'Indian economy is in trouble': Ex-IMF economist Surjit Bhalla on what went wrong
India's immediate challenge is not poverty, but slowing growth and collapsing investment sentiment, says Surjit Bhalla
- May 19, 2026,
- Updated May 19, 2026 5:20 PM IST
Economist Surjit Bhalla has warned that India's economy is facing a deepening investment crisis and said it was "high time for the Modi government to course correct". He said India's immediate challenge was not poverty, but slowing growth and collapsing investment sentiment.
"I don't actually," Bhalla said when asked whether he feared a return to mass poverty because of global conflicts and economic disruptions. "But what I do think is that in India's case, something has happened, and we can discuss that about our growth process. Investment is not taking place. Private investment is not taking place, and FDI has really declined into negative territory."
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Earlier this month, Prime Minister Narendra Modi warned that the world is currently trapped in a "decade of disasters" driven by crises, including the Covid pandemic, escalating global wars, and severe energy shortages. He cautioned that these events threatened to reverse decades of progress and could push millions back into poverty.
Bhalla said India's extensive food subsidy system had prevented poverty from worsening sharply. "As far as poverty is concerned, we have an elaborate system of freebies of food. So perhaps he (PM Modi) is pointing out that maybe we should cut the food subsidies, something I would fully support. It doesn't make any sense for 800 million people to get free food in India."
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When asked what changed his mind, as he was very optimistic about the Indian economy, the eminent economist pointed to falling investment, especially foreign direct investment. "We've got strange rules which no other country has in terms of FDI. The investment climate in India has really gone negative, and that is well known. The foreigners are not interested in investing in India. Indians are not interested in investing in India."
Bhalla served as Executive Director for India at the International Monetary Fund (IMF).
Asked to explain why things went south, Bhalla said the investment climate in India is very bad, and that is what has gone wrong. He also suggested that the government was in a "great comfort zone" because it was winning all the elections.
"So, it doesn't see any urgency or need to do reforms, especially on the growth side. Some 6 months ago or so, I gave a keynote speech as to why the Viksit Bharat slogan should now be changed, just like the slogan that we are the fastest-growing major economy in the world should be changed. We are not (the fastest growing). So, let's get our facts right. To conclude, I will say poverty is the least of our problems. Our problem is growth. If growth continues this way, then poverty will also become our problem."
Bhalla said India had increasingly relied on public infrastructure spending while private investment weakened. "What has happened over the last 10 years, we have substituted government investment that is public infrastructure investment for private investment. Our total investment to GDP ratio has stayed almost exactly the same as 32%," he said. "While we all welcome the government investment, private and foreign direct investment is a lot more productive for the economy than government investment."
The former IMF economist singled out India's 2015 Bilateral Investment Treaty as a major reason behind weak foreign investment inflows. According to him, the treaty created conditions that investors found restrictive, including provisions that prevented investors from exiting disputes quickly and required them to pursue remedies through Indian courts.
"In 2015, we passed what was called the new bilateral investment treaty. According to the new treaty, if a foreigner and a domestic investor wanted to go for a divorce, the government would not allow it and would say, 'Stay put for 5 years before you do anything.' No other place on planet Earth has such a rule. The two partners decide to divorce, and they do."
"The second stipulation in the investment treaty of 2015 was that after the 5 years have elapsed, you will go before an Indian judge in order to get your problems resolved. So what happens? The foreign investment is not taking place. The investment climate is bad. Domestic investors are going outside, and we are chugging along at 6%. For 31 years, GDP growth in India has averaged 6%. It didn't go up, hasn't gone down, but we should be increasing our average growth rate rather than maintaining it at 6% level.
When asked if it is time for the Modi government to maybe correct, Bhalla said: "I disagree. It's not the time. It's high time for the Modi government to course correct. We are in a crisis, and crises have been known to bring about reforms."
Economist Surjit Bhalla has warned that India's economy is facing a deepening investment crisis and said it was "high time for the Modi government to course correct". He said India's immediate challenge was not poverty, but slowing growth and collapsing investment sentiment.
"I don't actually," Bhalla said when asked whether he feared a return to mass poverty because of global conflicts and economic disruptions. "But what I do think is that in India's case, something has happened, and we can discuss that about our growth process. Investment is not taking place. Private investment is not taking place, and FDI has really declined into negative territory."
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Earlier this month, Prime Minister Narendra Modi warned that the world is currently trapped in a "decade of disasters" driven by crises, including the Covid pandemic, escalating global wars, and severe energy shortages. He cautioned that these events threatened to reverse decades of progress and could push millions back into poverty.
Bhalla said India's extensive food subsidy system had prevented poverty from worsening sharply. "As far as poverty is concerned, we have an elaborate system of freebies of food. So perhaps he (PM Modi) is pointing out that maybe we should cut the food subsidies, something I would fully support. It doesn't make any sense for 800 million people to get free food in India."
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When asked what changed his mind, as he was very optimistic about the Indian economy, the eminent economist pointed to falling investment, especially foreign direct investment. "We've got strange rules which no other country has in terms of FDI. The investment climate in India has really gone negative, and that is well known. The foreigners are not interested in investing in India. Indians are not interested in investing in India."
Bhalla served as Executive Director for India at the International Monetary Fund (IMF).
Asked to explain why things went south, Bhalla said the investment climate in India is very bad, and that is what has gone wrong. He also suggested that the government was in a "great comfort zone" because it was winning all the elections.
"So, it doesn't see any urgency or need to do reforms, especially on the growth side. Some 6 months ago or so, I gave a keynote speech as to why the Viksit Bharat slogan should now be changed, just like the slogan that we are the fastest-growing major economy in the world should be changed. We are not (the fastest growing). So, let's get our facts right. To conclude, I will say poverty is the least of our problems. Our problem is growth. If growth continues this way, then poverty will also become our problem."
Bhalla said India had increasingly relied on public infrastructure spending while private investment weakened. "What has happened over the last 10 years, we have substituted government investment that is public infrastructure investment for private investment. Our total investment to GDP ratio has stayed almost exactly the same as 32%," he said. "While we all welcome the government investment, private and foreign direct investment is a lot more productive for the economy than government investment."
The former IMF economist singled out India's 2015 Bilateral Investment Treaty as a major reason behind weak foreign investment inflows. According to him, the treaty created conditions that investors found restrictive, including provisions that prevented investors from exiting disputes quickly and required them to pursue remedies through Indian courts.
"In 2015, we passed what was called the new bilateral investment treaty. According to the new treaty, if a foreigner and a domestic investor wanted to go for a divorce, the government would not allow it and would say, 'Stay put for 5 years before you do anything.' No other place on planet Earth has such a rule. The two partners decide to divorce, and they do."
"The second stipulation in the investment treaty of 2015 was that after the 5 years have elapsed, you will go before an Indian judge in order to get your problems resolved. So what happens? The foreign investment is not taking place. The investment climate is bad. Domestic investors are going outside, and we are chugging along at 6%. For 31 years, GDP growth in India has averaged 6%. It didn't go up, hasn't gone down, but we should be increasing our average growth rate rather than maintaining it at 6% level.
When asked if it is time for the Modi government to maybe correct, Bhalla said: "I disagree. It's not the time. It's high time for the Modi government to course correct. We are in a crisis, and crises have been known to bring about reforms."