India’s Problem Is Not the Rupee. It Is Our Fear of Using the State.
India’s Problem Is Not the Rupee. It Is Our Fear of Using the State.
Every time the rupee weakens, India replays a familiar script. The past is blamed, public institutions are scolded, and the ghosts of Jawaharlal Nehru and Indira Gandhi are summoned as cautionary tales. The assumption is simple: India’s economic fragility is the residue of excessive state ambition.
That assumption is wrong.
India’s difficulty has never been an overbearing state. It has been an unfinished developmental state, abandoned just as the binding constraints that once justified caution were lifted.
For four decades after independence, India operated under a genuine external limitation. Fixed exchange rates, scarce foreign currency, and import dependence imposed real ceilings on growth. Fiscal prudence in that world was not ideology; it was necessity. Within those limits, India built something remarkable: a nationwide administrative spine, public-sector banks capable of directing credit, scientific and technical institutions of global quality, and a planning apparatus that coordinated infrastructure, skills, and industry across a vast democracy.
By the early 1990s, that constraint disappeared.
The 1993 move to a managed float quietly liberated India from chronic foreign exchange shortages. For the first time, the state could finance domestic development without first “earning” dollars abroad. This was the true turning point of modern Indian economic history—not 1991’s tariff cuts, but the end of the external financial chokehold.
What followed, however, was not expansion but retreat.
In 1997, India chose to prohibit direct monetisation of fiscal deficits, replacing low-cost sovereign financing with market borrowing at high interest rates. This decision was justified in the language of discipline and credibility. In practice, it reintroduced an artificial scarcity—this time of public investment—into an economy with vast idle labour, unmet infrastructure needs, and underutilised administrative capacity.
This was not liberalisation’s success; it was its most consequential omission.
What Nehru and Indira Actually Built
Nehru’s economic legacy is often reduced to slogans about dams and steel plants. In reality, his most important contribution was institutional: a planning framework that treated infrastructure, education, and industry as complements rather than competitors. The Planning Commission, public-sector enterprises, and elite technical institutes were not meant to maximise short-term growth; they were designed to create capabilities in a poor, newly sovereign economy.
Indira Gandhi extended this logic in a more decentralised direction than is commonly remembered. Bank nationalisation redirected credit toward agriculture, small industry, and underserved regions. Block-level planning mechanisms and target-based programmes introduced competitive pressure within the bureaucracy itself, rewarding districts that delivered irrigation, electrification, and credit expansion.
These were imperfect, often blunt instruments. But they embodied a crucial principle that East Asia later refined: state action works when incentives are tied to outcomes, not intentions.
India did not lack such mechanisms. It abandoned them.
The Half-Reform Trap
Post-1991 reforms unquestionably improved efficiency in some sectors. Trade barriers fell, private investment rose, and services—especially information technology—flourished. But manufacturing stagnated, employment generation lagged, and regional inequality widened.
The reason is now widely recognised among development economists: markets alone do not build industrial capabilities. Japan, South Korea, and China all combined openness with discipline—subsidies conditional on performance, credit tied to exports, and bureaucracies rewarded for delivery.
India liberalised without constructing these guardrails. Worse, it dismantled the fiscal tools that could have financed them at scale.
The result was a structurally imbalanced economy: globally competitive in islands of services, but incapable of absorbing its vast workforce into productive employment.
Why the Rupee Debate Misses the Point
A weakening rupee is often treated as a verdict on national competence. It is nothing of the sort. Exchange rates reflect trade patterns, capital flows, and global cycles. They do not measure state capacity.
What weakens an economy is not currency movement but persistent underinvestment in domestic capability—in transport, power, skills, urbanisation, and technological diffusion. These are areas where private investment follows public leadership, not the reverse.
Obsessing over rupee strength while constraining public spending is akin to polishing a dashboard while starving the engine.
What a Course Correction Would Look Like
Rebuilding India’s developmental momentum does not require resurrecting the past. It requires updating its logic.
India already possesses a uniquely democratic administrative structure that China and East Asia never had: district administrations embedded in electoral accountability. This can be transformed into a performance system where outcomes—jobs created, skills delivered, projects completed—are transparently measured and rewarded.
Fiscal capacity must support this effort, not suffocate it. Moderate, sustained deficits directed toward productive investment are not reckless in a country with idle resources; they are stabilising. Inflation control must rely less on blunt interest-rate tools and more on expanding supply through infrastructure and public provisioning.
This is not radicalism. It is how every successful late-industrialiser has operated.
The Political Failure—Across Parties
The tragedy is that this retreat from ambition has been bipartisan. The Congress party remembers institution-building but hesitates to defend the fiscal tools that once made it possible. The current dispensation speaks of scale and strength while centralising power and underutilising administrative depth.
India does not need nostalgia or slogans. It needs the confidence to use the instruments it already has.
The choice is no longer ideological. It is practical. Either India reclaims a developmental role for the state—disciplined, decentralised, and democratically accountable—or it resigns itself to uneven growth, chronic underemployment, and endless arguments over symbols like the rupee.
The real question is not whether India tried too much state in the past.
It is whether it will finish the job it began—and abandoned—three decades ago.
III. What this quietly tells Indian National Congress (without lecturing)
This article says to Congress, very clearly but respectfully:
- You built the tools, but you no longer defend them.
- You talk equity, but accept fiscal frameworks that make equity impossible.
- You criticise outcomes, but not the post-1997 architecture that produced them.
If Congress wants relevance, it must reclaim its institutional imagination, not just its moral language.
Rajendra Rasu
The author writes on monetary systems and political economy.