Farewell to Incredible India Bereft of leaders, an Asian giant is destined
for a period of lower growth. The human cost will be immense
Jun 9th 2012 | from the print edition
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IN A world economy as troubled as today’s, news that India’s growth rate
has fallen to 5.3% may not seem important. But the rate is the lowest in
seven years, and the sputtering of India’s economic miracle carries social
costs that could surpass the pain in the euro zone. The near double-digit
pace of growth that India enjoyed in 2004-08, if sustained, promised to
lift hundreds of millions of Indians out of poverty—and quickly. Jobs would
be created for all the young people who will reach working age in the
coming decades, one of the biggest, and potentially scariest, demographic
bulges the world has seen.
But now, after a slump in the currency, a drying up of private investment
and those GDP figures, the miracle feels like a mirage. Whether India can
return to a path of high growth depends on its politicians—and, in the end,
its voters. The omens, frankly, are not good.
*In office but not in power*
Some of this crunch reflects the rest of the world’s woes. The Congress-led
coalition government, with Brezhnev-grade complacency, insists things will
bounce back. But India’s slowdown is due mainly to problems at home and has
been looming for a while. The state is borrowing too much, crowding out
private firms and keeping inflation high. It has not passed a big reform
for years. Graft, confusion and red tape have infuriated domestic
businesses and harmed investment. A high-handed view of foreign investors
has made a big current-account deficit harder to finance, and the rupee has
plunged.
The remedies, agreed on not just by foreign investors and liberal
newspapers but also by Manmohan Singh’s government, are blindingly obvious.
A combined budget deficit of nearly a tenth of GDP must be tamed,
particularly by cutting wasteful fuel subsidies. India must reform tax and
foreign-investment rules. It must speed up big industrial and
infrastructure projects. It must confront corruption. None of these tasks
is insurmountable. Most are supposedly government policy.
Why, then, does Mr Singh not act? Vacillation plays a role. But so do two
deeper political problems. First, the state machine has still not been
modernised. It is neither capable of overcoming red tape and vested
interests nor keen to relax its grip over the bits of the economy it still
controls. The things that do work in India—a corruption-busting supreme
court, the leading IT firms, a scheme to give electronic identities to
all—are often independent of, or bypass, the decrepit state.
Second, as the bureaucracy has degenerated, politics has fragmented. The
two big parties, the ruling Congress and the opposition Bharatiya Janata
Party (BJP), are losing support to regional ones. For all the talk of
aspirations, voters do not seem to connect reform with progress. India’s
liberalisers over the past two decades, including Mr Singh himself, have
reformed by stealth. That now looks like a liability. No popular consensus
exists in favour of change or tough decisions.
As a result, when the government tries to clear bottlenecks, feuding and
overlapping bureaucracies can get in the way. When it suggests raising fuel
prices, it faces protests and backs down. When it tries to pass reforms on
foreign investment, its populist coalition partners threaten to pull the
plug. It does not help that the ageing Mr Singh has little clout of his
own: he reports to the ailing Sonia Gandhi, the dynastic chief of Congress.
With a packed electoral timetable before general elections in 2014,
Congress does not want to take risks.
Is it time for a change at the top? Mr Singh has plainly run out of steam,
but there are no appealing candidates to replace him. Mrs Gandhi’s son,
Rahul, has been a disappointment. What about a change of government? The
opposition BJP is split and has been wildly inconsistent about reform. Its
best administrator, Narendra Modi, chief minister of Gujarat, is divisive
and authoritarian. If it formed a government tomorrow, the BJP would also
have to rely on fickle smaller parties.
Some reformers pray for a financial crisis that will shake the politicians
from their stupor, as happened in 1991, allowing Mr Singh to sneak through
his changes. Though India’s banks face bad debts, its cloistered financial
system, high foreign-exchange reserves and capable central bank mean it is
not about to keel over. A short, sharp shock would indeed be useful, but a
full-blown crisis should not be wished for, because of the harm that it
would do to the poor.
Instead the dreary conclusion is that India’s feeble politics are now
ushering in several years of feebler economic growth. Indeed, the
politicians’ most complacent belief is that voters will just put up with
lower growth—because they supposedly care only about state handouts, the
next meal, cricket and religion. But as Indians di
