India’s liberalisation began with a bang in 1991, but two decades on the unreformed parts of the economy are becoming a drag on growth. Time for another bang Jul 21st 2011 | MUMBAI |

IN A strange reversal of the norm elsewhere, in India the economic policymakers and economists have become the optimists while bosses do the worrying. In June a deputy governor of the central bank predicted that the country’s economy would grow at a double-digit rate during the next 20-30 years. India has the potential for such a feat, with its vast and growing labour force and now famous entrepreneurial spirit. But in the past six months the private sector, which is supposed to do the heavy lifting that turns India from the world’s tenth-largest economy (measured at market exchange rates) into its third-largest by around 2030, has become fed up.
“Why the hell should I pay my taxes?” asks the boss of one of the country’s biggest firms. “What happens in India is not because of the government but in spite of the government,” says the head of a pharmaceutical company. Corruption has “paralysed the government,” reckons the chief executive of one of India’s most prestigious firms. “We know what the problems are and we have done nothing…somebody’s neck has got to be on the line,” says the leader of a bank. Some important foreigners are fed up too. The former head of one of India’s largest foreign investors shakes his head and says it was naive about putting shareholders’ cash there.


Businesspeople have always loved to carp about India’s problems even as they have rushed to take advantage of its terrific growth rates. But lately their irritation has had a nervous edge. In the first quarter of 2011 GDP grew at an annual rate of 7.8% (see chart 1); in 2005-07 it managed 9-10%. The economy may still be slowing naturally, as the low interest rates and public spending that got India through the global crisis are belatedly withdrawn. At the same time, the surge in inflation that began last year and was first caused by food prices has spread more widely, causing some to doubt whether in the medium term India can really grow at the 8-10% the optimists hope for without overheating.

To raise the economy’s growth potential, India could do with another dose of reform, aimed at markets for inputs, from electricity to labour and land, that are still choked. The chances of that look slight. The government has been clobbered by a corruption scandal over the award of telecoms licences in 2008, which has already brought down two ministers. Meanwhile, efforts to make it easier to buy land, cut the large public deficit or introduce a new sales tax have been allowed to drift. Faced with ominous long-term problems, for instance in electricity supply, the government has frozen. And there have been long delays over small decisions, such as the approval of investments by foreign firms. Even when decisions are made they sometimes seem to backfire. On July 8th reports of a draft bill aimed at settling the terms on which mining companies can acquire and exploit land ended up sending the shares of firms in the industry lower rather than higher. A cabinet reshuffle on July 12th was widely dismissed as a damp squib.
Not all is doom and gloom. The outside world chortles at a good Indian fiasco, such as the 2010 Commonwealth games, yet pays less attention to successes such as the cricket world cup this year. Some well-run states, such as Gujarat, continue to motor along; some former basket-cases, such as Bihar, are creating a strong record of reform. Exports are roaring, with engineering doing particularly well, helped by special economic zones, which are freer of red tape than the rest of India and account for 22% of all exports.
But in India as in many fast-growing places, the confidence to invest today depends on the conviction that the long-term trajectory is intact, and it is that which is in doubt. Already big Indian firms sometimes seem happier to invest abroad than at home, in deals that are often hailed as symbols of the country’s growing clout but sometimes speak to its weaknesses—for example, purchases of natural resources that India has in abundance but struggles to get out of the ground. Now, with reform flagging, firms could cut their domestic expansion plans.
The data are both unreliable and mixed, but suggest that in the first quarter of 2011 capital expenditure slowed sharply. Foreign direct investment into India has been subdued for a year (though it did pick up in May). The most recent industrial-production figures have been soft, showing an annual growth rate of 5.6%, about half that of 2010. A further dip in investment could be self-fulfilling: if fewer roads, ports and factories are built, this will both hurt short-term growth figures and reduce the economy’s long-term capacity, which will in turn do little to boost confidence.
Don’t worry, we’re on autopilot


From the stately avenues of New Delhi, such worries are viewed as hysterical. After all, there have been doom-mongers about India’s miracle ever since liberalisation began in 1991. And despite outsiders’ desire for more orderly progress and their endless whingeing about the roads, India’s chaotic model of development has rewritten the rule books. Compared with that of East Asian tigers, it often seems back to front. Services have boomed and manufacturing has stagnated as a share of output (see chart 2), while most people still work informally and live rurally. India has world-class information-technology exporters but imports lots of fridges; it has 15 times more phone subscribers than taxpayers; and in the coming years most Indians are likelier to be connected to a national, biometric, electronic identity-system than to a sewer.


But overall, the formula seems to work. It has yielded rapid growth for two decades and India has sailed through the financial crisis that has battered the West. Growth has transformed living standards and cut poverty (see table), although there is some controversy over how to measure the latter. Middle-class folk say their children laugh when told what it was like before 1991, when phones took years to get, soap burned your skin and red tape suffocated the economy. Back then, the leading founder of Infosys, a big technology firm, has recalled, importing a computer would take about three years and require 50 trips to Delhi to get official approval.
That all came to an end 20 years ago, on July 24th 1991, when Manmohan Singh, then minister of finance, facing a balance-of-payments crisis, told parliament that “the room for manoeuvre, to live on borrowed money or time, does not exist any more.” He attacked the prioritisation of producers over consumers, and swept away tariffs and the mesh of licences used to micromanage firms. The reforms were less dramatic than events in the Soviet Union—where a month later Boris Yeltsin stood on a tank and denounced an attempted coup—but also changed hundreds of millions of lives. Mr Singh’s speech marked India’s entry into global capitalism. He ended by paraphrasing Victor Hugo: “No power on earth can stop an idea whose time has come.”
Today such radicalism seems alien, even though Mr Singh is prime minister, heading a coalition led by the Congress party. Plenty of heavyweight people think that progress is still being made, if more quietly. Suman Bery, an economist, speaks of the “old Indian formulation that at the end of every two-year period it seems as if you have got nowhere but in each seven-year period you look back and things have been transformed.” Reform is not a word that describes what happens in government any more, says a senior official, but “nuts-and-bolts” changes do occur, at a pace that India’s democracy can handle. Added up, they make a difference.
That may be good enough if the foundations of growth are strong enough. Assessing those foundations is not easy to do neatly, but demography, at least, is in India’s favour, with the ratio of workers to dependants forecast to rise until 2030 or so, in marked contrast to China. Over the past decade demography has added about 1.7 percentage points to the growth rate of GDP per person, reckon Shekhar Aiyar and Ashoka Mody, of the IMF. This boost will not get much bigger but it will last for a couple of decades. Better still, because workers save more than non-workers, India’s saving rate is rising towards East Asian levels and should provide more domestic funds for investment. Taken together, more workers and more capital explain about half of the recent growth rates of about 8%, estimates Chetan Ahya, of Morgan Stanley. A recent OECD study put the proportion at three-quarters.
It can be a short leap from there to the view that because a fair amount of growth is assured the government doesn’t have to try very hard. Entrepreneurs can be relied on to work their magic. This fits a romantic view of Indian businessmen who triumph against the odds, from Bangalore’s IT gurus to Mumbai’s dabbawallas, who deliver 200,000 lunches daily, and the car-valet squads who will miraculously find scores of parking places for your wedding guests, often by bribing the neighbours’ janitors. But if more capital and bodies are to support near-double-digit growth, they have to be used ever more efficiently. For that, wheeler-dealing and inert government are unlikely to be enough. More reform is needed too.