To understand India today, to steer away from the shrill debates of the past few months, and to gauge its forward trajectory, the best starting point is to internalise how we got here. Some 25 years ago, India overcame its existential dilemmas, made tough decisions, rejected autarky, and broke away from the Hindu rate of growth. This path was not preordained; it was forced upon us. Our foreign exchange reserves were barely worth three weeks of imports, resulting from the build-up of fiscal imbalances through the ’80s. Pushed, India undertook unprecedented reform. If one considers the alternative, we could have had lost decades like Russia, or faced hyperinflation that has plagued Argentina.

At that time, we faced an economic T-junction. For me, personally, who had just started out in business a year out of Columbia Business School, it was confusing, challenging, and exciting. One had studied the International Monetary Fund’s recipe and the so-called Washington Consensus. In theory, it was appealing, but empirical evidence showed it failed more often than it worked. The Federation of Indian Chambers of Commerce and Industry had an internal think tank called The Wednesday Group, where I was invited to speak. Many of the tradeoffs discussed were fundamental to how we defined the world. On one side was the benign security of continuity. On the other was the fear of economic collapse. The dilemmas were real. India could have lost its way—but it did not.

People forget the radical departures made by the Narasimha Rao government, from choosing an apolitical Manmohan Singh as finance minister, to sending opposition leader A.B. Vajpayee to lead talks on Kashmir at the United Nations. We need to be prepared for a similar break if we want to write history again.

Fast forward

At a meeting for foreign investors, organised by the London-based International Institute for Strategic Studies, I was asked to talk about India. This was before demonetisation and the resultant turbulence, and before Trump’s victory inspired a “risk off” posture for global business. I spoke about bets I was willing to make about India, and bets I was not willing to make. Looking at the past few months in the rear view mirror, I think the India story has not really changed.

If I were to give the same talk today, I would put the burning question of demonetisation to rest. I am optimistic that demonetisation will change people’s behaviour, curb the parallel economy, and channelise savings more effectively. But the unintended consequences—including two lost quarters of economic growth, political polarisation, and extreme hardship for many sections of society—have increased the India risk premium. Japanese investment bank Nomura’s Economic Surprise Index for India indicates that the actual incoming data has been slightly worse than consensus estimates post-demonetisation, and further negative surprises are likely this fiscal. Despite this, I believe the bets about India fundamentally remain the same as what I had articulated then.

The central bet for India’s prosperity will be the growth of disposable income in the hands of the middle class. As basic expenses for shelter, food, and clothing plateau, people rapidly cross the mark where a disproportionate share of total income is disposable. In the last 10 years, this has grown at 17% on average, clipping at 25% for some segments. The domestic consumption story is playing out across sectors. It is the visible force behind cellphone entrepreneurs becoming multi-billionaires within two decades, and the invisible force that has allowed some liquor billionaires to go bust in a dramatic manner.

Add to this the narrowing of political debate. This was true before demonetisation, and I believe it will revert to normal levels; the left-right philosophical divide in India has become more centric. Such convergence of views gives leaders the freedom to be more effective. “Political risk” used to be a phrase Western investors deliberated upon while considering emerging markets in the ’90s. Today, in a near reversal, Indian businessmen can rightly ask their European and American counterparts for similar analysis regarding their countries.

India’s economic fighting weight is just over 7% GDP growth. This is the long-term trend one should bet on. A credit bubble, which we saw in the past decade, will push up this number. High oil prices will drag this down. Both agony and ecstasy will be less severe if we anchor to this reality. On the geopolitical side, the evidence of China’s rise since the late ’70s—while keeping its head down politically—is internalised here in India. The bet is that India will only seek a positive engagement with the world, and avoid controversies and conflicts.

Now, let me focus on the bets I am not willing to make, though I wish I could have said otherwise.

Indian banks remain weak after a decade of indiscriminate lending. India’s deficits will continue to distort the economy, pulling away money from investments and towards consumption. Oil has been our friend for the past few years, so the focus has shifted away from deficits. But this has started to change and the dragon of deficits will surface again. The rupee will have its own downward risks, driven by the inflation differential between India and the western markets and the current account deficit, and as western interest rates rise, thereby affecting capital flows. Nevertheless, I do believe India has come a long way and we must press ahead.

The results of alchemy

The transformations from the preceding quarter century should serve us well as we set our sights on the future. India has metamorphosed from a caterpillar into a butterfly. Changes in league tables are a sign of dynamism. In 1991, the largest company in India in terms of market capitalisation was Tata Steel, valued at $400 million. Today, its market value is $5.4 billion, and it does not even make the top 50. Meanwhile, the top slot goes to Tata Consultancy Services, which had started its software activities only six years before Rao’s reforms. Today, its market cap is $76 billion. Such have been the dimensions of change.

On another measure, the greater Delhi region has emerged as the single largest market in India for many product categories, overtaking Mumbai, the traditional king. On the social scale, South India’s population growth has plateaued to replacement level; living standards are mirroring much richer countries. On the political front, both anti-incumbency as well as the proportion of first-time MPs in India are much higher here than in the U.S. or Europe, making India more dynamic politically. At the individual level, many young people are finding they are making more money than their parents did at their peak. Such stories will continue to play out in coming decades.

However, there are many social challenges. I subscribe to the view that narrow economic measures of progress are misleading because they look at people merely as consumers and not as citizens. Social indicators in India remain worrying: India’s life expectancy is well below Vietnam’s. Infant mortality is higher than Nepal’s. Access to sanitation is trailing Pakistan. The literacy rate is behind Myanmar’s, female literacy even more so. India’s Gini coefficient is higher than Egypt or Indonesia, meaning it is a less equal society. Nobel laureate Amartya Sen called India’s success “an uncertain glory” three years ago in his iconic book with the same title. His colleague Michael Walton has shown the distribution of India’s rate of GDP growth to be “structurally disequalising”.

Such changes also highlight the transient nature of things. There is nothing preordained about our current situation; bad choices undermine a lot. Global macro conditions are less favourable today than in 1991. Internationally, the mood is swinging towards protectionism. These swings tend to be multi-decade trends, and reverse with generational shifts. According to the World Values Survey, the swing towards populism became noticeable after the financial meltdown of 2007. If I am reading the tea leaves right, this will run its course for another decade. India will need to adjust to these realities while negotiating trade agreements and depending less on global capital flows to keep the rupee buoyant and cost of capital low. My greatest fear for India in the next quarter century is complacency, driven by nationalistic pride, the middle income trap, political adventurism, or lack of tenacity.

Playing to win

India’s rise in the decades to come will mean conquering uncharted territory. Nobel Laureate Herbert Gasser said: “Forget the times of your distress, but never forget what they taught you.” If India wants to be an outlier, it would need a 1991-style play to win. It would need to go beyond sound macroeconomic management and cleaning up the government interface.

It would need a sensitive management of social fault lines. Every government comes with extreme elements at the fringe. The trick is how these voices get modulated. Because the current government has come in with an absolute majority, many groups with ideologically extreme positions believe this is their time to further their cause. This manifests itself as intolerance. If this is not contained, social upheaval is likely.

India needs to beef up its regulatory bodies and government institutions. Fast growth requires strong institutions. Even though Jawaharlal Nehru’s socialist agenda was misplaced, his greatest achievement was that his government tried to create world-class institutions. India’s success in the coming decades will be determined more by the institutional legacy that Prime Minister Narendra Modi leaves, rather than the effectiveness of the executive decisions of his government.

I recall a United Nations report with a cynical yet simple lesson: When the poor people of a rich country give money to the rich people of a poor country, they call it aid; when the rich people of a country exploit the poor, they call it capitalism; and when the poor people of a poor country take away from other poor people, they call it anarchy. It is ironic that political forces meant to help the underprivileged have resulted in excluding most of the labour force from the formal sector. The Walk Free Foundation’s annual “modern slavery index”, a measure of labour conditions in various countries, ranks India shamefully low, with Uzbekistan, and North Korea as peers. Labour law reform is a necessity, not to help business, but to provide flexibility for the organised sector to recruit.

Bank recapitalisation, trade liberalisation and privatisation are major pending economic initiatives. Bank liquidity is a must to keep the economic wheels turning. India’s internal trade is hampered by bureaucratic complications and cascading taxes. The Goods and Services Tax Bill, a significant initiative for a uniform nationwide value-added tax to create a common national market with minimum tax distortions, has been long overdue. On the international side, India’s share of regional trade is much lower than it should be, mostly because of mishandling of regional politics. The government’s recent initiatives need to be solidified. Privatisation is a politically sensitive but economically important need, which will help the government deficit, increase asset productivity and have positive ripple effects in the economy.

It’s a long task. American playwright Arthur Miller said: “An era has reached its end when its basic illusions are exhausted.” This was where India was in 1991 when it shed its socialist cloak. We are facing another turning point now, and the recent illusion—that we have a divine right to fast growth—has been shattered. It’s now time for our leaders—and the electorate—to rise to the occasion!

Gaurav Dalmia, chairman, Dalmia Group Holdings. The views expressed here are his own.