Government must focus on reducing risks to private investment for inclusive growth, says former CEA Arvind Subramanian

Former Chief Economic Advisor Arvind Subramanian has said that while India has achieved macroeconomic stability and improved returns on investment, the government must now concentrate on lowering risks faced by private investors to ensure inclusive and sustainable growth.

Speaking to CNBC-TV18, Subramanian said, “The government has been very successful in increasing the returns to investment, but the risks to investment have not gone away and still remain very high. That’s what the government needs to focus on going forward.”

Reflecting on India’s economic journey since liberalisation, he pointed out that the post-1991 period witnessed rapid economic expansion, yet failed to generate enough formal jobs. “We had spectacular growth, even by international standards, something like 6-6.5% per capita over a long period. Yet that rapid growth was accompanied by little structural transformation. We were not able to provide formal, reasonably well-paying, and productive jobs to a vast swath of our population,” he said.

Subramanian added that India’s private investment has remained weak despite strong public investment and a stable banking system. While sectors such as AI and services have gained prominence, he cautioned that focusing only on these areas would not make growth inclusive. “We still have to make a concerted effort to generate low-skill jobs across the economy,” he said.

The former CEA also observed that India needs to learn from its own successes, not just its failures. “People often say we should learn from our failures—but in India, we’ve also failed to learn from our successes,” he remarked.

His comments come in the context of a new book he has co-authored with political scientist Devesh Kapur titled A Sixth of Humanity: Independent India’s Development Odyssey. The book examines how India—a country of continental scale—has, through democratic means, sought to achieve four major transformations simultaneously: forging a nation from disparate identities, building state capacity, creating markets, and modernising a caste-bound society.

Kapur noted that India’s democratic framework has been instrumental in holding the country together despite deep social and linguistic diversity. “Democracy was not just something of intrinsic value but also had enormous instrumental value in building a nation with modest levels of bloodshed,” he said, pointing out that unlike the violent paths to state-building in the West, India’s nationhood evolved largely peacefully.

Together, the authors describe India’s 75-year development record as mixed—a story of remarkable stability and endurance alongside persistent structural challenges. As India looks to the future, Subramanian said the next phase of growth must be anchored in an environment where private capital feels secure and confident to invest.

Below is the excerpt of the discussion.

Q: Dr Arvind Subramanian, first you—can you tell us what you intended to convey in the book?

Subramanian: Yeah, I think maybe we should first begin by elaborating on what you just said. Why was the Indian experiment, when India was newly created, such a daunting and challenging task? You laid out the fact that India had to carry out all these transformations simultaneously through democratic means, on soil that was so diverse, full of cleavages and contradictions.

Just to highlight how challenging the task was—we show early in the book that there have broadly been two successful paths of development. The first path is the Western model, where political and economic development go hand in hand. Countries grow economically, and the franchise is extended gradually as they develop. Growth happens slowly—at about 2-2.5% over 150 to 200 years. That’s one successful model, and the West belongs there.

The other successful model is what happened after World War II, when many Asian countries—Japan, Korea, Taiwan, China—achieved successful transformations. But they were different from the first model in two respects. First, they grew very rapidly over a shorter period, something like 5.5-6% depending on the country, for about 40 to 50 years. Second, their political development either happened well after reaching high levels of economic development—like Korea or Taiwan—or it did not happen at all, as in the case of China, which remains a highly repressed economy.

So, if you contrast those two with India, which from day one said, “We will have democracy,” political development came first. And of course, we’ve been trying to do all the other things you just mentioned. So, this comparison shows how unique India’s path was—it really stands out among successful development models.

Q: Professor Kapur, if you’d like to add—what is the main message you wanted to give, or the main takeaway?

Kapur: The book basically looks at how India went about building a nation-state and building markets—what choices it made, why it chose universal franchise at very low levels of development, and what the consequences of those early choices were.

It also tries to understand why, when it became clear that some of those choices were not working out, it was so hard to exit from them. And then, when it eventually did, what were the factors that led India to move away from its earlier, less effective choices. One of those choices, for example, was how the private sector was stifled early on—and only after 1991 were those fetters finally cut.

Q: This economic story—of how we throttled the private sector and then freed it somewhat from 1991—is a story that’s relatively well known. What is not very well known about India, as you point out, Professor Kapur, is what you call the Hobbesian order—that the country managed to avoid major violence and civil war. Can you elaborate on that?

Kapur: What we point out is the very distinctive path of nation-building that India took. The broader, quintessential Western experience was based on nationhood built on a single language and a single religion. That option was not available to India. Democracy, therefore, was not just something of intrinsic value but also had enormous instrumental value in building a nation with modest levels of bloodshed.

State-building everywhere has been accompanied by massive amounts of violence because the state is defined as an entity with a monopoly on coercion. To achieve that monopoly, it tries to crush all other sources of violence. In India, because it chose democracy as its path to nationhood, it managed to avoid the massive human casualties that occurred in many other countries.

Q: Dr Subramanian, you point out that India throttled the private sector, especially up until 1991. But today, if you look at the last few years, India has proactively been trying to encourage the private sector. In the 1950s, when we chose steel as an important industry to focus on, we put it in the public sector. But now, when India wants to encourage semiconductors—and not be blackmailed by China or anyone else—we’re putting it in the private sector. The state is ready to give subsidies to the Tatas and some foreign entities. And then you have the PLI schemes and a million other ways in which the state is proactively creating champions. So, do you think the chapters ahead will be much more dynamic for the Indian economy?

Subramanian: First, let’s recall one or two of the experiences and lessons of the past. The growth we achieved after we opened up—between 1991 and around 2012–2015—was remarkable. One of the paradoxes was that we had spectacular growth, even by international standards, something like 6-6.5% per capita over a long period. Yet that rapid growth was accompanied by little structural transformation—specifically, we were not able to provide formal, reasonably well-paying, and productive jobs to a vast swath of our population.

So, while there was dynamism for long periods, we didn’t get the manufacturing jobs that could have made the growth more inclusive. That’s one lesson to keep in mind. The second is that people often say we should learn from our failures—but in India, we’ve also failed to learn from our successes, which is why I’m emphasising this point.

Even during the period of rapid growth, our fiscal situation remained fragile, with among the highest deficits globally—as we document in one of the chapters.

Now, why do I say all this? Because going forward, India once again needs rapid economic growth. You’re right in saying we’re emphasising the private sector and giving it more space. But we should not think, “Oh, let’s just focus on AI and services,” because those won’t deliver inclusive growth. We still have to make a concerted effort to generate low-skill jobs across the economy.

Finally, it’s true that today there’s a lot of macroeconomic stability. The banking sector is flush with funds and able to provide credit. Public investment and connectivity have been built up. But the major challenge is that private investment has remained weak for long periods, even though FDI is now coming in.

In a nutshell, while the government has been very successful in increasing the returns to investment, the risks to investment have not gone away — they still remain high. That’s what the government needs to focus on going forward.

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