Everyone I talk to has the same opinion about India – it is inexorably moving towards fulfilling its destiny of being the next superpower in the world. The euphoria has been fuelled by 9% plus growth, favourable demographics, an open market combined with a vibrant democracy and until recently a stock market outperforming every other in the world. Any argument to the contrary is met by a condescending look and an unspoken “Let me humour the half-wit” along with a repetition of the facts outlined above.

It is true that India has come far from the days of ‘Hindu rate of growth’ and the license raj. However it would be naïve to extrapolate the impressive performance since 1991 to the future. Ignoring economic cycles, the factors responsible for the performance of any economy can be broadly classified into those which impact economic potential and those which impact economic efficiency. The latter is the percentage of potential actually achieved. Factors such as infrastructure, technology and education level impact potential while market structure - heavily regulated or free - determines the level to which it is achieved.

Economic growth since liberalization has been primarily based on removal of inefficiency from the system. Successive governments have been reasonably successful in removing the chains that redistributive politics created in the 20 odd years from late 60’s to early 80’s. Markets have been opened to competition and stifling regulation removed unleashing the entrepreneurial spirit of Indians. As a result the investments in infrastructure, heavy industry and education made after independence under Nehru and added piecemeal by his successors, provided the platform to jump start growth.

However, India is now approaching the limits of its potential. And all sectors – agriculture, manufacturing and services will be negatively impacted. This is best illustrated with an example of a textile manufacturer. Not only does he need to set up his factory but also a power plant. Since the provision of electricity is a joke, almost every factory and every residential complex has to build a private power station. After the factory is set-up, the manufacturer must face the antiquated roadways and railways which are unable to meet the exacting standards of his JIT supply chain. This of course assumes that the monsoon gods favour the cotton farmer and the manufacturer can procure his raw material. It is pathetic that more than 50 years after independence more than half of cultivated land is monsoon dependent. It is an eye-opener to the sincerity of our ‘farmer friendly’ politicians. Changing global weather adds to the grimness of the situation. Even after overcoming these hurdles, the manufacturer is not out of the woods yet. The ports and airports are clogged leading him to miss delivery deadlines. The situation has improved little despite infrastructure being made a priority in every budget and every speech.

In the above situation we have implicitly assumed that his factory is staffed by skilled workers. However, despite world class educational institutes of excellence, Indian manufacturers struggle to find educated and skilled manpower. This is because the primary education system is a mess and the ‘stars’ from NITs/ IITs are either overqualified for most roles or will not deign to work at such low wages. They would rather be in software. The media perpetuated image of a vast army of ‘English speaking educated young Indians’ looking to take over the world is a myth. Talent is scarce and to figure out this truth one only needs to look at the churn rates and spiraling wages in the ITeS sector. Changing jobs every six months is not an indicator of the opportunities available but a signal that the system is supply constrained. No doubt there are several hundred thousand qualified young people graduating every year, but what about the millions that the educational system spews out without imparting any skills? For a service sector led economy, the millions represent lost potential.

The prognosis seems grim. The recent phenomenal growth and international admiration has had the same effect on politicians as cocaine on an addict. Before the stock market tumble lessened the glory, irrationally exuberant leaders of the land had assumed superpower status a foregone conclusion. So much so that attention was refocused on equitably dividing the pie and ‘uplifting’ the downtrodden rather than insuring continued growth. This will not only do nothing to enhance economic potential but will also negatively impact economic efficiency by distorting the market. This heralds a return to the misguided populist policies of Indira Gandhi. No surprise that these policies are being spearheaded by her party where her former cabinet colleagues are important opinion makers.

Populist policies are hard to eschew given that one part or the other is going into elections. And with BJP’s downfall being attributed to India failing to shine on a majority of the population, an economically rational agenda is harder to follow, especially when the majority party is trying to perpetuate a dynasty. However, the solution is not Chinese style decision making but understanding that ‘a rising tide lifts all boats’. There is a trickle-down effect of growth but its effectiveness depends on the ability of the economic structure to disseminate it. This comes back to infrastructure and education. The former determines whether opportunities are confined to cities or reach every household in the country. The latter determines whether households can exploit those opportunities. The failure of the BJP lay in the fact that it did not properly address these fundamental issues thus confining growth to an urban minority. The lesson is not to focus on dividing gains from growth equitably but to focus on building a structure where growth touches all. For India to claim superpower status, it has to internalize this lesson first.

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