Surjit Bhalla Explains What Is Really Wrong With India Economy

TITLE: Surjit Bhalla Explains What Is Really Wrong With India Economy | Govindraj Ethiraj | The Core Report CHANNEL: The Core DATE: 2026-05-23 ---TRANSCRIPT--- Hello and welcome to the core reports weekend edition. Economist Dr. Sujujit Bala wrote an article in the Indian express a day ago saying that the government is winning elections but losing the economy. That statement has predictably created uh a lot of ferrar and evoked many reactions many emotional as well. But let’s try and understand what lies behind that and what is really some of the issues that we should be looking at. What are the issues that he’s raising? How many of them are to do with longerterm structural responses to some of the challenges we are facing including of the energy shock and what could be some of the more short-term responses. So Dr. Bala just to give you a background is a former part-time member of the prime minister’s economic advisory council. He’s also worked as an economic adviser to the 15th Finance Commission and also has been a contributing editor for the Indian Express and also has worked as a fund manager of sorts as founder chairman of the Oxers research and investments. Dr. Bala, thank you so much for joining me.

Dr. Bala, thank you so much for joining me. So, I’m picking up on uh your recent article where you talked about uh the government winning the elections but losing the economy. So, let me place that aside because I’m assuming what it suggests is that uh the government is not giving enough bandwidth to some of the economic issues at hand. If I were to uh go further down that path, uh would you say that the government is not responding adequately to the crisis that we are facing right now which is the energy shock and the resultant uh let’s say accelerated depreciation in the rupee or are you referring to a more longerterm time frame? Yeah, so I am referring very definitely to a longer term time frame. uh we can talk about you know the West Asia crisis, oil prices going up that’s happening to every country around the world and I don’t think uh it’s very useful uh to uh discuss uh as to what is uh happening right now around the world. I mean nobody really knows. We thought the war would end 3 weeks ago is still going on etc. So we can speculate absolutely but my analysis to which you’re referring to is very much long-term and if you will it ends in 24 or 25 so much before this. So everything that I’ve tried to point out has to do with a longer term if you will uh which means that the present term uh the the downswing or the the angst has been exaggerated by what was already happening. Um so in that sense uh I am very definitely interested in the short medium and long run but not the immediate short one. Okay. So let me u sort of ask you a counterfactual. The the rupee is hovering around 96 to a dollar and therefore there are we are at panic stations. If the rupee was let’s say at 84 to the dollar which it was uh not too long ago or even stronger than that do you think we would have been responding similarly or would we have been even looking at all the issues that we’re looking at including long-term medium-term and short-term you know I think um and I’ve seen you know some very senior and economists who I respect a lot uh Gita Gopinat as well as um Arvin Panagri have pointed out uh as to what to do with a very immediate uh situation which is let the dollar and both of them are arguing uh let the dollar uh be free or let the rupee be free and it’ll automatically get back to normal once the crisis has passed and if I can use that as a departure now though they are two very very senior uh economists and who I know both of them and I have a lot of respect for both of them. However, my question to you and perhaps we can discuss um let us say that you know the war ended today and the oil prices came down tomorrow. Okay. Now my entire article and all the data has to do with what happened prior. So in other words that doesn’t solve anything in my view. Nothing. It doesn’t solve the FDI problem. It doesn’t solve the weakness in the economy. The fact that we are not growing as per Vix Balat. we’re growing much at the same rate as we’ve been growing for the last 30 years. So I I don’t see that’s why when you started off with and very reasonable question which long-term or short-term you’re talking about u I think it is you know to argue and the second part on the same dollar and it has got a lot of press etc that look this is like 2013 now 2013 and actually that’s a useful part point of departure in 2013 13 we had a big current account deficit. There was a real problem. We were part of the fragile five where the economies and the exchange rate was collapsing. And remember in 2013 came after 9 years of the highest inflation rate India has ever experienced an annual average of eight. And so what’s the inflation rate over the last four five years? One of the lowest we’ve ever experienced. So what’s the current account deficit for the last 5 years? One of the lowest. So you know I don’t see the traditional application of reasoning to understand the present problem. The present problem is a crisis of confidence. So as I said let’s remove West Asia from the discussion okay and let’s remove the immediate present from the discussion. So is there a problem with the Indian economy? Yes. And the problem is a crisis of confidence. Let’s go a bit further. What is the immediate long-term or important indicator of the problem is a huge decline in foreign direct investment. Net foreign direct investment because net means the money coming in and the money going out. Domestic money going out, foreign money coming in for investment. investment is the biggest uh most important contributor to growth. So that’s the issue that we need to tackle. That’s the question we need to answer. Why is that happening? And I try and answer that in my article or the two articles and the simple answer is that you know you studied economics that around the world when you want for a developing country to grow the most important factor is FDI why it’s it’s only 2 3 4% of GDP but why it brings in technology techology. It brings in supply chains. It brings in global links and that’s when you become part of a globalized system. What did we do? Now let’s get to what did we do in 2015? We came up with a grand idea that and you know many of us including myself didn’t and we should go into why we didn’t catch on to it until about 22 23. Okay, I’m happy to go to that. But basically and you know a good departure point is I was I headed the high level committee on on on trade uh HLAG for the department of commerce in 2018 and 19 and we had some very distinguished economists on the team and and political analysts etc. None of us talked about or even considered FDI. Why? And we were considered okay whether exchange rate should depreciate whether in real terms our exchange rate was overvalued or undervalued. But we didn’t discuss FD FDI because and this gets to the crux of the problem. In 2015, India decided that it was too attractive a market for international investors that they were dying to come into India and therefore we could dictate terms to the foreign investor. So and part of the dictation of terms was that once you enter in then you can’t leave you know the song you can check out anytime you want but you cannot leave so these guys a foreign investor was so committed in our thinking to investing in India that if they wanted to divorce with a with a fir with a domestic partner they had to wait five years, okay, of constant negotiation or whatever else they were supposed to do. So that was the bits bilateral investment treaty model called model bilateral investment treaty in 2015. The reason it did not appear in the foreign direct investment that was taking place or that we are now talking about was because these FDI uh treaties or the sorry the FDI commitments of a foreign firm are for not for 2 years or 3 years they’re for 10 years or 15 years. So they had come in before 2015 had committed to bringing in this much investment and they continued to comply with that. when time came to renegotiate they said we are leaving and that’s why suddenly in 24 and 25 by that time every FDI treaty had been exhausted and they’re not no they were not continuing at the same time okay at the same time are because of retrospective taxation ease of non on ease of doing business we should call um you know enforcement direct rates I mean basically domestic investors started to leave and find greener pastures abroad so they said we’re not going to invest in India I’d rather go and invest abroad so it’s that combination and notice none of it is affected by the exchange rate if you will. So it is that you don’t regardless of exchange rate you don’t want to come in. Yeah. So if I can uh you know uh deep dive into that uh now FDI is of course of many kinds. If I look at historical, let’s say take the case of Ford and General Motors, they restructured globally and they pulled out from India a few years ago of course and Ford has been debating half a foot back into India but still not here definitely not to uh sell cars but maybe use it as a manufacturing base. Now uh other companies like Hyundai and LG have done offers for sale and uh taken out money but the companies are very much here and uh growing and uh you know contributing to the economy. Now my question really is uh there is a lot of FDI which has come and has stayed and in all probability will continue to stay and some maybe the one the kind you’re referring to wanted to leave or exit for specific reasons. So my the larger question really is why is that distorting the overall picture so much even illustratively? No. Then there is something called QCOS quality control orders. Okay. And as I mentioned in the article that has really jumped since 2017. Now, quality control orders are something that a domestic firm initiates to prohibit or decrease its own competition. So therefore, I bring in a QCO. I have got the foreign investor. Okay? So they here the foreign investor is very much with the QCO and I’m hurting other investors both domestic and foreign. because for national security reasons or whatever else we cook up. So we need to look at the the wiring of our system of our deep state if you will. This is how the deep state offers operates. So you know we bring in QCOs we require you to go to an Indian judge and I I literally in 2024 at a niti Aayog meeting in front of the prime minister as well as the finance minister as well as leading officials from the PMO I made this point right there and I said look Indians don’t want to go to an Indian judge so why should a foreigner go to an Indian judge and everybody knew what I was talking about. So it’s not as we don’t know what the problem is. We know what the problem is. We know what is causing and yet we merily go along. So now in 2025 last year in February the finance minister made this commitment in parliament saying and in the budget speech that listen two committees were set up uh one for ease of doing business uh and the second one to take a revised look at the bits bilateral investment treaties. So they knew that there was a problem with the bit that had been introduced in

Now we can’t find I can’t find no one can find what the new bit is but there’s speculation of what the new bit is and the speculation says then listen instead of 5 years waiting period it’ll be 3 years and then it’s unsure whether you have to go to an Indian judge or you can have an international arbitration judge there’s a parallel path that again these are rumors until the policy happens uh that you know uh you can choose right from the word go when you sign the contract that uh when you come in whether you’ll go to an international judge or not. I don’t know why they think anybody will go to an Indian judge but you know I don’t understand it. I mean this is you know everywhere China, Vietnam, Bangladesh, Ethiopia all these countries very successful growth economies right try and encourage the foreign investor from coming for coming in they give them tax incentives what do we do we tax at exorbitant rates I mean it just I I don’t No, but we need a fundamental revisit to our policies. And here’s where if I permit to say so that I am uh now optimistic that and that’s what I tried to write in the article that look there is no downside. There’s no political downside to the government. they’re winning every election and they’re winning every election both because they have something to offer and that the opposition doesn’t have is offering less and less. So we never ever politically that one party will be in as politically comfortable situation as the BJP is today. Never ever again it’ll happen. So I I’m optimistic that look if now we don’t reform economic reform then you know uh then I don’t know very sad

so u you know using the bilateral investment treaty both as an illustrative problem of what ails our uh let’s say economic uh environment for foreign investors as well as a specific problem that you’ve pointed out uh linked also to the feeling that you know we were confident and so on and I’ll come back to that but if if uh you know keeping that uh I mean parking that aside for a moment the my larger question here is you do you feel that the government is devoting enough bandwidth to addressing the economic issues of today and I think that’s really my larger question for today because I mean if if we devote the right bandwidth uh get the right people into the room at regular intervals go out and do road shows A lot of this may be solved faster including the immediate challenges that we’re facing. How are you reading it? Very good question. Now the way I look at it and I I think it’s what many of us look at it the same way that you need to identify look politicians, prime ministers etc. have you know they can’t be dealing with everything. So they have to have a set of advisors, economic advisers in this case and then political advisers, foreign policy advisor and it seems that the economic advisers are in the PMO and nobody outside and it’s not clear that the PMO is very encouraging of different opinions. And we don’t know whether the PMO their individuals making the policy designing the policy ever appear in public. So forget the prime minister not having so why you know why aren’t you interviewing the PMO instead of me? Who am I? You should be interviewing the PMO. Please explain why the rupee is where it is. All of these questions you have to ask. I mean that’s the problem that we don’t we don’t have an open system of you know I’m not saying the PM should be answering questions. Okay that’s a separate ball game. I noticed that you haven’t me mentioned the ministry of finance so far. Yeah. So you know again ministry of finance is there’s a politician at the head and I think I have a lot of respect for her but again you know it’s the economist policy advisor that dictate policy that make policy I mean the politician has to look at various other things but they throughout this is not something new it’s that in the olden days there was a lot of discussion back and forth by the policy advisor. There was an open discussion now Ananta is talking but even he feels constrained and I think we need to just you know have a real open discussion about policies. You said uh your chief economic adviser feels constrained in what way? No, no, I I haven’t seen you’re not interviewing him. You’re not asking him the hard questions. Why aren’t you doing that? No. Is mind you, it’s not just you. I don’t see right an open I mean he writes his columns. I’ve attended seminars by him but he’s the only one. And all of these are not for you know remember even on your show I mean I have argued forever that we should not have a secret budget making. It should be open discussion. You know this idea that for two weeks everything is secret this that and all the policies are made in secret. We this is is an ongoing process and the world has changed you know everywhere else this is the process except here because here we are wedded to an IS system which was manufactured in 1800 and we haven’t changed so you know it’s secret we even I think I don’t know whether we’ve dispensed with the halva but you know I mean we need to modernize decision making that’s all we can keep the halwa but at least modernized decision making discussion expertise I mean we live in the world of AI and our IAS is still dictating you know whatever they dictate which is why we are in a problem so for those who are trying to understand uh what is the architecture then and this is a primal question that I’m asking what is the architecture then of our economic and financial decision making particularly at the political level because you mentioned PMO you said that there are a lot of decisions taken within that without sufficient interaction as you mentioned but there’s also a ministry of finance and then you said that uh the there’s an economic adviser who is uh engaging with the world but not interacting with the world is if I’ve understood you correctly so what is the then the architecture that we or how do we understand the architecture of economic decision-m in India right now it’s in secret. So, and you know, all I’m saying is look, there’s a lot of expertise in India. Okay? And we know that this very same Indian when he or her leaves India, they do fantastically well. They’re very modern, state-of-the-art, they beat everybody. And that very same Indian in India as a member of the IAS or the IFS cannot deliver. That’s what is story. So it’s not we don’t know we know we have a lot of expertise but there is no communication with and there’s no interaction there’s no criticism there’s no discussion you know everything is done in secret and comes in from above then a crisis comes from above oh what should we do and they’re not asking you or me or what they should do they’re deciding on what basis I don’t know. Take ease of doing business. Now there’s a report by Goba on ease of doing business which has got lot of wavy views but nobody can see the report. So I you know it’s why can’t we have an open discussion? So I and on economic policy we have zero we don’t see anything from the RBI. We don’t see anything from there. There is the MPC that meets. Okay. And it’s unclear how much influence they have or I haven’t seen them come up with any radical departures or questioning. So we all caught in this web. But the monetary policy committee I mean their contributions are linked to setting of monetary policy which is really interesting. But I I mean that’s a separate issue. But you’ve been part of the government in more ways than one. You were a part-time member of the Prime Minister’s Economic Advisory Council. You’re still, if I’m if I uh I mean, if I’m correct, chairperson of the Ministry of Commerce’s high level advisory group on trade. Uh you’ve been economic or economic adviser to the 15th Finance Commission. So you’ve been part of uh the system. So are you saying that even when you were part of the system, you were feeling excluded or No, no. I look I look let’s take when I was as I said right at the beginning I headed the H lag I’ve been look I’ve never been a paid member of the government uh unless you consider the IMF these are all appointed you know I was part of the RBI capital account convertability I think that’s when we first met or something in 1998 so you There were advisory bodies and I remember writing a disscent note in almost every comm but yes there was but you didn’t make I didn’t make the advisers don’t make the decisions it was always very opaque as to how the decision uh was but you know we’ve had um some very good you know we’ve they formed I mean take I think the best way to look at it is take the 91 reform Okay, which we all admire. Okay, and were breakthrough in India. Now there were a lot of pieces that individuals and economists uh had written about what als you know Bhagwati had that Bhagwati Desai had that book or so you know there was a lot of communication even though they were not part of the government but and then the decisions were made and I think right decisions were made at some time we should discuss why agriculture was not reformed. formed by the 91 reforms. But even the fact that that was not reformed, it was a mega breakthrough over time. Okay. And I would date it somewhere from the second term of Manmour uh so 2010 2011 continuing that I think communication policy communication has become more and more difficult and and it’s the time when we have become more and more globalized and that is where and And I started off by saying in how in 2010, you know, we thought that we would be China plus one and it turned out it was Bangladesh and Vietnam. Now I’ve never had a satisfactory explanation of why we didn’t open up every time every every academic seminar or quasa academic seminar I go to um is you know we have to increase the share of manufacturing in GDP and Ananta has a very good paper and he’s written we have to I want to ask I’ve been hearing that we need to increase the share of manufacturing to GDP for the last 30 years hasn’t happened. So different governments it hasn’t happened. Hence I’m propelled and I have been propelled to think of the deep state. Why is it every government comes out with that ambitious goal? not super ambitious but just we have to increase it and it doesn’t go up. So we all sit around and say we must increase it and we all nod our heads absolutely right we must increase it why don’t we put the policies in place to increase it so I mean if I can pick up I mean on that specific illustration so let’s say a couple of things that the government has been doing or has done one of course is an extensive investment in hard infrastructure uh the second is let’s a production linked initiatives or PLIs which have been offered to manufacturing firms. So there is an intent and there is definitely some action because PLI are effectively grants uh and then we are doing bigger grants for sec setting up for example semiconductor complexes. Now let’s say or let’s assume for a moment that the government is doing as much as it could or should despite as you say there’s a deep state and so on. But let’s look at the other side which is the private sector. uh is I mean one is that the private sector is not investing enough and that’s well documented now but is there are there some soft issues that we are perhaps ignoring in all of this because we either we’re looking at data or we’re looking at the hard facts but are there is there something softer when it comes to intent desire uh motivation confidence which we are perhaps overlooking no I’ll categorically reject any criticism of the private sector of I know the PM I know the AFM they were all saying uh I know Ananta has been earnestly asking why and writing articles that at least like in Commodore that why isn’t the private sector investing group does it happen anywhere else in the world the reason individuals firms react to incentives we know that they don’t act to humanity or please or please invest here. No, you do the policies and you then find out whether they will invest more or not. So it’s the policy stupid. It has nothing to do with anything else. And the point is the sad part is that the government and the makers of policies know what policies will drive. So don’t blame the private sector. Don’t blame anybody except yourself. That is to say, and that’s in every country in the world. Communist not communist, free not free, democ democratic, not democratic, one party rule, multi-party rule. It’s the policy is stupid. And you know why is that so difficult for us to absorb? So the guys like you say, “Oh, you know, these guys are not doing enough.” I’m right on. They are doing what they should be doing which is reacting to incentives. If they didn’t react to incentives, they’re not rational. And you know, I believe in the market. I believe that human beings are rational and therefore doing exactly the rational thing to do. They’re not investing because it’s rational for not to invest in India. So one incentive for uh corporate India to invest or expand and therefore put more money on ground is obviously if they perceive that the market is growing. If they’re all working at let’s say less than 75% capacity or many of them are then the incentive to to grow. So I I mean is this a specific question? I mean is there a more nuanced demand issue that corporate India or India Inc. is dealing with right now which is why investment has slowed down. Uh that’s one but on the other hand since you said policies what would be let’s say one or two policies that could change minds immediately. So at one time it would it appeared that by reducing corporate tax that could have been a big incentive and the government did reduce corporate tax. We reduced goods and services taxes in September last year. That’s also an incentive and it’s worked for to some extent at least for the automobile sector and some of to some extent for the consumer goods sector. So maybe it’s not all coming together but there are a bunch of things here and there which are happening but what is the big ticket one that you’re looking at? So I think how do we get back to ground zero okay and I think these are very straightforward simple policies which they can do tomorrow and you will see the effect of it day after first we get back to FDI policy pre2050 boom we already know what that architecture everything else. Second, the government commits never again to bring in any retrospective tax. Okay. Announce I mean s Jaitle said you know he couldn’t remove it then etc. He was very apologetic about having still on the books but that’s the problem. So no retrospective tax FDI policy back to 2015 prior to 2015 as it is in the rest of the world decrease your taxation on foreign investment. Okay. And I would say subsidize you bring it. And then for Indian uh corporates and you had started on this why can’t we do what the Koreans did and what practically every country did you we will the government will subsidize if you go ahead and export but our deep state won’t allow that we will benefit you will benefit India will benefit but the ring s will go down because they will have to perform rather than um uh you know take it so they are comfortable you know we haven’t talked about the fact that I think me large members of the population and of the government and of the corporates are very happy with the status quo they making their profits right and they keep blaming others when the solutions are straightforward. Yeah. I mean it’s just obvious what needs to be done and that is where I am a little bit hopeful because the political constraints are out and maybe the government will now take the bold steps. If it doesn’t take the bold steps, you and I will be having this discussion again in six months and nine months and 12 months and you know it’s business as usual. A problem in India, it’s business as usual all the time and noing or has an incentive especially in the bureaucracy and in the in the industry. I don’t you know that that’s where the deep state comes in. QCO think about why does a QCO happen? I mean it’s obviously to create a layer of protection for domestic industries. Yeah. Yeah. It’s the same nothing I’ve said is anything new. We protect and we shouldn’t be protecting. Right. Uh last question. uh you know there was some debate around the currency since this is where it all started and we are still focused on that. uh what’s your view on whether we should let the rupee float or uh should we defend and linked to that you know a lot of people say that oh you earn in rupees you spend in rupees so why should you bother about the dollar so I mean I’m putting that as a primer question how how do you read I rather what are your views on this and how should we be responding or looking at the statement which says that you know we earn and spend in rupees so we should Don’t really worry. I would say uh if you let the zupi float by itself and don’t do anything the others, it’s stupid and suicidal and won’t get us anywhere. Nothing. However, you do some of these basic policies and there are three or four that I mention and then let the rupee float. There you have a story, but you let the whoopy float by itself. I mean, you know, you’ll have I don’t know. I mean, I I just think that’s why I started off with that argument, this idea, let this opi float and somehow our problems all washed away. I don’t buy that at all. But but after you get the policies simultaneously okay simultaneously you announce this and you say and actually you won’t even have to say anything about the rupee it’ll automatically appreciate we will be away from the crisis if you just announce few basic common sensical policies. So uh so the short answer to your question is I Don’t let the rupee float by itself. Let a throw by itself, it’ll drown. Yeah. And the supplemental question, I mean, uh, you know, we earn in rupees, spend in rupees, so should we bother beyond a point about what’s happening to currency. Yeah. No, but the other thing that you should know is that by most conventional calculations, the rupee is not overvalued. So it shouldn’t be in a crisis situation which it is it is because of these other factors but the traditional factors of current account deficit how much our reserves I mean you know so uh yeah I to me I would not be if anybody asked my views I said I have no views on the whoopy first do these two three things then let’s talk right Dr. Bala it’s been a pleasure thank you so much for joining me on the core report thanks