Modi's Market: India's Political Economy

Image credit: Satish Acharya via Facebook

Everyone recognises that politics and economics are inextricable. Good economics accounts for political vagaries, moving beyond an abstract monolith of mathematical theory and the homo economicus, while good politics provides ballast in times of economic turbulence. Excellent governance lies in recognising and leveraging this nexus, and few nations demonstrate this link as stridently as India. As the world’s most populous country and its fifth (soon-to-be third) largest economy, India’s choices illuminate the far-reaching implications of treating politics and economics, domestic and external, as mutually constitutive. India’s shrewdness in employing this link for national development thus warrants close analysis.

Against a backdrop of de-globalist sentiment, Prime Minister Narendra Modi has crystallised his intentions: to build a muscular, self-reliant nation resistant to unilateral coercion. “When we grow and excel, the world will acknowledge our worth,” he opines.

Yet the lofty target of achieving developed-country status by 2047 (India’s centenary of independence) requires an unprecedented annual growth rate of 7.8%. That goal sits uneasily with the unorthodox economic policy pursued.

Private sector capital expenditure remains anaemic, with business investment shrinking by 1.1% over the past decade. Rather than organic, broad-based private sector dynamism, India has intentionally nudged its growth towards politically aligned sectors, including defence, semiconductors, and renewable energy. This is reinforced by a rather low factory capacity utilisation of 70%. Beyond mere autarky, this is an endorsement of state-guided industrialisation. The market would otherwise maximise potential. 

The Atmanirbhar Bharat Abhiyan, or Self-Reliant India campaign, is clearly pro-business over pro-market, favouring select industries over a pure free-market approach. The surge of luxury gated communities in urban centres reflects this: capital flows into elite, high-margin projects that reward politically connected actors, while affordable housing — less than 20% of new launches this year — lags. The bias toward mega-projects amplifies the grandeur of India’s economic story, reflecting Modi’s use of political branding to secure both voter support and international recognition.

On the first anniversary of Prime Minister Narendra Modi’s second term, Alok Nirantar draws the PM’s self-reliance in congratulating himself. Image Credit: Alok Nirantar via The Print

Whether these political payoffs outweigh the risks of centralised, narrow industrial growth that may entrench oligopolistic concentration and long-term fragility remains uncertain. Resilience falters when too much rests on a handful of players. Still, Modi’s manoeuvres serve a larger aim: enabling India to punch above externally imposed expectations, while asserting political influence through economic power.

However, the interplay of politics and economics is most vividly observed in India’s soil. Agricultural protectionism, which traditionally begets inefficiency, is deliberately embraced: import tariffs stand at 40% on butter and 60% on powdered milk. Contrary to the economic orthodoxy that tariffs significantly hurt the importer, there is clear strategic acumen behind this policy.

The reasons are manifold. Agriculture employs over 40% of India’s workforce, making farmers the most influential voting bloc. As Hindus comprise 80% of the population, Hindu-nationalist politics imbue the dairy industry with a particular sanctity: cows are revered religiously and are emblematic of poverty alleviation. Such symbolism entrenches political path dependence, where agricultural reforms are highly unfeasible, as the rancorous protests of 2021 demonstrated.

Farmers protesting against the central government's recent agricultural reforms in New Delhi. Image Credit: Agence France-Presse via The Straits Times

But what orthodox economics derides as weakness is repurposed as strength through protectionism. Internally, shielding farmers from import competition ensures smallholder incomes, avoids large-scale job losses, and keeps domestic demand intact. Protectionism also secures food security against a volatile global market, serving the self-reliance agenda. Internationally, agriculture remains a bargaining chip in trade talks, exchanged for services and technology. Once again, India’s economic trajectory is political by design — and rather than shunning this reality, Modi embraces it, crafting a distinctly Indian growth story.

If agriculture anchors stability, digital public infrastructure accelerates dynamism. Here, politics catalyses economic transformation rather than reinforcing tradition. Aadhaar, the Unified Payments Interface (UPI), and the broader India Stack were conceived to streamline welfare delivery, bypassing ‘philanthropic’ intermediaries and minimising leakages. Politically, these were models of state responsiveness and capability. But such systems also, astonishingly, reap long-term economic dividends: by increasing access to credit, millions have been drawn into the formal economy, inducing entrepreneurship, consumption and private investment. Incredibly, what began as a political project to strengthen legitimacy has unlocked new engines of growth. Politics has virtually been recast as an economic multiplier, with trickle-down effects on India’s people.

India’s foreign policy, shaped by its doctrine of multi-alignment, mirrors this same political–economic logic on the global stage. Eschewing any binding treaties with single powers insulates India from unilateral restrictions on its development agenda. Instead, it pursues selective engagement: co-operating where interests align, withholding where they diverge. This deliberate ambiguity upholds autonomy in domestic policy-making, unimpeded by external duress, while unlocking economic opportunities across multiple fronts.

This sentiment, long palpable, has been cemented by recent trade tensions sparked by the United States of America (USA) and India’s refusal to yield to American demands. The USA raised punitive tariffs on Indian exports by 25% (on top of existing 25% duties) in retaliation for India’s unprecedented importation of discounted Russian oil and arms. Despite global sanctions aimed at punishing Moscow for violating Ukraine’s sovereignty, Russia accounted for nearly 36% of India’s crude oil imports in 2024, an eighteen-fold increase since before the war. It also remains India’s primary arms supplier. These strains have prompted a profound rethinking of India’s foreign policy, vindicating long-standing sceptics who warned against over-reliance on any single strategic partner, particularly the USA.

Image credit: The Economist via Getty Images

Yet, rather than escalating the conflict, India has chosen restraint.

The logic is clear: India’s economic engine is largely domestically driven, with exports contributing just 21% of GDP, and only a fifth of that bound for the USA. The message is implicit yet firm: India’s growth is resistant to external pressure, and it will not mortgage strategic autonomy for marginal trade gains.

What has most aggravated India, however, is the ‘strategic tilt’ towards Islamabad during the May 2025 conflict. When the USA positioned itself as the ‘peacemaker’ of the Kashmir disputes, hosted Pakistan’s army chief at the White House, and even engaged in discussion on joint ventures in cryptocurrency and resource mining with Pakistan, it represented a historically unprecedented breach of trust. Such overtures cut directly against decades of tacit alignment on South Asia’s balance of power.

Faced with these realities, India has pursued self-reliance while simultaneously turning outward with renewed determination, cultivating ties with other major powers (including direct competitors of the USA) in pursuit of a more balanced, multipolar order. Where other states yield to pressure or settle for concessions, India repositions itself on the global stage. This offers yet another example of how the nation deliberately employs politics, alongside market incentives, to reinforce its growth story.

Beyond its ties with Russia, India has also signalled its refusal to acquiesce to American mercantilism by recalibrating relations with China after six years of perceived hostility. Modi’s visit to the Shanghai Cooperation Organisation emphasised conciliation, framing relations around ‘partnership over rivalry’ and an ‘atmosphere of peace and stability’. Commercial flights, suspended since the 2020 border clashes, have resumed, while India’s imports from China have surged by 75% over the past five years.

Russian President Vladimir Putin, Indian Prime Minister Narendra Modi and Chinese President Xi Jinping at the Shanghai Cooperation Organisation summit in Tianjin on Sept 1. Image Credit: Agence France-Presse via The Straits Times

Looking ahead, India’s economic trajectory faces a moment of reckoning. Its capacity to navigate political realities will determine how effectively it can supercharge growth. 

Modi’s instincts tend towards centralisation. Simplifying the GST, cutting income taxes, and decriminalising minor business offences have all incentivised investment. Yet India’s future may demand fiscal federalism, with clearer divisions of functions and finances across government levels to accelerate decision-making. States are already driving transformation: Tamil Nadu has achieved 11% growth through idiosyncratic land and labour policies, attracting global firms like Apple; Telangana and Maharashtra are reforming electricity markets, replacing free power for farmers with solar incentives and lowering industrial costs. With a fifth of urban under-30s unemployed, urgency may catalyse long-overdue federal reforms.

Externally, India’s doctrine of multi-alignment reduces trade risks and opens up avenues of growth. Tariffs alone pose minimal immediate threats, but services exports may be vulnerable to tighter visa regulations, data localisation, or reshoring amid global tensions. Diversifying across geographies hedges risk and asserts sovereignty: ASEAN for its supply chains, Africa for markets and resources, the EU for technology and green finance, the Middle East for energy security, and China-plus-one for supply diversification.

Image Credit: The Economic Times

India now pursues multiple aspirations: achieving self-reliance, integrating into the global economy, and diversifying international partnerships. At first glance, this appears to be a classic trilemma — one where it is impossible to satisfy all three simultaneously. India has nevertheless deftly navigated these objectives by employing its political agency to shape economic outcomes beyond the reach of the free market alone. Its pro-business model, strategic use of agriculture, digital economy initiatives, and nuanced diplomacy, all driven by political incentives, underscore how politics and economics powerfully co-define one another. Harnessing this dynamic has been a boon and provides a lens to understand India’s long-term development beyond any single policy. 

Likewise, nations must recalibrate their economies to suit the increasingly politicised environment. Amid unprecedented competition, nations which embrace this reality and provide political scaffolding to economic theory will be best positioned to advance their development agendas.

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