Sunday, April 15, 2012

India's economic reforms

Now finish the job
MANMOHAN SINGH, India’s prime minister, cut a lonely figure on the evening of April 14th. Surrounded by some of his closest friends, intellectual companions, cabinet ministers and political colleagues he sat in a brightly lit seminar room, supposedly to enjoy a “festschrift”, a celebration of his work. Instead it felt like an ambush.

The event, in Delhi, was billed as a discussion of India’s economic reforms, hosted by a prominent and respected economics think-tank, ICRIER, along with Oxford University Press. The idea was to celebrate Mr Singh and the launch of an updated version of a book marking his momentous economic reforms of the early 1990s. These, everyone agrees, did more than anything else to usher in sustained and rapid economic growth which has helped to lift millions out of absolute poverty.

As ever, Mr Singh sat twinkly eyed and almost entirely silent, as a series of speakers took turns to address the room. Yet rather than waste time celebrating his work of two decades ago, everyone pushed on with far more urgent business: trying to get India’s prime minister to understand that, without a second round of economic reforms, and soon, India’s economic prospects will look far grimmer in the next few years than they have recently. In turn, Mr Singh may not be remembered as the man who reformed India’s economy, but the man who only got the job half done.

The evening had the mood of an intervention: when friends and relations get together and, without warning, confront a loved one who has some sort of destructive habit that he won’t admit to. In normal life it might be an addiction to drugs or booze. In India’s political life, and the case of Mr Singh, it is a desperate failure to push on with reform.

Close friends spoke bluntly. Dr Isher Judge Ahluwalia, a close family friend of the prime minister, who edited the book celebrating Mr Singh’s work and who hosted the evening, set out plainly how a “deteroriating macro environment, a downturn in investment” plus a dire fiscal situation, poor governance and more are weighing down on India.

Then a blunt-speaking economics professor from the University of Chicago, Raghuram G. Rajan, pointed out that things are looking bad when “domestic industry prefers to invest abroad” rather than brave the hassles and uncertainty of India today. Nor did he shy away from identifying who was at fault: “paralysis in growth enhancing reforms” is a blunt way for an economist to speak; it means Mr Singh and his cabinet have done almost nothing to promote growth, devoting energy instead to ways to dish the proceeds of growth as welfare and other public spending.

He argues that the licence permit raj, supposedly cleared away two decades ago, in fact lives on strong, for example in keeping out foreign investors from higher education. The commanding heights of India’s economy (power production most notably) are still largely state run. And finite resources, such as land, telecom spectrum and natural resources are shared out in unpredictable (and too often corrupt) ways.

He frets, too, that India’s middle class has no clue how high economic growth was first brought about, and instead is deeply, and increasingly, suspicious of capitalism and liberalisation. The result, as another speaking eloquently pointed out, is that no political constituency for reforms exists. He saved his most explicit attacks for the budget passed last month, with a baffling mix of anti-business measures, especially over retrospective tax, which is now scaring away foreign investors that India desperately needs.

Even the governor of the central bank, Dr Duwuri Subbarao, joined in. He damned the prime minister’s government with faint praise, explaining that India today “probably” does “not face an imminent implosion” as it had done in 1991, though he went on to list how the fiscal deficit (today at 5.9% he says, compared with 7% in 1991), the current-account deficit (worse today than then) and short-term debt (ditto) are worrying. “We are not saying the economy is in the pink of health…we should be concerned…we should prove the current downturn is just a short-term phenomenon”.

For an hour or more, the comments flowed, tempered at times with more positive asides and recognition that India’s story is (in particular compared with much of the rest of the world) not all gloomy. It was the sort of frank and intelligent intervention that India needs more often: it should be repeated in parliament, on television, in newspaper columns, around dinner tables and farther afield, so more Indians stop being so complacent in assuming that high growth is guaranteed.

Almost half of India’s population was born in the past two decades, and knows little other than rapid economic expansion. For them, slumping back to the bad old days of the Hindu rate of growth (3.5% or so) would feel like a shocking recession. Is the prime minister listening, or able to do anything to change policies, say to welcome more foreign investors, slash subsidies for fuel, sort out the dodgy tax proposals, pass some of the dozens of reforms (on land acquisition for example) that have been long stuck in parliament?

It hardly seems so. His government looks timid, beholden to destructive allies and leaders in Congress who don’t grasp that India is losing its economic fizz. At the end of the evening he graciously offered a few dozen words in reply, concluding with: “I am confident that with determination we will overcome”. It didn’t sound very confident. But here’s hoping. The Economist

No comments:

Post a Comment