Surjit Bhalla Explains What Is Really Wrong With India Economy | Govindraj Ethiraj

ELI5/TLDR

Surjit Bhalla argues the rupee falling to 96 is a symptom, not the disease. The disease is that foreign direct investment has collapsed, and it collapsed for reasons that were baked in years before the current oil shock. India in 2015 quietly told foreign investors they had to lock themselves in for five years and only fight in Indian courts if things went wrong — and a decade later, the contracts are running out and those investors are walking. His prescription is short: undo the 2015 treaty regime, kill retrospective taxation, subsidise exports the way Korea did, and stop running the economy as a secret kept inside the PMO.

The Full Story

The bait-and-switch on the headline crisis

Bhalla starts by waving away the present panic. Yes, the rupee is at 96. Yes, oil is up because of the West Asia war. He doesn’t think any of that matters for the argument he wants to make. His thesis was written in numbers from 2024 and 2025, before the latest shock. The point of departure is not the rupee — it’s that even if the war ended tomorrow and oil came down, nothing would be solved.

He’s also impatient with the 2013 comparison.

“In 2013 we had a big current account deficit. There was a real problem. We were part of the fragile five… And so what’s the inflation rate over the last four five years? One of the lowest we’ve ever experienced.”

So this isn’t a balance-of-payments crisis. It’s something else. He calls it a crisis of confidence.

The FDI collapse and the 2015 own goal

The single number Bhalla keeps pointing at is net foreign direct investment — money coming in minus money domestic firms are sending out. That number has cratered. FDI is only 2-4% of GDP but it’s the carrier wave for technology, supply chains, and integration into global production. Lose it and you lose the thing that turns a developing economy into something else.

He locates the original sin in 2015, when India redesigned its model Bilateral Investment Treaty. The new terms told foreign investors that once they were in, they couldn’t easily leave. If they wanted to exit a domestic partnership, they had to spend five years in negotiation. Disputes went to Indian judges — a courtroom that even Indians try to avoid.

“I literally in 2024 at a niti Aayog meeting in front of the prime minister as well as the finance minister… 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.”

The damage didn’t show up immediately because existing FDI commitments run 10 to 15 years. The earlier cohort kept honouring their old contracts. But by 2024 and 2025, the renewal cycle hit. When the time came to renegotiate, they said: we’re leaving.

Meanwhile domestic capital was also walking — partly retrospective taxation, partly enforcement directorate raids, partly just better risk-adjusted returns abroad. None of this, Bhalla notes, has anything to do with the exchange rate.

Quality Control Orders and the deep state

The other lever he names is Quality Control Orders, which exploded after 2017. A QCO is dressed up as a safety or national security measure but is really a domestic firm raising a wall around itself, with one or two friendly foreign partners already inside.

“We need to look at the the wiring of our system of our deep state if you will. This is how the deep state operates.”

The deep state in Bhalla’s usage is not a shadowy political cabal. It’s the bureaucracy, the IAS, the comfortable incumbents — the people who have spent thirty years nodding along to the line that manufacturing’s share of GDP must rise, while making sure none of the policies that would actually raise it ever get passed.

Why the comparison with Korea hurts

The contrast he keeps reaching for is what every successful Asian export economy did. China, Vietnam, Bangladesh, Ethiopia — all of them rolled out the red carpet for foreign capital and tax-incentivised exports. India taxes both at exorbitant rates, then asks why the private sector isn’t investing.

He categorically refuses to blame Indian corporates for low capex.

“Don’t blame the private sector. Don’t blame anybody except yourself… It’s the policy stupid. And you know why is that so difficult for us to absorb?”

Firms react to incentives. If they’re not investing, the incentives are wrong. Capacity utilisation under 75% is the visible symptom — nobody adds a new line when the existing one is half idle and the policy floor is shifting.

The architecture of secret government

Ethiraj presses him on who, exactly, is making the calls. Bhalla says the economic advisers live inside the PMO, never appear in public, and don’t seem to welcome dissent. The Ministry of Finance has a politician at the top whom he respects, but the real policy work happens elsewhere and in private. Even the chief economic adviser — Anantha Nageswaran — writes columns and speaks at seminars but operates within constraints.

“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.”

His complaint is structural. India still makes the budget the way it was made in 1800: two weeks of secrecy, halwa ceremony, sudden reveal. The rest of the world has long since switched to open consultation. The IAS, designed for 1947 governance, is still running the steering wheel in a country trying to plug into AI-era global supply chains.

The optimism

Despite all of this Bhalla calls himself optimistic, on one narrow ground. The BJP has the most politically secure position any Indian party has held in decades. There is no electoral cost to bold reform. If they don’t take the opening now, they probably never will. He lists the moves he’d like to see, in order, executable tomorrow:

Roll the FDI framework back to its pre-2015 state
A binding government commitment never to apply retrospective taxation again
Cut tax on foreign investment, ideally subsidise it
Subsidise exports — the Korean model — making subsidies contingent on export performance

Announce these together and you wouldn’t need to defend the rupee at all. It would appreciate on its own.

On letting the rupee float

The last exchange is the cleanest. Should India let the rupee float and ride out the storm? Bhalla’s position is sharp: floating without the underlying policy fixes is suicidal. The rupee isn’t overvalued on conventional metrics — it’s not a price problem, it’s a confidence problem. Do the four things above, then let it float, and it will appreciate on its own. Float it now, on its own, and it drowns.

Key Takeaways

The 2015 model Bilateral Investment Treaty is Bhalla’s central villain — 5-year lock-in, Indian court jurisdiction, terms that assumed foreign capital had nowhere else to go
FDI commitments run 10-15 years, so the policy damage from 2015 only became visible in the 2024-2025 net FDI numbers
Bhalla treats current macro headlines (rupee at 96, oil shock, West Asia war) as essentially irrelevant to the long-term diagnosis
Unlike 2013, India today has low inflation and a small current account deficit — this isn’t a balance-of-payments crisis, it’s a confidence crisis
Quality Control Orders have exploded since 2017, functioning as protection rackets for incumbent domestic firms
He refuses to criticise the private sector — firms respond to incentives, full stop, and the policy stack is the variable
Manufacturing-share-of-GDP has been a stated goal for 30 years across multiple governments and never moves — Bhalla treats this as evidence of “deep state” (bureaucratic) capture, not political failure
Economic decision-making lives inside the PMO with no public discussion; even the CEA operates under constraints
The China-plus-one opportunity was lost to Vietnam and Bangladesh
His four-step prescription: pre-2015 FDI rules, no retrospective tax, lower/subsidised tax on foreign investment, Korean-style export-linked subsidies
Floating the rupee without these policy fixes would be “stupid and suicidal” — with them, the rupee appreciates on its own
BJP’s political dominance is the rare window for reform — “never ever again it’ll happen”

Claude’s Take

Bhalla is at his best when he’s specific. The Bilateral Investment Treaty timing argument is the kind of thing you don’t hear in the standard rupee-panic discourse — it’s an actual mechanism, with a delay structure that explains why the damage is showing up now rather than in 2015. The QCO point is similarly useful. These are levers you can name, not vibes.

The weaker register is the “deep state” framing, which keeps shading from a sharp critique of bureaucratic inertia into something closer to a general grievance about not being listened to. He was inside multiple advisory bodies. He wrote dissent notes. He says nothing ever happened. That may be true, but the framing tends to flatten the difference between “the IAS protects incumbents” and “people in the PMO don’t take my calls.” Both might be real, but they’re different problems.

The prescription list is also suspiciously clean. Roll FDI policy back to pre-2015, kill retrospective tax, cut taxes, subsidise exports — done by tomorrow, rupee appreciates by next week. The Korea comparison is a recurring move in Indian reform writing, and it always glosses over the fact that Korea had a developmental state with execution muscle that the Indian bureaucracy explicitly lacks (by Bhalla’s own description). If the deep state can sabotage manufacturing share for 30 years, what makes you confident it will administer Korean-style export subsidies cleanly?

Still — 7/10. The BIT-and-renewal-cycle thread is genuinely worth holding on to, the refusal to blame corporates for low capex is correct and unfashionable, and his calibration of which numbers are the present problem (FDI) versus which are noise (rupee, oil) is more disciplined than most of what gets written about the Indian economy in a panic week. Lose a point for the repetitive “deep state” rhetoric and another for the unjustified confidence that four announcements solve everything.

Surjit Bhalla Explains What Is Really Wrong With India Economy | Govindraj Ethiraj | The Core Report