India’s Issues Endangering Economy and Governance Will Have Global Effects

By Amir Jahangir

The Global Risk Report 2023 issued by the World Economic Forum just prior to the annual meeting in Davos this year has characterized critical factors about India. It identifies the country’s hidden weaknesses and vulnerabilities, making it one of the most serious threats to future global economic stability.

The 2010s saw global military expenditure growing in line with GDP and government budgets (5% of expenditure, down from 12% in the early 1990s). However, today, global military expenditure as a proportion of GDP is rising, driven predominantly by higher spending by the United States of America, the Islamic Republic of Iran, Russia, India, China, and Saudi Arabia.

India has shown an increase in allocations for the Ministry of Defence (MoD) by 9.8 percent to INR 5.25 trillion (approx. USD 70.6 billion). This does not, however, cover MoD’s two main items of expenditures. Those items are separately accounted for under the Defence Pensions and MoD (Civil) heads.

As per Observer Research Foundation, the Indian Ministry of Defence’s allocations, whether gross or net, do not reflect India’s true defense spending. Large expenses, especially those related to the four border guarding forces (BGFs) and India’s defense-related nuclear, space, and cyberspace activities conducted outside the MoD-controlled entities – are incurred by other ministries and departments.

India’s actual defense spending is thus much greater than what is reflected in MoD’s allocations.

Table 1 shows the net budget of the MoD and the four BGFs which are part of the Ministry of Home Affairs (MHA). As can be seen, out of India’s larger defense budget of INR 5.7 trillion, nearly 8 percent is spent through the MHA for the defense of the country’s external borders. The defense budget breakup is as follows:

India’s Defense Budget 2022-23 Breakup

 

Ministry Component INR Billion % of Total % of CGE % GDP
Ministry of Defence (MoD) Defence Services Estimates (DSE) 3853.70 68 9.77 1.49
Defence Pensions 1196.96 21 3.03 0.46
MoD (Civil) 201.00 3.5 0.51 0.08
MoD Total 5251.66 92 13.31 2.04
Ministry of Home Affairs (MHA) Border Security Force (BSF) 227.18 4.0 0.58 0.09
Indo-Tibetan Border Police (ITBP) 74.61 1.3 0.19 0.03
Assam Riffles (AR) 66.58 1.2 0.17 0.03
Shastra Seema Bal (SSB) 76.54 1.3 0.19 0.03
MHA Total 444.92 8 1.13 0.17
Grand Total Defence Budget 5696.58 100 14.44 2.21

Source: Observer Research Foundation

The Indian Army had revealed that 68% of the army’s equipment is in the ‘vintage category’, 24% in the current and 8% in the state-of-art grouping, and consequently, insufficient funds are certainly not going to remedy this worrying state of affairs. This indicates India’s defense budget will increase on an average of 8%-10% per annum just to replace the equipment over the next 8-10 years. A substantial undertaking that India needs to take over its undernourished population.

Water Issues

However, in the face of spreading humanitarian crises and state instability, water infrastructure continues to be used both as a weapon and target, mirroring past water conflicts and terrorism in India, Pakistan, and Afghanistan.

Water-related disputes have a long history in India and Pakistan, extending back to the partition of British India in 1947. The Indus Waters Treaty, signed in 1960, is the primary agreement between the two countries for the management of the shared rivers Indus, Chenab, Jhelum, and Ravi. However, there have been multiple instances of water being used as a weapon, with both India and Pakistan accusing each other of breaking the treaty’s conditions.

Terrorists have targeted water infrastructure in recent years, causing major damage and worsening the region’s already critical water situation. The terrorist attack on the Mangla Dam in Pakistan in 2007 is one example of water infrastructure being targeted by terrorists. The dam supplies water and energy to huge portions of Pakistan, and the attack damaged the dam’s infrastructure and endangered the lives of thousands of people downstream.

Over 12,000 global business experts, when the World Economic Forum asked the question: “Which five risks are the most likely to pose the biggest threat to your country in the next two years?” and were asked to select these from a list of 35 risks, India’s top risks were identified from digital inequality to erosion of social cohesion to climate change as the greatest risks that have global implications.

Lack of Access to Digital Services

India faces the greatest threat and risk of digital inequalities and lack of access to digital services to its society and citizens’ classifications. With fractured and unequal access to digital networks and technologies stemming from under-investments, low digital skills, insufficient purchasing power, or government restrictions on technologies.

The rural-urban digital divide in India can create multiple Indias with significant socioeconomic and political implication divides. Despite registering a significant (digital) growth rate of 13 percent in 2021-22, only 31 percent of the rural population in India uses the Internet compared to 67 percent of the urban population.

The digital divide in the access and usage of ICTs and the internet has also led to an exclusionary consequence in the three most important sectors: education, health, and finance. In a country plagued by high socioeconomic inequality, digitalization cannot be posited as the panacea for the inherent challenges of the physical world. It becomes particularly problematic when half of the population neither has access to gadgets and the internet nor the technological know-how to move to a digital environment.

In such circumstances, digitalization becomes unequal, favoring the digitally connected while excluding the rest, and in certain cases, exacerbating the already existing inequalities.

The data on India shows that there is evidence of a palpable digital divide between the rich and the poor, the urban areas and rural areas, men, and women, and among different caste and religious groups. This divide mirrors the existing socioeconomic inequalities—it means that often the most marginalized groups have been the least digitalized whereas the privileged groups reap the benefits of digitalization. The digital divide is also prominent between rural and urban India.

The recent Oxfam Report “Indian Inequality 2022” accounts that, the government of India has been promoting its flagship program, Digital India, with a vision to transform India into a digitally empowered society and knowledge economy. In the process, the government has been deploying emerging technologies to enhance the delivery of its services to the citizens.

As per the UN’s e-participation index (2022) which is a composite measure of three important dimensions of e-government, namely provision of online services, telecommunication connectivity, and human capacity, India ranks 105 out of 193 nations. The report says that India is at a high level in terms of human capital development and online services provision, courtesy of Digital India, but is held back by relatively lower levels of infrastructure development. It has the scope to benefit people who have the technological know-how and access to ICTs but has the risk of being exclusionary to the digitally disconnected population. Furthering the digital divide and exclusion among the populations, creating the social divide on the lines of economic, religious, communal, social strata, and education attainment and opportunities.

Geopolitical contestation of resources both at regional and global levels is also a risk that India needs to mitigate. Deployment of economic levers by global and regional powers to decouple economic interactions can be a challenge between nations, restricting goods, knowledge, services, or technology with the intent of gaining geopolitical advantage and consolidating spheres of influence. These are some key issues that the Indian leadership needs to concentrate on. This includes, but is not limited to currency measures, investments, and providing human capital access and natural resources management for a global market. This has especially put India on a confrontation path with China, Brazil, and Russia in terms of competition in textile and information communications technologies, along with a race to dominate the Indian Ocean and the South China Sea region to ensure sea trade and balance of power.

More than 270 million households in India are facing economic stress. Broad sections of the population have shown an inability to maintain their current lifestyle due to increases in the cost of essential goods which are not matched with a rise in real household income. The 2019-2021 data shows that about 16.4 percent of India’s population lives in poverty, with an average intensity of 42 percent. About 4.2 percent of the population lives in severe poverty. About 60% of India’s more than 1.4 billion people live on less than $3.10 a day, the World Bank’s median poverty line. And 21%, or more than 250 million people, survive on less than $2 a day.

The other challenge India faces is the growing median age population (28.4 years in 2023). The median age in India would be crossing 38.1 years by 2050. Making India the most Populus country in the world with a population of more than 1.64 billion people. The challenge India has today is that 65% population still lives in Rural India, where connectivity, education, and poverty are moving toward deteriorating social cohesion.

India’s ability to deal with its debt crisis can be a challenging task for future governments. Collapse or lack of social services and public Infrastructure can create serious constraints on progress and development. The recent Covid19 has shown the fault lines in India’s health and social infrastructures.

Infrastructure development is critical for improving India’s manufacturing competitiveness and achieving sustained growth. Although India has focused its efforts to improve Power generation and transmission, transportation infrastructure capacity constraints continue to limit corporate performance and investments.

Despite India’s significant infrastructure investments (about 35% of GDP), according to government estimates, it still requires an additional US$1.5 trillion in infrastructure investments over the next decade. But even this would likely only help bridge the infrastructure deficit rather than create room for future growth.

S&P Global estimates that poor infrastructure is among the biggest hurdles in crystalizing the Indian program and dream of, called “Make in India,” which aims to improve the nation’s manufacturing capabilities and support higher growth for generating employment. Corporate growth and investments can be hampered if the government fails to close the infrastructure deficit, which some experts estimate costs about 4%-5% of GDP due to inefficiencies. Lack of attention to infrastructure development can not only amplify inefficiencies contributing to economic restraints but can also slow down long-term growth.

Sustained policy improvements, which the Modi government has been trying to deliver, can be tumbled with electoral choices. Confidence in the sustainability of economic growth, and infrastructure development will be essential to attract otherwise muted private-sector investments in India. S&P Global has identified that Infrastructure may be India’s stumbling block, or if not done right, it could be the key to the country’s failure for economic potential, making it difficult to sustain the largest population in the world by 2050, creating a global depression that can engulf major Indian allies on economic and political fronts.

Climate change is a reality that the South Asian region is facing, neighboring Pakistan faced devastating floods in 2022. Over 800,000 hectares of farmland have been wiped out by the 2022 floods in Pakistan – this has resulted in increasing commodity prices significantly in a country that is already grappling with record 27% inflation. Similar natural disasters and extreme weather can impact India’s environmental challenges.

Failure to mitigate climate change in India, along with environmental damage incidents and the government’s poor climate-related public policy choices can result in serious biodiversity loss and ecosystem collapse, this can lead to a possible natural resource crisis for India in the next 5-8 years. Extreme caution is to be observed as the natural resource crises can spill over into the neighboring nations and regional blocks in the form of chronic health catastrophes.

The prolonged economic stagnation in India can also limit its public policy options, the increasing poverty challenge is creating a social divide between the Hindu majority and “others”, including the Muslims, Christians, and Dalits. A silent minority that is increasingly capturing the socio-economic space in society, creating further rifts between the extremist Hindu intelligentsia and the growing Indian professionals.

The coming years will present tough trade-offs for the future Indian governments facing competing concerns for society, the environment, and security. As secular India’s Tiranga is losing its colors into the shades of saffron extremism, India has its own set of complexities that can impact global prosperity and balance at risk.


About the Author

Amir Jahangir is a global competitiveness, risk, and development expert. He is a leading strategic communication specialist. He can be reached at [email protected] and tweets at @amirjahangir.


  • This article seems like a joke to a common Pakistani like me. If this is the case with India, we are certainly doomed for generations to come.

  • Don’t worry about India. Indians will manage. Worry about Pakistan who neither Pakistanis can manage nor international lenders.

  • Hi, I am a Pakistani origin economics professor working in London. In 1990, just before liberalisation of Indian economy, even more scathing articles had come out and the world had dismissed India as a forever poor nation. Just reminding people of history. Thank you.


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