a single number. GDP alone won’t cut it.

Apples to Oranges

That said, let’s play devil’s advocate. If we go purely by the numbers, India’s economic trajectory post-1991 liberalization has been nothing short of transformative. Fast forward to Q4 2024, and with a 6.2% growth rate, India stands as the fastest-growing major economy in the world. Numbers tell a compelling story—but the real question is, what lies beyond them?

To understand why GDP is such a widely used (and sometimes misleading) measure of economic progress, we first need to break down what it actually represents. GDP is an aggregation of four key expenditures:

• Private Consumption: Household spending on goods and services.
• Investment: Business spending on infrastructure, machinery, and capital goods.
• Government Spending: Public sector expenditures on services and infrastructure.
• Net Exports: Export revenues minus import expenditure.

Each of these components drives the economy in different ways, and their relative contribution changes over time. Before diving deeper into India’s growth story, let’s take a step back and provide some much-needed context

Conventional wisdom, common sense and empirical evidence have long suggested that economies dominated by consumption and government spending do not foster a path for long-term sustainable economic growth. The wise have said that history does not repeat but that it rhymes instead. Consumption driven growth dominating a nation’s GDP has led to economic slowdowns via stagflation and excessive borrowing that do not support an improvement in the average citizen’s quality of life, job creation and overall wealth. High consumption is inversely correlated with savings and in turn, investments required in expanding an economy’s productive capacity. On the other hand, economies dominated by government spending have been proven to be unsustainable in the long run unless otherwise balanced by growth in investment exports and net exports via the private sector.

The following similar yet contrasting case studies are cautionary tales for those armchair economists (myself included) and Indian policy enthusiasts alike:

United States – High Consumption & Easily Accessible Debt: 

This one needs no introduction. With consumption dominating 70% of total GDP in December 2024, it is well known to even the armchair economist that consumerism is a major part of the US’s economic landscape. Coupling a culture of high consumption with easy access to credit and rising asset prices (stocks and real estate, primarily) led to the famous debacle that is commonly known as the Global Financial Crisis in 2008-9. 

My only fault during this opportune time was that as an 8-year-old, I was focused on finding where I could stream (legally of course!) the latest Dark Knight movie instead of setting aspirations to become a child real estate magnate (I should’ve bought the dip!). 

Jokes aside, easily accessible credit led to an increase in debt as a proportion of total GDP and when US borrowers were not able to service their next interest rate rise; they defaulted on their home loans and had little income left to fuel their spending which ultimately led to a collapse in consumption. And in turn GDP contracted by 4.2% in 2009. Similar echoes of this tale can be heard in Japan’s “Lost Decade” from 1991-2000, Spain’s “Deep Recession” in 2008-13 and Italy’s “Lost Two Decades” from 2008-2019. While the US has arguably managed to recover from the GFC; the lesson is that high consumption, fuelled with easily available debt and asset bubbles spells a cautionary tale for the Indian economy.

Sri Lanka – The Dangers of Government Led Growth & Fiscal Mismanagement:

I vividly recall my father quoting Milton Friedman’s famous line, “There’s no such thing as a free lunch,” when I first asked him why we couldn’t get Fish & Chips without me completing my chores. At the time, I didn’t fully grasp its significance, and perhaps I still don’t. But Sri Lanka’s economic collapse in 2022 proved that when governments prioritize short-term populism over long-term fiscal discipline, the bill eventually comes due—and the middle class is often the one left to pay.

So What Went Wrong for Sri Lanka?

1. Tax Cuts & Populist Spending Drained Government Revenue
   • In 2019, massive tax cuts reduced VAT from 15% to 8%, slashed corporate taxes, and wiped-out key revenue sources.
   • Welfare programs and subsidies expanded unsustainably, leading to a 30% drop in government revenue and widening fiscal deficits.
2. Debt-Fuelled Growth Led to a Sovereign Default
   • Government spending was financed through excessive external borrowing, with public debt reaching 104% of GDP by 2022.
   • As foreign reserves collapsed, Sri Lanka defaulted on $4 billion of debt in April 2022—its first-ever sovereign default.
3. Printing Money Triggered Hyperinflation
   • Instead of cutting spending, the government printed money to finance deficits, expanding the money supply by 40% in two years.
   • Inflation soared to 69.8%% by mid-2022, collapsing purchasing power and triggering mass poverty.
4. Catastrophic Agricultural Policies Worsened the Crisis
   • A sudden ban on chemical fertilizers in 2021 caused a 20% drop in rice production, forcing Sri Lanka to import food it once exported.
   • The tea industry, its largest export earner, lost $425 million, worsening the foreign exchange crisis.

By 2022, Sri Lanka was out of foreign reserves, unable to import essentials like fuel and medicine, leading to mass protests and political upheaval.

Sri Lanka’s collapse proves that government-led economic growth without fiscal discipline leads to disaster. With states such as Punjab, Himachal Pradesh and Karnataka in poor fiscal health due to a growing culture of freebies, India’s policymakers must take note—populist spending, debt-fuelled consumption, and reckless economic decisions come at a heavy cost. As Friedman warned, there are no free lunches—someone, somewhere, always foots the bill.

Learning from Experience

Embedded within the cautionary tales of the US & Sri Lanka are key lessons for India’s growth story. As the economy continues to grow larger; consumption and government expenditure must be balanced with sustained investment alongside policymakers working to ensure improvement in the country’s trade balance. Based on the most recent data, India’s private consumption expenditure comprises 60% of GDP whereas Investment, also known as Gross Fixed Capital Formation, accounts for 30% and Government Expenditure approximately 10%. The government still runs a current account deficit in which imports exceeds exports despite continued growth in the country’s Professional Services and IT sectors. 

Table 1: 2022 – Components of GDP: US, China, Japan, Germany & India

	Private Consumption	Government Spending	Fixed Investment	Exports	Imports	Net Exports
United States	68%	14%	21%	12%	15%	-4%
China	37%	16%	42%	21%	18%	3%
Japan	56%	22%	26%	22%	25%	-4%
Germany	51%	22%	22%	51%	49%	2%
India	61%	10%	30%	23%	26%	-4%
Source: World Bank National Accounts Data (2022)​

Among the countries listed in Table 1, India’s 61% private consumption figure is dangerously close to the US’s 68% but arguably without the same credit safety net. Although private consumption remains high, its share has been declining since the 1960s. India’s economic growth in large part has been driven by its’ enormous consumer base, the inverse of countries like China which have relied on a more investment-oriented approach. 

China’s 42% investment rate shows how capital formation can lead to sustained growth – a key lesson for India. An over-reliance on private consumption poses risks similar to those witnessed in economic crises across the US, Japan, Spain and Italy. 

Chart 4 highlights that despite GDP growth, India’s persistent trade deficit signals an overreliance on domestic demand rather than external competitiveness—an imbalance that must be corrected. In recent years with the rise of consumerism, India has witnessed a noticeable rise in household debt levels with the increasing adoption in Equated Monthly Instalments (EMIs) to finance consumer durables. However, India’s banking system has remained resilient due to the RBI’s conservative regulations, strong capital adequacy and continued reduction in Non-Performing Assets (NPAs). Unlike the US pre-GFC, Indian banks have avoided excessive leverage. 

Yet resilience today doesn’t guarantee immunity tomorrow. Urbanisation has fuelled both consumerism and rising debt burdens across major cities. As seen in Chart 6, EMI burdens in metro cities like Mumbai and Hyderabad are already alarmingly high. This signals rising financial stress in urban centres, making overleveraged consumption a looming risk for economic stability. I’ve witnessed this firsthand during my sabbatical while working and traveling across metro cities in Delhi and Gujarat. It wasn’t uncommon to meet young professionals from my own age group who had overextended themselves with loans, struggling to keep up with their EMIs for the latest premium smartphone on the market. As this trend continues, where borrowing outpaces income growth – financial stress could build which expose the economy to external shocks and stagnated economic growth. 

India’s Growth Thesis

My point here isn’t that consumption driven growth does not matter but without a greater focus on; private business investment, improvement in export-led growth, and targeted government intervention; the Indian economy risks its fate at the mercy of volatile consumer sentiment, unsustainable debt-driven consumption, and external shocks that could derail long-term stability. 

Government spending has always been a double-edged sword in the case of India’s economy, despite comprising a tenth of the nation’s GDP. On one hand, government investment decisions by current and successive governments have led to reforms and improvements that tangibly demonstrate economic progress. For instance, the cross-party collaboration on the Goods and Services Tax (GST), initiated under the UPA and implemented by the NDA in 2017, improved India’s fragmented tax system, boosting compliance and government revenue from ₹7.4 trillion (2017) to ₹20.1 trillion (2023). 

On the other hand, recent government expenditure trends have favoured populist spending, often widening the fiscal deficit without boosting output. Known as “revdis” in India—meaning handouts—such policies can undermine long-term economic growth. A clear example is Punjab’s free electricity scheme for farmers (under the AAP Government), which, while politically popular, has continued to push the state’s Debt-to-GSP ratio to 48.9%, among the highest in India. In 2022-23 alone, ₹18,000 crore was spent on power subsidies, diverting funds from education, healthcare, and infrastructure. Free electricity has also worsened groundwater depletion, as unchecked irrigation strains Punjab’s natural resources. Meanwhile, the state’s power sector faces mounting losses, unable to modernize due to financial distress, reiterating Freidman (and my Dad’s) point of ‘no free lunches’.

For those who know me personally, Punjab—especially my birthplace, Ludhiana—holds a special place in my heart. Coming from a family of businessmen, I’ve often heard the unfortunate stories of industrialists who have relocated their factories to more business-friendly regions, driven away from Punjab by inadequate infrastructure and restrictive land use policies. Similar echoes of short-term welfare spending over sustainable government investment spend can be heard across the states of Himachal Pradesh, West Bengal and Bihar, among others. So whilst social welfare is important, fiscal responsibility demands a balance between ‘freebies’ and productive investment to sustain economic growth. 

As such, India stands at a crossroads—should it rely on consumption-led growth alone or learn from nations that are building lasting prosperity? South Korea, once dependent on consumption (over 80% of GDP in the 1960s), transformed into an industrial powerhouse by prioritising investment (now 31% of GDP) and exports (44% of GDP). Germany, often cited for its strong welfare system, proves that competitiveness and social security via welfare schemes can coexist—it runs trade surpluses of 5–8% of GDP, with exports making up nearly 43% of GDP. China, through relentless capital investment (peaking at 46% of GDP) and export-driven growth, lifted 850 million people out of poverty in just three decades. These economies didn’t grow by relying on consumption or unchecked government spending—they built productive capacity, prioritised exports, and invested in the future of their people. India must do the same.

With India’s massive population and problem of abject poverty still lingering, GDP per capita sits at just $2,700 USD (World Bank, October 2024), placing it 141st globally. In contrast, this figure for major economies like the US, China, Germany, and Japan ranks them 5th, 68th, 19th, and 26th, respectively. 

Stripping away the ‘hype’ around GDP as the ultimate measure of progress, we get a clearer picture—where a rising power like India is excelling and where the gaps remain. 

India’s path to sustained economic growth is clear – boosting investment, expanding exports and ensuring fiscal responsibility. Yet achieving this is easier said than done. Beyond debt, consumption and policy choices – there’s a deeper, more frustrating bottle that drags India’s progress: rampant bureaucracy. From endless approvals to archaic regulations, the ‘Sarkari Babu’ culture slows down businesses, stifles innovation, and makes economic growth a bureaucratic obstacle course. In my next piece, I’ll break down how India’s bureaucratic machine is holding back its rise—and what must be done to fix it. Stay tuned and thank you!

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