Structural Cracks in the Indian Economy — A Conversation with Arvind Subramanian
India is weathering a painful economic storm. Fuel prices have surged four times in under two weeks, the rupee has slid sharply against the dollar, and airlines are pulling back both international and domestic flights. The government has framed much of this as collateral damage from an external conflict — but former Chief Economic Adviser Arvind Subramanian, now a Senior Fellow at the Peterson Institute for International Economics, argues that this framing misses the deeper point. In a recent interview on Decoder with anchor Nidhi Razdan, he laid out why India's vulnerabilities are not just a product of geopolitical shock, but of longer-term structural failures that the country has yet to squarely confront.
A Crisis That Pre-Dates the War
The war has undeniably delivered a severe blow — not just through higher energy costs, but also through rising fertiliser prices, potential declines in Gulf remittances, and reduced exports to the region. Yet Subramanian points out that the rupee was already among the worst-performing currencies in its peer group before hostilities broke out, having declined nearly 20% — and that was despite the Reserve Bank of India spending significant reserves to defend it.
"The puzzle," he says, "is why the sentiment is so disproportionate to the underlying shock." Inflation had been relatively contained, the current account deficit was not alarming, and official GDP growth stood at a robust 7%. And yet investors were nervous. That, in Subramanian's view, points to something more fundamental.
The Real Problem: Structural Weaknesses
The two most important engines of long-run economic growth — private investment and exports — have both been weakening, not just over the past year but over the better part of a decade. This, Subramanian argues, is the real story.
He is careful to acknowledge what the government has done right. In recent years it has simplified the GST, cut taxes, liberalised labour laws, opened more sectors to foreign direct investment, and even finalised far-reaching free trade agreements with the European Union and the United States. These are meaningful reforms on paper. But they have not translated into a meaningful revival of private investment or foreign direct investment. Why?
The answer, he suggests, lies in the gap between policy on paper and practice on the ground. Reducing the costs of doing business through legislation is one thing; reducing the risks of doing business through fair, predictable implementation is quite another. Several factors are chilling investor sentiment:
- Uneven playing field: Certain corporate groups are perceived to receive preferential treatment, making other investors wary of entering sectors where the regulatory environment may work against them.
- Weaponisation of state agencies: The arbitrary or selective use of enforcement bodies and tax authorities creates anxiety among businesses.
- Centralised decision-making: A drift away from cooperative federalism — with key decisions being made unilaterally at the centre — adds to investor nervousness.
Subramanian frames this as a "not-to-do list" rather than a to-do list. The problem is not that the government hasn't done enough; it's that certain deep-rooted instincts continue to undermine what has been done.
A Call for Personnel Change
One of Subramanian's most pointed arguments — and the one that generated the most commentary — is his call for a change in personnel at the ministerial, bureaucratic, and technocratic levels. He is careful not to name individuals, but his reasoning is clear.
First, credibility matters in modern markets. Investors are not just watching policies — they are watching who is communicating them. The current crisis has revealed a vacuum of confident, transparent, and authoritative voices explaining the situation and laying out a coherent plan of action. The response has been reactive rather than proactive.
Second, and more fundamentally, if the problem is rooted in habits and instincts, the same people in the same roles are unlikely to change them. Fresh personnel signal a genuine break from the past — and in a democracy, Subramanian notes, healthy churn in decision-making is a feature, not a bug. Staleness of ideas at the top has costs.
The Denial Problem
Asked about the Finance Minister's recent pushback against what she called a "cynical narrative" about India's economy, Subramanian was direct: defensiveness does not reassure investors. Transparency does.
He identifies two distinct forms of denial at work. The first is the straightforward refusal to acknowledge that a serious problem exists. The second is subtler — accepting that there is a problem, but misdiagnosing its cause, treating it as a short-term capital flow issue rather than a structural one, and reaching for incentive schemes and capital-attraction measures instead of addressing root causes. Both, he argues, need to be confronted.
The management of headlines instead of the management of the actual economy, he implies, has become a defining feature of how economic challenges are being handled.
Energy Prices: A Long-standing Achilles Heel
The current fuel price hikes have brought a chronic vulnerability back into focus. India — across governments — has consistently struggled to price energy and fertiliser at or near their cost of production. Prices are politically sticky going up and never seem to come down when global rates fall, creating exactly the kind of one-sided pain that breeds public frustration.
Subramanian argues that instruments like Direct Benefit Transfers now make it possible to transition toward market-linked pricing while protecting the most vulnerable. The poor can be cushioned through targeted support; middle-class and industrial users do not need to be shielded from price signals that drive rational consumption.
He also notes the political paradox here: a government with the kind of dominant electoral majority India's currently enjoys is precisely the one with the political capital to absorb short-term pain in exchange for long-run gains. Whether it chooses to use that capital is a different question.
What Lies Ahead
Looking ahead, Subramanian is not optimistic about a quick resolution. He expects the energy shock to worsen before it improves, given how long it would take to bring production capacity back online. That means more difficult choices for the Reserve Bank of India — whether to raise interest rates to defend the rupee and fight inflation, or to allow the currency to depreciate further.
The likely outcome, in his assessment, is a "stagflationary shock" — a combination of higher prices and slower growth as rising input costs compress production. Citizens should be prepared for this.
On the Prime Minister's appeal for austerity — urging people not to travel abroad or buy gold — Subramanian is measured. There is a legitimate point about conserving foreign exchange. But there is also a contradiction: asking people to spend less abroad while simultaneously resisting exchange rate depreciation is incoherent. The exchange rate is the very mechanism that naturally reduces such spending. You cannot appeal to voluntary restraint and resist the price signal that enforces it.
Conclusion: No Room for Economic Jingoism
Subramanian reserves particular scorn for what he calls "economic jingoism" — the habit of benchmarking India's performance against other struggling economies and declaring relative victory. It is, he says, a distraction from the harder task of honestly diagnosing what is wrong and fixing it.
The external shock is real. But it has exposed, rather than created, India's vulnerabilities. The path forward requires acknowledging structural weaknesses, changing the instincts that perpetuate them, and being willing to tell the truth — to investors, to citizens, and to itself.
Based on an interview with Arvind Subramanian, former Chief Economic Adviser to the Government of India and Senior Fellow at the Peterson Institute for International Economics, on Decoder with Nidhi Razdan.
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