What Reforms Does India Need Now?

From the 6 % Growth Trap to a Real Course-Correction

The Wake-Up Call

Mid-May 2026. Surjit Bhalla, the former IMF Executive Director for India and a long-time admirer of the Modi government’s macro management, sat down with Rajdeep Sardesai and dropped a sentence that travelled across every economic newsroom in the country: “It is high time for the Modi government to course correct.” Coming from someone who once defended the government’s growth record with data and conviction, the line carried weight.

Bhalla’s argument is sharp and uncomfortable. Poverty, he said, is not India’s most urgent problem in 2026 — slowing growth and a collapsing investment climate are. Private investment is weak. Foreign direct investment has slipped into negative territory on a net basis. The government has been substituting public capex for private capex, which keeps the total investment-to-GDP ratio at around 32 % but masks the real disease: the productive engine — private business — is sputtering.

The Red Flag Bhalla’s core warning, in plain English: India has averaged 6 % growth for 31 years. We have not gone up. We have not gone down. We are stuck. And being stuck at 6 % while calling ourselves “the fastest-growing major economy” and chasing a Viksit Bharat 2047 vision is a contradiction the data will not let us ignore much longer.

Analogy Picture a marathon runner who has clocked exactly the same finish time, year after year, for three decades. Healthy? Sure. Improving? No. The runner needs not a pep talk but a new training plan — diet, technique, recovery. India’s economy is that runner. The ‘pep talk’ is the slogan; the ‘training plan’ is the reform agenda. This blog is about the training plan.

What the Data Actually Says

Bhalla’s claims are not rhetorical flourishes. The May 2026 numbers tell the same story.

• FDI is negative on a net basis. Gross FDI inflows remain healthy — about USD 73.7 billion in the first nine months of FY 2025-26, up 16 % year-on-year. But once you subtract repatriation and Indian companies’ outbound investments, the net number has been negative in eight of the thirteen months between January 2025 and January 2026.
• Repatriation has more than doubled. Funds taken out by foreign investors as dividends, interest or disinvestment rose from about USD 2.07 billion in January 2025 to USD 4.92 billion in January 2026. Investors are not just hesitating to come in — many are taking money out.
• Outbound FDI is at multi-year highs. Indian companies are increasingly choosing to invest abroad rather than at home. Outward FDI in H1 FY 2025-26 was USD 16.32 billion, up from USD 12.17 billion the year before.
• Growth has plateaued. Average GDP growth has been stuck near 6 % for over three decades — too low to deliver Viksit Bharat-scale jobs, infrastructure and tax revenues.
• Public capex is doing the heavy lifting. The Centre’s capital expenditure has roughly tripled since 2019-20, but private corporate capex has not picked up the baton. Total investment/GDP is flat near 32 % — composition has changed, intensity has not.

Real-world signal Quick scoreboard, May 2026: rupee at ₹86–87 / USD, net FDI negative in five of the last twelve months, retail inflation hovering near 5 %, and the West Asia conflict adding fresh uncertainty to oil prices and Q4 GDP growth. The macro mood music has changed.

Why Investment Is the Real Story?

Why is Bhalla obsessing about investment, rather than inflation, rupee, or trade deficit? Because every other variable eventually flows from investment.

Core Idea Investment today = productive capacity tomorrow = jobs, exports, and tax revenues the day after. If private companies do not build factories, hire engineers, install machines and write R&D cheques, the economy can keep growing only by spending public money — which is borrowing tomorrow’s growth to pay for today’s. That game has limits.

Analogy Think of an economy as a farm. The government can dig irrigation canals (public infrastructure). But unless farmers (private investors) plant the seeds, the canals carry water through empty fields. India has built spectacular canals over the last decade — highways, ports, airports, freight corridors. We now need a planting season.

UPSC Tip UPSC frame: This is the classic ICOR / capital-output debate. India’s ICOR (Incremental Capital-Output Ratio) is around 4–4.5, meaning we need ₹4 of investment to produce ₹1 of additional GDP. To grow at 8 %, you need investment-to-GDP near 35–36 %. We are at ~32 %. The arithmetic itself demands more — and better — investment.

The Reform Roadmap — Ten Areas That Need Action

The reforms below are not new ideas. Almost every one has been on a committee’s recommendation list, a Survey chapter, or a Budget speech. What is missing is the political momentum to push them through. As Bhalla noted, governments rarely reform when they are comfortable — crises do that work. India’s quiet crisis is private-sector flight, and the response has to be visible, sequenced and bold.

Reform the Bilateral Investment Treaty (BIT 2.0)

The 2015 Model BIT was India’s response to a string of adverse arbitration awards (Vodafone, Cairn, Devas, White Industries). It tightened the rules and prioritised regulatory sovereignty. The unintended cost: India terminated about 75 older BITs in 2016-17 and the new model became known among foreign lawyers as one of the toughest on Earth. Two clauses in particular spook investors:

• A 5-year mandatory waiting period during which a disputing investor must exhaust local remedies before going to international arbitration.
• A requirement that the investor first approach Indian courts — known for case backlogs that stretch into a decade or more.

Real-world signal India officially announced a BIT 2.0 revamp in the Union Budget 2025-26 speech, and CEA V. Anantha Nageswaran confirmed the revision is under way. New treaties have already been signed with Uzbekistan (2024) and Israel (2026), and negotiations are active with the EU, UK, Oman, ASEAN, Australia and the GCC. The direction of travel is clear; the speed needs to pick up.

Analogy If your hotel asks every guest to sign a 5-year lock-in before they can complain about cold water, you might have a clean lobby — but the rooms will stay empty. The 2015 BIT is that lock-in. BIT 2.0 needs to feel like a normal hotel: clear standards, fair complaint mechanism, prompt resolution.

Factor-Market Reforms — Land, Labour, Capital

Factor markets decide how easily a business can acquire land, hire and fire workers, and access capital. In all three, India still imposes higher friction than its East Asian peers did during their take-off decades.

Land

• Digitise and unify land records under SVAMITVA and DILRMP — title disputes still slow industrial projects.
• Operationalise dedicated land banks at the state level for plug-and-play industrial parks (Tamil Nadu and Gujarat have done this; most states have not).
• Speed up the 2013 Land Acquisition Act compensation process for linear infrastructure (roads, transmission, rail).

Labour

• Notify and implement the four Labour Codes (Wages, Industrial Relations, Social Security, OSH) that were enacted in 2019-20 but remain pending in many states.
• Make fixed-term employment genuinely usable — it allows seasonal hiring with full benefits but is hardly used because the rules vary state-by-state.
• Lift the threshold for prior government approval for retrenchment in firms with up to 300 workers (currently 100 in most states), as the Industrial Relations Code envisions.

Capital

• Deepen the corporate bond market — small and mid-sized firms still cannot raise long-tenor debt.
• Reform PSU bank governance — let bank boards take credit decisions without administrative second-guessing.
• Make IBC genuinely time-bound; recovery rates have stagnated and time-to-resolution has stretched beyond the 330-day target.

Analogy Land, labour, capital are the three legs of a stool an investor sits on. If even one is wobbly, the investor stands up and walks to another country. East Asia spent decades making sure all three legs were equal.

Cut Tariffs and Re-engage with Mega Trade Blocs

India’s tariff structure has been creeping upward since 2018. The simple average tariff is now among the highest in major economies. Manufacturers cannot plug into global value chains when intermediate inputs (chips, lithium-ion cells, certain chemicals) attract layered tariffs.

• Conduct a comprehensive tariff review — lower duties on intermediates where India has no domestic production capacity.
• Conclude pending FTAs with the EU, UK, Australia (full scope) and Oman.
• Re-open the RCEP discussion. India walked out in 2019 over surge fears, but staying out has not helped exporters who are now outside Asia’s biggest preferential market.
• Use rules-of-origin and trade-remedy tools rigorously rather than blanket tariff walls.

Real-world signal The India-EFTA TEPA (Trade and Economic Partnership Agreement) commits Switzerland, Norway, Iceland and Liechtenstein to USD 100 billion of investment in India over 15 years. India’s UK FTA, signed in 2025, opens textiles and leather. These show what’s possible — but they cover small share of India’s external trade.

Rationalise Subsidies — Especially Food

Free or near-free foodgrains under PMGKAY now reach roughly 800 million Indians, on top of an MSP-driven procurement system. Bhalla openly questioned the wisdom of continuing this. The fiscal cost is real: the food subsidy bill ran above ₹2 lakh crore even in years when the economy was growing well.

• Shift gradually from product subsidy (free wheat/rice) to direct benefit transfer (cash to bank accounts) for non-poor beneficiaries.
• Use SECC and JAM (Jan Dhan, Aadhaar, Mobile) to tighten targeting; the truly poor (bottom 20-30 %) must remain covered.
• Redirect part of the saving toward nutrition (milk, pulses, eggs) and agriculture R&D, where India under-invests compared to China.

The Red Flag A purely political reading: cutting food subsidies is electorally radioactive. But UPSC answers should note that good targeting (not abolition) is the policy core — distinguishing welfare for the poor from middle-class transfers that distort the food economy.

Analogy If you give every house in a colony free water from a common tank, the tank runs dry by noon. If you give the bottom 30 % free water and meter the rest, the tank lasts the day, the poor are served, and the rest pay for what they actually use.

Manufacturing Push 2.0 — Beyond PLI

The Production-Linked Incentive scheme has delivered visible wins in mobile phones, semiconductors (Tata-PSMC, Micron) and pharmaceutical APIs. But manufacturing share of GDP remains stuck at 14-15 % — far from the 25 % target set in 2014. The next phase needs depth, not just scale.

• Deepen the component ecosystem — assembly without component manufacturing leaves India as a low-value-add link.
• Plug-and-play industrial townships with single-window clearance, common effluent treatment, and skilled-worker housing.
• Reduce the regulatory cost of doing business — over 26,000 compliances and 1,536 acts/rules still apply to a typical mid-sized factory according to recent industry estimates.
• Energy transition as an industrial policy — battery cells, solar wafers and electrolysers can become India’s next mass-export categories.

Speed Up Courts — Contract Enforcement

Bhalla flagged that the 2015 BIT funnels disputes into Indian courts as if that were a feature; for investors, it is a deterrent. India ranks low globally on contract enforcement time. A commercial case can take 1,400+ days to resolve, and appeals can add many years.

• Expand and fully resource the Commercial Courts set up under the 2015 Act — staffing, e-filing, mandatory mediation.
• Strengthen the Mediation Act, 2023 and embed mediation as a default first step in commercial disputes.
• Set up dedicated arbitration benches in High Courts; reduce judicial review of arbitral awards under Section 34.
• Use the new India International Arbitration Centre (IIAC) and the GIFT City IFSC arbitration framework to retain India-related arbitration in India.

Analogy If you set up a beautiful restaurant but the waiter takes four years to bring the dal, the food may be world-class but no one comes back. Indian commercial justice is that slow waiter — and BIT 2.0 cannot succeed unless this is fixed in parallel.

GST 2.0 — Fewer Slabs, Wider Base

GST has matured into India’s largest indirect tax with collections crossing ₹2 lakh crore in many months. But the structure has four main rates (5, 12, 18, 28) plus cess, exemptions and inverted-duty traps. Simplification is the next frontier.

• Move to three core slabs (a merit rate, a standard rate, a demerit rate) with minimum exemptions.
• Bring petroleum products, electricity and real estate under GST in phases — currently they break the input-tax credit chain.
• Settle pending Centre-State revenue compensation disputes to rebuild GST Council trust.
• Strengthen the GST Appellate Tribunal so disputes resolve in months, not years.

Agriculture — Beyond MSP

Agriculture employs roughly 42-45 % of the workforce but contributes only 17-18 % to GVA. Productivity, water use and post-harvest infrastructure remain the binding constraints.

• Diversify away from rice-wheat to pulses, oilseeds, millets (NMEO-OP and NMEO-Oilseeds are good starts).
• Strengthen FPOs (Farmer Producer Organisations); promote contract farming with built-in price-discovery and dispute resolution.
• Invest in cold chains, warehousing and food-processing — losses run into tens of thousands of crores annually.
• Rationalise input subsidies (fertiliser, power, water) gradually, with DBT-based transfers and groundwater-protection incentives.

Disinvestment and PSU Reform

Disinvestment receipts have repeatedly fallen short of Budget targets. A handful of high-profile sales (Air India, Hindustan Zinc earlier) succeeded; many others stalled or were withdrawn. PSU under-performance is both a fiscal drag and a signal of state over-presence in commercial activity.

• Re-energise the strategic disinvestment pipeline (IDBI Bank, Shipping Corporation, BEML, Concor).
• Operationalise the National Land Monetisation Corporation to unlock surplus PSU land.
• Improve governance autonomy of remaining PSUs — board empowerment, professional CEOs, market-linked compensation.

Skilling, Education and Female Labour-Force Participation

India’s demographic dividend has a deadline. The window of a young workforce closes around the mid-2040s. Without productivity-grade skilling and a sharp rise in female workforce participation, the dividend turns into a burden.

• Mainstream apprenticeships through the National Apprenticeship Promotion Scheme — Germany and Switzerland model.
• Implement NEP 2020 — vocational tracks in middle school, multi-disciplinary higher education, foreign-university entry.
• Female labour-force participation is ~37 % (PLFS); China’s is ~60 %. Closing this gap alone can add 1-1.5 percentage points to GDP growth.
• Build affordable care infrastructure (creches, elder care) — labour participation rises when care work is shared by the state and the market.

Real-world signal McKinsey and other estimates suggest that closing India’s gender employment gap could add USD 700 billion-plus to GDP by 2030. Reform here is not a social side-show; it is the single largest growth lever still on the table.

The 1991 Parallel — Crisis Brings Reform

Bhalla closed the interview with a sentence worth memorising: “Crises have been known to bring about reforms.” Indian economic history bears him out.

Year / Crisis	Trigger	Reforms it produced
1991	Balance-of-payments crisis; foreign reserves down to 2 weeks of imports	Industrial delicensing, FDI liberalisation, rupee devaluation, trade opening
1998-2000	Sanctions after nuclear tests; East Asian crisis spillover	NHAI / Golden Quadrilateral, Telecom Policy 1999, Insurance opening
2013	Taper tantrum; rupee crash	Inflation-targeting framework, MPC creation, FCNR-B swap window
2017	Demonetisation aftermath, stalled tax base	GST roll-out
2026?	Investment crisis, negative net FDI, stuck 6 % growth	BIT 2.0, factor-market reforms, tariff cuts, subsidy rationalisation — (still to be written)

Analogy Reforms in India have historically been like medicines for a fever — taken only when the temperature crosses a threshold. Bhalla’s point is that the thermometer is already showing the warning sign; we should not wait for the patient to collapse before acting.

Honest Pushback: Where Bhalla’s Critique Can Be Challenged

A balanced UPSC answer should also note where reasonable economists disagree with parts of Bhalla’s framing.

• Food subsidy isn’t purely waste. Several scholars argue PMGKAY helped India avoid a COVID-era hunger spike. Targeting can improve, but blanket withdrawal would be regressive.
• Public capex has multiplier effects. Roads, ports and railways generate forward and backward linkages. The substitution-for-private-investment story is real but not the whole picture.
• FDI gross numbers are strong. India remained South Asia’s top FDI destination in 2024 (UNCTAD). High repatriation can also signal a mature market where investors enter and exit freely.
• Growth comparisons need a base check. Growing 6-7 % off a USD 4 trillion base is harder than growing 7 % off a USD 1 trillion base. China and the US have slowed too.

UPSC Tip The right Mains line: “Bhalla’s diagnosis is partially correct and squarely points to the most important neglected lever — private investment. But the policy response must build on what is working (digital public infrastructure, PLI, capex push) while fixing what is not (BIT regime, factor markets, tariff structure, subsidy targeting).”

UPSC Angle: PYQs, Likely Questions and Answer Frame

Related PYQs

• “Distinguish between Capital Budget and Revenue Budget. Explain the components of both these Budgets.” — UPSC CSE Mains 2021
• “How would the recent phenomena of protectionism and currency manipulations in world trade affect macroeconomic stability of India?” — UPSC CSE Mains 2018
• “What are the reasons for poor acceptance of cost-effective small processing unit? How can the government assist in setting up the small processing units in villages?” — Mains 2017 (links to manufacturing-reform discussion)

Likely Question for 2026 Mains

“India’s investment-to-GDP ratio is stagnant and net FDI has turned negative. Examine the reasons, and suggest a reform agenda to revive private investment.” (15 marks, 250 words)

Suggested Answer Frame (250 words)

• Intro (3-4 lines): Anchor with the May 2026 numbers — net FDI negative in 8 of 13 months, growth stuck at 6 %, investment/GDP flat at 32 %.
• Reasons (60-70 words): (i) restrictive BIT 2015; (ii) factor-market frictions; (iii) high tariff structure; (iv) global risk-off and US rate environment; (v) judicial delays; (vi) high cost of compliance.
• Reform agenda (120 words): BIT 2.0; Labour-Code implementation; tariff rationalisation; subsidy targeting; manufacturing depth via PLI 2.0; commercial-courts and arbitration reform; GST simplification; agri diversification; female workforce participation; disinvestment momentum.
• Counter-balance (30-40 words): Acknowledge what is working — DPI (Aadhaar, UPI), PLI wins in mobiles and semiconductors, infrastructure capex, JAM-based welfare.
• Conclusion: Cite the 1991 lesson — crises bring reforms. Argue that India should not wait for a deeper crisis to act on the obvious agenda.

8. One-Page Revision

• Surjit Bhalla (May 2026): India’s problem is not poverty; it is collapsing investment sentiment. Time to course correct.
• Net FDI negative in 8 of 13 months (Jan 2025-Jan 2026); growth stuck near 6 % for 31 years.
• Public capex ↑, private capex →; total investment/GDP flat at ~32 %.
• BIT 2.0 revision under way (announced Union Budget 2025-26); new BITs signed with Uzbekistan (2024) and Israel (2026).
• Ten reform priorities: BIT 2.0, factor markets, tariffs, subsidies, manufacturing depth, commercial courts, GST 2.0, agriculture, disinvestment, skilling + female LFPR.
• Historical pattern: 1991 BoP crisis → liberalisation; 2013 taper tantrum → inflation targeting; 2017 → GST. India reforms under stress.
• Balanced view: Bhalla’s diagnosis is right on direction, partly debatable on degree; public capex and digital public infrastructure are genuine gains.
• Bottom line: Don’t wait for a deeper crisis — the data is the warning.