26/09/2013 07:30 BST | Updated 25/11/2013 05:12 GMT

Myths Are Obscuring the Truth About the Indian Economy

India's reverence for her cows, considered holy by Hindus, is well-known. But one sacred cow has long had even the Western world genuflecting before it: the belief that since the 'dismantling of the licence Raj' in 1991, India has exploited its economic freedom to become what Foreign Affairs once declared on its cover "A Roaring Capitalist Success Story". A narrative of the Indian economy's elephantine forward stomp, regularly achieving annual growth rates between 7.5% and 9%, is pushed by observers, from the likes of former Procter & Gable CEO Gurcharan Das's bestselling India Unbound to even the CIA's futurologists, who expect India to overtake the US by 2050.

Yet India now sits on the brink of a currency crisis. In a rupee avalanche of Himalayan proportions, India's currency has depreciated 14% since the beginning of the year, hitting an all-time low in August of 68 to the dollar. Despite the rejuvenatory efforts of India's new "rockstar" central banker Raghuram Rajan, the rupee's value remains below 60 to the dollar, a widely-held "psychological benchmark". An exodus of equity investors looms. Although Unilever recently did kindly buy out minority stakes in its Indian division, foreign bondholders have withdrawn $6.5bn since mid-May.

Indian officials blame the prospect of US tapering (the rolling back of quantitative easing), dismissing the crisis - as Prime Minister Manmohan Singh did in his last speech on the economy - as "a short-term shock", while the likes of India's richest man Mukesh Ambani continue to claim "India is still rising". But although the rupee, like most emerging market currencies, will prove a casualty of the US Federal Reserve's monetary policy, the rupee crisis in fact points to a fatal seam in India's entire progressive narrative.

For starters, US Federal Reserve Chairman Ben Bernanke can hardly be blamed for India's enormous trade deficit (Ajit Ranade of AV Birla approximates to be $300bn by 2013/14), which, coupled with lower capital inflows owing to uncertainty over economic reforms, have summoned the spectre of a 1991-style current account crisis, a spectre Manmohan Singh supposedly banished to its grave during that era's subsequent reforms.

Spellbound by India's noughties growth rates, policymakers were unbothered by the fact that, unlike China, India was (and still is) importing more than exporting, neglecting manufacturing to become instead the world's IT outsourcing capital. This despite the truism that no country in history has undergone an economic transformation without a labour-intensive manufacturing boom; India has yet to experience industrial revolution. The likes of Gurcharan Das hubristically believed that India could become the first economic superpower without a substantial manufacturing base: "The notable thing about India's rise is not that it is new, but that its path has been unique."

This illusory notion of Indian exceptionalism has been one myth among many that inspired the intoxicating vision of India's tiger-like economic leap. Others include India's much-vaunted 'demographic dividend', which, as Amartya Sen's forthcoming book An Uncertain Glory points out, has been squandered on child mortality that is 25% higher than in neighbouring, infamously poor, Bangladesh. What human resource capital remains is a more likely booster of crime than GDP. India's skilled, English-speaking workforce is similarly mythical, with a quarter of Indians effectively illiterate. Sen explains how literacy has always been at the forefront of any economic transformation, from present-day China to Meiji Japan, the latter's 1868 literacy levels higher than India's today.

And there India's economic problems come full circle. To stave off a current account crisis, India needs to scale back government spending. That, inevitably, will result in the rolling-back of literacy and healthcare programmes essential for the healthy, educated workforce investors expect.

There are no easy answers to India's economic bind. The only certainty is that the illusions haven't helped. The Indian novelist Aravind Adiga's insight that "the greatest danger to the nation's future is no longer poverty or Pakistan, but overconfidence," is an astute one. In a country famed for its mythology, such are the pitfalls when a tradition for myth-making pervades even the economy.