India’s electoral shock poses a stunning economic puzzle. How is it possible that the electorate chastised rather than handsomely rewarded a leader who has presided over an astonishing economic boom? This would seem to be an event unprecedented in world history.

Consider the data. According to official data, in the three years leading up to the election, the economy posted real GDP growth rates of 9.7 percent, 7 percent, and 8.2 percent. To be sure, the first of those numbers is the recovery from Covid. But even so, such consecutive numbers — increasing the size of the economy by more than one-quarter in just three years — would normally describe economic nirvana. So, what happened? Has the Indian electorate just demolished the adage attributed to former US President Bill Clinton’s adviser: “It’s the economy, stupid”?

No, and the explanation resides in a combination of measurement, model, and Modi. Consider how.

Start with measurement. Within the economic community, it is no secret that there are many problems with Indian GDP measurement — faulty deflators, the failure to deflate inputs and outputs separately, outdated sectoral weights, poor measurement of the large informal sector. These problems haven’t received much publicity, largely because the IMF, World Bank, investment banks, rating agencies, and foreign governments have been remarkably silent about these issues. But the problems are severe and matter hugely for interpreting India’s economy.

Consider a recent example. In the past two years, the nominal and real GDP numbers have been telling two completely different stories. According to the nominal GDP numbers, growth has sharply decelerated from 14.2 percent to 9.6 percent. But the real GDP numbers show that growth has surged from 7 to 8.2 percent. The only way to square these numbers is if broad inflation has completely collapsed, falling to just 1.4 percent.

Festive offer

This seems highly implausible. It is true that the Wholesale Price Index (WPI) inflation has decelerated. But WPI is not the correct deflator, since it measures input prices, whereas GDP is evaluated at producer prices, that is to say, output prices. And output prices have not collapsed; they continue to increase rapidly, as the 4.8 percent Consumer Price Index (CPI) inflation shows.

That said, even if growth has not been quite as dazzling as the official statistics suggest, it has been reasonable. So, there remains an electoral puzzle to be explained.

Some analysts have argued that the electorate was dissatisfied because the fruits of growth have been shared unequally. In this K-shaped view, government policies enabled the very rich to gain at the expense of the poor. It is polemically appealing but not accurate to claim that only a few billionaires have benefited from India’s economic growth. Casual observation but also recent survey results confirm that the standard of living of virtually all Indians, including those at the bottom, has improved considerably over the past decade.

What is true is that growth has been unbalanced, in the sense that some sectors have been growing much more rapidly than others. And this brings us to the second element of the explanation: India’s economic model. India’s development has always favored export-oriented services and people with high skills at the expense of agriculture and manufacturing and those with fewer skills more generally.

Consider, for example, India’s well-known global success: Its export-oriented services sector. After the pandemic, as the world economy recovered and globalization in services resumed, stellar names such as Goldman Sachs, JP Morgan, and Microsoft transferred large amounts of high-skilled analytical work to India. Employment in Global Capability Centers (GCC) surged to an astonishing three million people. And as these workers have needed offices and housing, the surge in GCC employment has set off a construction boom, benefitting the workers in that sector.

On the other hand, consider agriculture. The woes of farmers have been a problem for Indian economic policy since independence. Governments have responded by providing subsidies, especially to the cereal-growing farmers in the North. But they have also repeatedly turned the terms of trade against the sector. Whenever food prices have risen and farmers scented opportunity, the government has imposed export restrictions and liberalized imports to bring down prices, thereby damaging farm incomes. The most recent example relates to onions. As prices rose, India imposed export restrictions and then released them slowly and partially which led to disaffection among onion farmers in Maharashtra, one factor in Modi’s poor performance in that state.

This pattern of a rapidly growing export-oriented service sector and a lagging agricultural sector has been India’s long-standing economic model. It cannot be attributed to the incumbent government. But there are some ways in which the Modi government’s policies have made the imbalances worse — and this is the third element of the explanation.

The informal sector has been devastated by a series of government actions. Data on informal enterprises is by nature scant, but proxies such as purchases of Fast-Moving Consumer Goods (FMCG) and two-wheelers suggest that the triple shock of demonetisation, flawed implementation of the Goods and Services Tax (GST) and drastic lockdowns during the pandemic has destroyed profitability and employment.

As for manufacturing, the Modi government has made efforts to encourage this sector, notably by providing subsidies through the Production-Linked Incentives (PLI) scheme. But this policy has had very limited success. A major reason is that it has been offset by other government policies such as protectionism. Another reason is that there has been no comparable push in labor-intensive sectors which would have expanded job opportunities for the poor and women. An even bigger reason is that the political strategy has unbalanced the playing field. A few years ago, we coined the expression India’s “2A stigmatized capitalism” to highlight the generous and extensive favors granted to big business houses (especially Adani and Ambani) that allowed them to prosper at the expense of other investors, domestic and foreign. The resulting non-level playing field has extracted a toll, discouraging overall investment in the industrial sector.

In sum, there are only two ways to reconcile the economy and the voting results. We would suggest that growth has not been as dynamic as the official numbers suggest, nor has it been very balanced. Put another way, the overall pie has not grown sufficiently rapidly and it has been shared unequally, but in a different manner than believed. As a result, the unskilled people working in the agricultural, informal, and manufacturing sectors — the bulk of the workforce and voters — experienced the economy in a way that accords with ground-level reporting: that is, negatively.

Alternatively, if we don’t accept the explanations of faulty measurement and an inherently slanted development model, we will be left with the biggest puzzle in global democratic politics: That gangbuster growth led to electoral disaster.

Where are you, James Carville?

The writers are, respectively, Principal, JH Consulting, Senior Fellow, Peterson Institute for International Economics and former Chief Economic Adviser, Government of India.