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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The writer is chair of Rockefeller International. His latest book is ‘What Went Wrong With Capitalism’
India is still reporting world-beating economic growth but no longer getting any love for it. Flows of foreign money into the country have dried up, suggesting outsiders believe that the reported GDP growth rate of over 8 per cent masks underlying weaknesses.
Most strikingly, corporate revenue normally grows (or shrinks) with the economy — in any country. But last year corporate revenue growth for listed companies in India decelerated to barely half the GDP growth rate. Rather than taking comfort in the headline real GDP figures, which are likely to be boosted by technical factors related to adjustments for inflation, policymakers would be wise to address some key faultlines.
Among the leading signs of weakness: India is losing more people and attracting a lot less money than it used to. This decade, a net total of 675,000 people emigrated each year, up from 325,000 in the 2010s. Only Pakistan, Bangladesh and Ukraine have seen a larger exodus while China is haemorrhaging people at the same pace as it did in the last decade, 300,000 a year. A chunk of this outflow from India is “brain drain” — a loss of exactly the skilled workers it needs to compete in advanced fields. As a result, one-third of Silicon Valley’s tech workforce is now Indian.
Employment growth continues to be weak; even at the famed Indian Institutes of Technology, 38 per cent graduated without a single job offer from a campus recruiter in 2024. Many Indians are leaving to find work in the few countries still friendly to immigrants, such as the UAE and Saudi Arabia, drawn in by the region’s construction boom.
A sense of limits is reshaping capital flows as well. India has long attracted only modest capital from abroad, thanks in large measure to the lingering “Licence Raj”, which can make it prohibitively expensive to acquire land or hire and fire workers. Asian economies that have sustained rapid growth — such as China and Vietnam more recently — saw net foreign direct investment surge above 4 per cent of GDP during their boom phases.
That figure never surpassed 1.5 per cent in India, and it is now just 0.1 per cent. Over the past decade, India dropped in the rankings for net FDI/GDP, from 12th to 19th among the 25 largest emerging countries. While the net numbers have been depressed recently by foreigners repatriating past profits, gross flows are low too, with India ranking below most emerging markets last year.
In addition to India’s long-standing reputation as a difficult place to do business, new risks have been holding back foreign investors including New Delhi’s deteriorating relations with its neighbours, the tariff battle with Washington and doubts about its tech potential. China and South Korea spend more than 2.5 per cent of GDP on research and development; India’s outlays last year were just 0.65 per cent of GDP. It is no surprise then that it has no serious players in AI.
These shortcomings are souring financial markets. After a long drought, stock markets in the emerging world finally saw net inflows last year. India, however, experienced record net outflows of $19bn. The intense foreign selling was countered by domestic buyers, with households keen to increase their historically low exposure to equities. Nonetheless, the Indian stock market significantly lagged behind its peers last year.
India needs much more foreign capital to grow rapidly because its domestic savings pool is not enough. Unlike the east Asian economic miracles, India has a weak manufacturing sector, so it never became an export powerhouse and has almost always run a current-account deficit. Among other beneficial side effects of foreign capital — particularly of direct investment — is that it brings greater access to new technology.
India’s basic weaknesses point the way forward. Over the past year, New Delhi took significant steps to streamline the labour code, simplify bankruptcy rules and launched an agency devoted to further cuts in red tape. The hope is that these reforms will finally spur new investment.
It is no coincidence that domestic private investment in India has also been anaemic over the past decade, held back by the same regulatory maze and overzealous bureaucracy that foreigners complain about. And boosting investment, both domestic and foreign, is the key to creating jobs and stemming the exodus.
India’s real growth rate will be revealed over time, as the technical factors distorting the economic data wash out. Regardless of what that number is, the tell-tale sign that India is on the miracle path will appear when it starts to import more capital and export fewer workers.