Bankrupting Itself: An Indian Story

How welfare politics are weakening India while China builds power.

The most dangerous policies rarely look dangerous. They arrive wrapped in fairness, empathy, and moral virtue. Politicians have perfected the art of selling policies that are disastrous for the long-term health of the nation—while convincing voters they are acts of generosity. It is not unlike my daughter persuading me to hand over my credit card for a Black Friday spree: everyone feels good… until the bill comes.

Human psychology makes this possible. We are wired to admire those who appear to stand for good. In prehistoric tribes, survival depended on appearing fair and aligned with the group. When a predator appeared outside the cave, the tribe had to act collectively. Being perceived as moral increased the odds that others would defend you. Today, modern politicians exploit the same instinct.

In India, this instinct has a price. The country is still transitioning from a lower-middle-income stage and desperately needs capital investment—factories, energy, technology, infrastructure. Instead, electoral competition increasingly rewards short-term consumption. Cash transfers, subsidies, and welfare schemes like Ladli Behna multiply across states, costing tens of thousands of crores annually. Borrowing to fund this consumption is like giving sugar to a diabetic: it feels kind, but it accelerates the disease.

Imagine a family drowning in debt. One son runs a profitable business. The other spends money. The father borrows more and gives it to the spender. The productive son stays silent to avoid appearing selfish. The spender is happy. The productive son’s silence becomes the family’s downfall.

Modern welfare politics often mirrors this pattern. India’s combined central and state debt is nearing 85–90% of GDP. Interest payments alone now consume roughly 23–25% of government revenues—more than the national defense budget. Punjab’s debt exceeds 45% of state GDP. Kerala’s is around 38–40%. West Bengal’s debt is near 37–38%. Productive states such as Maharashtra, Gujarat, and Karnataka carry far lower debt burdens, but fiscal federalism effectively channels capital from the productive to the unproductive.

Once welfare commitments appear, they rarely disappear. Each election forces politicians to promise more than the last. Lakhpati behna today. Crorepati behna tomorrow. The arithmetic of generosity compounds quietly—until suddenly it doesn’t.

This dynamic is not unique to India. Argentina once ranked among the world’s ten richest economies. Decades of borrowing, populism, and currency debasement reduced it to repeated sovereign defaults. Sri Lanka followed a similar path, culminating in a full-blown fiscal crisis in 2022.

History even provides a lesson from India’s neighbor. Late in the Ming Dynasty in China, the court faced mounting pressure to maintain subsidies, grain transfers, and regional appeasement while revenues stagnated. Short-term expedients kept the population calm, but military funding weakened and regional administrations hollowed out. Within decades, the dynasty collapsed, replaced by the Qing. Fiscal decay rarely looks dramatic when it begins—it usually looks compassionate.

The Scottish philosopher Adam Ferguson observed that when interest payments exceed defense spending, fiscal foundations begin to crumble. The United States recently crossed that threshold. Less discussed is that India, combining central and state finances, is already uncomfortably close.

And then there is geopolitics. India shares a long and contested frontier with China, whose economy is roughly $18 trillion—almost five times India’s $3.7 trillion. China produces three times more manufactured goods, spends over four times as much on R&D, and dominates critical industrial sectors from electronics to shipbuilding to EVs. Economic scale translates directly into military capability, technological edge, and geopolitical leverage.

Dominant states rarely tolerate powerful neighbors rising unchecked. For India to remain a civilizational power with real autonomy, its economy must approach 40–60% of China’s size, based on historical benchmarks. Today India sits closer to 20%. Below this threshold, sovereignty becomes increasingly theoretical. At best, the smaller state becomes a quasi-vassal—formally independent, but structurally constrained.

Consumption does not build power. Capital does. Factories matter. Technology matters. Industrial depth matters. Rhetoric does not build nations. Balance sheets do. And balance sheets are built through investment, discipline, and industrial ambition—not debt-funded generosity.

India still has a narrow window. Build a deep industrial base now. Invest in technology now. Accumulate national capital now. Because the arithmetic of power compounds as relentlessly as the arithmetic of debt.

But political incentives push in the opposite direction. Every election expands giveaways. Every subsidy becomes permanent. Every promise must be outbid by the next politician. This is how fiscal systems break.

Economics does not care about compassion narratives. Mathematics does not respond to slogans. Debt compounds quietly—until suddenly it doesn’t. Nations rarely collapse overnight. They drift there slowly. And then one day, the bond market notices. By then, the arithmetic is already irreversible.