The lost decade. India’s road to economic and social revival.

Expectations can be a source of great discomfort, they have the ability to fill you with both hope and hopelessness. When PM Modi rode into power in 2014, he came in with a bag of expectations. Now four years later we might disagree on what those individual expectations were, but if there’s one thing I feel we can all agree on is that none of us are fully satisfied. That’s primarily the irony with satisfaction. If you’re fully satisfied you might hardly have any incentive to improve.

This blog post is rather different. It’s an encapsulation of regarding what I perceive to be India’s most recent (we’ve had more than we should!) lost decade from 2007-2017.


To better explain the reasons why I feel this way, I need to take you back in time. Not our time, but Japan’s. The reason for why Japan, will hopefully become clear as you read on.

India and Japan have few similarities, but where we are alike, they’re quite strong. It was quite exciting for me to notice the similarities between nations that diverge so greatly. India after a long history of being open, and adaptable, stopped being so. We regressed quite a bit for reasons that are extremely understandable now that hindsight bias has kicked in. Hindsight bias really does have the ability to make surprises vanish (Kahneman).

Long story short, we bought into our own greatness a bit too much and thus there was no incentive to keep on improving and learning. We didn’t learn when Mohammed bin Qasim first tried to capture Sindh and we didn’t learn when he won Sindh the second time around. We stagnated till Ghazni came along and by then it was already too late. For the longest time we fought against cannons with elephants. The naïveté had to be strong for us not to realize the mismatch. For long stretches of history our biggest enemy was-well, our self. We just couldn’t get out of our own way. (For more in depth analysis I highly recommend reading any of Sanjeev Sanyal’s work)


When Commodore Perry of the United States Navy on an expedition trip to Japan showed up with bigger ships and guns in 1853 at the shores of Uraga. The Japanese did something quite extraordinary. Perry’s arrival was the first time the Japanese had seen a nation with bigger ships than theirs. His arrival signaled to them that times were changing and they had to as well. “Dominate or be dominated” was what Shimazu Nariakira, a feudal lord said after Perry’s arrival. It helped Japan rise above the stagnation it was in after close to 270 years of rule by the Tokugawa shogunate.

The Tokugawa shogunate while bringing peace to a nation desperately in need of it after 100 years of warfare, also closed off Japan from the outside world. The shogunate went to great lengths to keep Japan closed from what it perceived to be foreign vices. Many Japanese were executed while trying to leave, while foreigners trying to enter weren’t spared either. Perry’s arrival had an immense impact on the psyche of the Japanese. The Japanese understood that they needed to embrace modern ideas in order to survive. A classic Darwinian survival instinct kicked in and what followed was the greatest structural upheavals in modern history- the Meiji Restoration. Within a decade of Perry’s arrival, a shogunate that had ruled Japan for centuries had been replaced with an empire that was now eager to embrace foreign ideas. The devotion to the emperor was once again important, and the Japanese would say the natural equilibrium was restored.

The source of revolt against the shogunate was primarily led by Samurai’s who were slipping into oblivion after three centuries of rule that had rendered their services irrelevant. These Samurai’s mainly belonged to Japan’s lower class and hence understood the urgency. The restoration was a true bottom up revolution. The Meiji restoration transformed Japan from being heavily outmatched to reaching parity with western powers within half a century. It’s obviously not as simple as just opening up and transforming yourself, but the Japanese were determined and showed extreme conviction to follow the path laid down by the Emperor. The Emperor deserves a lot of credit here as well, because it would’ve been easy for him to use his regained powers to stop the transformation. A transformation that was based primarily on democratic western powers where monarchs held no importance, or were on the decline. But the Emperor had committed to the path laid out and led Japan to a semblance of parity within a decade. Once they reached parity, the Japanese too, bought into their greatness that eventually led to their downfall.


Fast forward a couple decades and Japan is recovering from WW2 by undertaking its own brand of economic reform. The reform made full use of Japanese human capital by focusing heavily on supply side productivity and efficiency.

It’s the 80’s and Japan is in the hunt to overtake the US as the world’s largest economy. The US still reeling from the effects of the oil embargo is still in the first phase of President Reagan’s economic reform. The Japanese are jubilant. Why wouldn’t they be? After decades of high growth they’re about to overtake the country that brought them to their knees and occupied them for seven years. The only recorded foreign occupation of Japan in history. Spirits are high. Japanese companies are reporting record profits and household incomes are rising… then the bubble burst. The Bank of Japan at the turn of the decade had loosened the purse strings a bit too much to sustain growth. The Japanese government and companies made full use of the easy monetary policy by borrowing excessively. The misallocation of resources was quite significant by any standards, even more so by Japanese standards. It resulted in them going from a close second to a distant second during President Reagan’s second term. It was an abject fall for a nation that prided itself on efficiency and was considered the greatest success story of the 20th century. The bubble bursting led to Japan missing out on a global boom during the height of globalization in the 90’s. A period that is known as Japan’s lost decade. High productivity leads to high growth which leads to complacency which leads to misallocation which finally leads to low productivity. It’s a virtuous cycle that’s hard to get out from if you don’t realize it soon. The lost decade during the 90’s for those who had grown up during the high growth years was the worst time of their lives. Many who were old enough during WW2 called it the worst time of their lives as well. Japan was a nation that had been brought to its knees again in the space of half a century. This time it didn’t know how to respond.


The turn of the century offered a glimmer of hope though. The election of Junichiro Koizumi, a charismatic leader and someone who appealed greatly to the grassroots, galvanized the nation. The eccentric prime minister rose to power following a decade of low growth and by taking on a factional system within his own party. People hoped that an outsider might tear up the current dispensation that they blamed for their economic woes. And upheave he did.

This blog focuses on two things that for me characterized Koizumi’s term. Koizumi’s finance secretary, Kazunori Tanaka’s effort to clean up the NPA’s mess, and Koizumi’s fight to privatize the postal system which resulted in him taking on his own party. First up though, Tanaka’s effort to clean up the NPA that India can learn a lot from. Japan’s banks had for long, stopped lending. Lending had fallen to record lows in the 90’s, burdened by NPA’s that were caused by high debt financed spending.

Tanaka’s response to the issue was a classic carrot and stick approach. Immediately after assuming power, Koizumi and Tanaka gave a majority of Japan’s banks, two and a half years to either start lending at levels required or to ask for government help. Asking for government help meant admitting that they were close to insolvency and that they had made mistakes. The help though was contingent on the government replacing the management that caused the mess. Admitting that they have messed up is extremely tough for most people, even more so for bankers.

So, when Resona bank in 2003 which at the time Japan’s fifth largest bank, admitted, it was an unusual moment in Japan’s banking history. An unusual moment not only in Japan’s banking history, but any country’s banking history. The government though quickly stepped in with a $17 billion bailout. The bailout brought much needed stability to Japan’s financial system at a crucial moment. The government was even quicker to replace the management. One detail to note is that Resona bank wasn’t nationalized, even though it was, by and large, under state control. The distinction is important because it’s much harder to privatize a nationalized company later, than to slowly step back and reduce your holdings. (Something that India has great experience with)

The gradual approach towards the NPA problem eventually led to the revival of Japan’s moribund financial industry. The NPA bailout though only cost the Japanese public ¥11 trillion compared to the ¥100 trillion put up by Japan’s private financial sector institutions to dispose of NPA’s. The bulk of funds came from asset sales and future earnings. Even though the government’s injection was relatively small, the move was still politically risky. Many Japanese had seen their incomes shrink for a decade now and loathed the idea of helping out the banks. This was also a time before the great recession and there was no template for such in modern history. The Japanese would’ve looked at their counterparts in the outside world sitting pretty and felt even angrier. The bailout though ended up being a boon for the banks financial industry and set it on a path to recovery. Public perception eventually turned around after Koizumi set out to convince the people. Koizumi’s popularity and the trust people placed in him, largely helped see the bailout through. The fact that the government had stipulated management change as part of the bailout agreement would have helped from a public communications perspective as well.


Koizumi’s second big contribution was to privatize the postal service. The postal service at the time did everything from delivering packages to being the world’s largest bank, courtesy of savings and life insurance accounts. The postal service was run by factions and used to disperse favors amongst the rank and file of the liberal party. Legislators often lobbied for funding that was set for the postal service to be diverted to their own districts. The fact that Koizumi was making the privatization of the postal service a priority was not going well with many in his own party.

So, when Koizumi presented a bill privatizing the postal service, the bill was expected to fail. A majority within his own party had protested against the bill and it did fail. What followed the defeat took everyone by surprise. Such a defeat would lead to a prime minister fighting internal battles within his own party to hold on to power thereafter, which he would eventually lose.

What Koizumi did after, was to throw the rulebook out. He wasn’t going to lie down but fight back and dictate terms. Koizumi called an election and picked candidates known as the “Koizumi children” against those within his party that had voted against the bill. Unexpectedly, not only did Koizumi win, he won on the back of one of the largest majorities the Japanese have given any prime minister. Koizumi had thrown out the rulebook and emerged victorious. Now, Koizumi had the power to do anything, but he ended up not running for reelection for the party chief next year, per LDP rules. For someone who was a rule breaker his entire life, the decision was baffling. Nonetheless, he did and also ended up retiring from politics altogether in 2008.

Even though Koizumi’s is remembered fondly for his substantial achievements. Achievements that included rescuing Japan’s banks, jumpstarting a moribund economy and taking on vested interests within and outside his own party. There’s still a large section in Japan amongst whom Koizumi is referred to as Mr. NATO (No Action Talk Only) for not doing enough when he had the opportunity. For a prime minister to have such notable achievements and still be associated with such an acronym, surprised me. It surprised me until I remembered history is filled with such stories. Mark Twain once said, “In twenty years, you’ll be more disappointed by the things you didn’t do than by the things you did.” It’s a quote that’s reinforced time and time again with the benefit of hindsight. The glass does seem half empty then.


When PM Modi rode into power in 2014 on the back of a majority for the first time in 30 years, he brought with him optimism and promise for change. A change that’s largely been talked more about than seen. While India’s lost decade started under UPA’s tenure, owing to their ineffectiveness and misplaced priorities, it has actually continued in PM Modi’s tenure as well. While the PM’s tenure has stemmed the decline that was underway, it’s done little less.

On the economic front, the prime minister’s reluctance to either hold banks accountable and recapitalize them earlier, has eroded away the advantage of a strong rebound in global demand. Not to mention low energy prices. Had the prime minister provided the banks with a bailout early in his tenure and changed the management of banks he would’ve found that there was a real possibility the people would’ve supported it. The government’s recent admission and injection of funds comes too late. The gradual approach worked for Koizumi, because his government was quick to act. The Modi government is to be blamed for simply wishing the problem away. The RBI under Raghuram Rajan’s leadership needs to be held responsible as well. Debt restructuring and ensuring the robustness of financial institutions clearly fell under the RBI’s domain. The RBI should have done much more when the problem became clear in the latter half of UPA-2, especially because of the policy paralysis that was so widespread. The UPA government wasn’t expected to do much, even more so with elections around the corner. The prime minister though does deserve massive credit here for restoring the independence of the RBI, and thus faith in an institution that had seen some of it erode away under the UPA.

It only goes to highlight that the country as a whole, needs to be held accountable for the lack of direction as much as the prime minister. The country in 2014 didn’t know what it wanted, and one can argue the country largely doesn’t know what it wants even now. If it does, it disagrees on the best way to get there. The only thing certain was that the electorate didn’t want a continuation of what was happening. Unfortunately, the prime minister’s lack of coherence has contributed to recent dissatisfaction. While the prime minister might have a vision for where he wants the country to be. The prime minister doesn’t have the ideology, at least in economic terms to help translate that vision. An ideology acts as a foundation for which a leader can build his economic policy on and acts as a deterrent when that policy goes through turbulence

Apart from reducing the fiscal deficit, there’s no other fixed policy position the government has adopted. While that may be beneficial politically, it’s unproductive for the economy. The prime minister I feel, lacks the belief in what India needs economically. He might actually believe in the government’s role being diminished, but the introduction of new surtaxes say otherwise. He might actually believe that reducing the fiscal deficit is important, but then what do you make of the recent health insurance program? While I don’t disagree with the government running a welfare system. The health insurance program is modelled on something close to the US program, which incentivizes attending private hospitals. The key difference being that the private hospitals in the US while expensive, do offer quality healthcare. Most Indian private hospitals are as bad as the public hospitals. Even if you, like me, think that the number of private hospitals might go up as a result and eventually competition would increase quality. The government has spoken about the program as something for the present, which I find to be problematic. With interest rates rising in the US, and FDI bound to go down as a result, the window for change is getting narrower.


If the prime minister has a coherent ideology, he’s doing a poor job of communicating it. The irony is self-evident. Also, evident is the contradictions in most of the government’s policies. The contradictions are not something that’s going to be fixed with more economic councils. The prime minister’s fear of commitment towards any one policy is causing people to gravitate back towards the known. Being committed is hard, even harder for politicians I admit. What change might result in, isn’t always clear, but the prime minister needs to show courage by being committed throughout. Not through abrupt economic shocks.

Talking about showing courage through abrupt economic shocks. While demonetization was certainly well intentioned, I think even the prime minister would agree it didn’t have the intended effect. Unless the intention was for the people to keep expecting the unexpected. Milton Friedman, once said, “One of the great mistakes is to judge policies and programs by their intentions rather than results.” Intention was something that was clearly what the policy was judged on. Unfortunately, it was also the only thing judged. Being a big admirer of the prime minister, it pains me to see him not making the most of this golden opportunity by hitting the reset button. The prime minister’s adherence to institutions and people that led us to this mess in the first place. When it comes to securing our national security interests, the PM has done more than anyone else in our history. I also know that he’s certainly motivated me and millions more, to work towards ensuring that India’s is in a much better place moving forward. But it’s hard to reconcile all of this with his faith in the institutions that caused this mess. The prime minister should know by now that those institutions aren’t in India’s long term interests. It’s this feeling of we’re seeing change, but not quite the broad change that’s required. This almost feeling might be behind why even the prime minister’s most ardent supporters are a tad bit disappointed. The prime minister is certainly miles better than anything the opposition can offer. But should TINA (There is no alternative) be the right incentive for us moving forward? It shouldn’t, but to be honest we can’t afford a repeat of 2004. The UPA rule set us back a decade and we simply can’t afford another one.

For the younger generation to have any hope in the future, the older system needs to collapse completely. My biggest issue with the prime minister’s approach is that instead of letting the old system collapse he’s allowed for it to be extended and reinforced. He isn’t trying to replace it, but rather trying to improve it. If history is any indication his efforts are to be in vain. The old system of excessive red tape, corruption, prejudices in class and gender… the list goes on, is holding back our progress. Let me point out here, that I’m not for one moment advocating for us to change our democratic/inclusive system. It’s a system that’s fundamental to who we are as a civilisation. But there are certain structures/institutions, where resistance forces are simply too strong to change. The Prime Minister was elected on the back of hope towards changing those structures. That anger I feel is descending into apathy. And there’s nothing worse for a nation than to descend into apathy, because it comes with an acceptance that the outcome isn’t going to change. The prime minister in some cases is relying on those same resistance forces to usher in change. We need to ensure that the hope we had when the prime minister was elected, translates to action.

Just like Japan in the 1860’s, we’re at a similar crossroad. We can either let the old system collapse and replace it with something better, or we can continue to reinforce the existing system and prolong our stagnation. A new system that resembles the India our forefathers dreamt of. Where we embrace modern ideas while remaining true to our values. There was a time in our history when you had women rishi’s and gender equality was greater than it is now. An insight that I first learned when listening to Amish Tripathi. While the insight filled me with pride about our history, it also left me bewildered as to why I hadn’t read more about it in books assigned for school. Obviously our education system needs to be the first that needs to undergo radical change, but given the HRD ministry’s misplaced priorities that seems unlikely to happen anytime soon.

As you’ve probably guessed, this is not a detailed manifesto for what change should be. Just what that change should represent. India has always been a bottom up country. We don’t always like being told what to do, but that shouldn’t stop us from seeing the flaws in our current system. The prime minister needs to guide the country towards that change, instead of trying to tinker with the status quo in the hope something will give. We shouldn’t fear the unknown. For our history is made up of stories where our heroes embraced the unknown and ended up victorious. Our history has its good and bad moments just like any other civilization. More good than bad, and that’s what sets us apart. We need to own our history, cherish it, improve on our shortcomings, and not be frightened by it.

Overall, this piece isn’t to discourage voters from voting for the prime minister in 2019’s election but to hold the mirror at a crucial juncture in India’s revival. There’s a lot we can learn from Japan to ensure our economic and social turnaround does actually take place. It’s also to make sure that the PM’s tenure isn’t characterized by two acronym’s (TINA AND NATO) that don’t reflect well in history books. Although they both face(d) unique challenges I’d hate for both their tenures to be remembered for similar things. When it comes to 2019’s election though, there is no doubt in my mind that the prime minister must be re-elected. While NOTA isn’t arguably the right incentive for an election, voting back the people who caused the mess or people who hold similar values, is absolutely the wrong incentive for any democracy. Taking a massive step back because we’re not moving fast enough is exactly like cutting off the nose to spite the face. The ideal way forward would be for the PM to finally take the plunge by charting out his own economic ideology.

The country in 2014 didn’t know what it wanted, and one can argue the country largely doesn’t know what it wants even today. If it does know, it disagrees on the best way to get there. The only thing certain then was that the electorate didn’t want a continuation of what was happening. If the election of 2014 can be summarized in a few words it’d be- while the country certainly voted for a leader it loved, it voted for a change it didn’t fully believe in. It’s something that the prime minister I feel has picked up on and might be a reason for him being non-committal. To end, Buckminister Fuller once said, “You never change things by fighting the existing reality. To change something, build a new model that makes the existing model obsolete.” It’s time for the both the prime minister and the country to finally buy into change and see it through, even if the result is uncertain. We can’t afford to continue on the path we’ve been on any longer.

2 responses

  1. hank you for the feedback. I’ll try and look at places where I can cut it at.

  2. […] new that I’m trying with this blog, instead of your usual 800-1000 words and in some instances, 4000 word blog posts, I’ll be doing a few relatively short (100-200 word) posts that […]

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