Reality check for Indias economic miracle
September 03, 2011
Amrit Dhillon
Women activists demonstrate against corruption and inflation in Mumbai. (July 27, 2011)
PUNIT PARANJPE/AFP/GETTY IMAGES
After years of basking in praise the second biggest economy in Asia, an emerging power, and an economic powerhouse India has hit a rough patch.
The most complimentary description these days of the Indian government is that of a rudderless ship being buffeted by storms with the captain missing and the compass lost.
This summer, India marked 20 years economic reform. It was on July 24, 1991, that the current prime minister, Manmohan Singh, then finance minister, presented a budget that transformed his country and began lifting it out of poverty. This same man now seems to have lost the plot and is presiding over drift and dithering.
This year, the seemingly unstoppable momentum of the Indian economy has faltered.
Some facts: Food inflation is the highest its been for 16 years at around 10 per cent or more; in its bid to tame inflation, the Reserve Bank of India has hiked interest rates 11 times in 16 months; the growth of GDP from January to March was the lowest in five quarters; the manufacturing sector which accounts for 80 per cent of industrial output grew at 5.5 per cent, the slowest in 18 months; and foreign direct investment fell 28.5 per cent to $19.4 billion in the year to March 2011 (although May saw a resurgence with an flow of $4.66 billion, the highest monthly inflow in 39 months).
The central cause of these troubles is the paralysis in leadership and decision-making. Having demonstrated extraordinary patience for years, foreign investors have grown weary of waiting for a new wave of economic reforms, such as allowing foreign direct investment in the retail, financial services and insurance sectors.
Everyone wants a slice of the Indian pie. Canada has 200 companies with investments in India, which it hopes to push to 750. Stewart Beck, the Canadian high commissioner to India, said in Kolkata this summer that he hoped the proposed Comprehensive Economic Partnership Agreement with India would increase bilateral trade from the current $4.5 billion to $15 billion by 2015. But for this pie to grow, the cook has to get his act together instead of sleeping on the job.
Foreign investors and Indian businessmen have watched with dismay as decision-taking has almost stopped because of corruption scandals that have erupted in the ruling Congress Party.
Frightened of media scrutiny over contracts for multi-billion-dollar projects, ministers and civil servants have hunkered down. Big infrastructure projects in roads, ports, railways, industrial corridors and airports are stalled because no one is prepared to make a decision.
The National Highways Authority of India set itself the ambitious target of building 20 kilometres per day last year. It succeeded in building only five per day. The department has not had a full-time chairman for the past six months. In a rare spasm of energy, Singh recently expressed displeasure at the inexplicable delay in filling the vacancy.
One of the key problems is government ministries working at cross-purposes. The CEO of a large infrastructure and power company told me of the frustrations of getting coal for his coal-fired plants: The power minister blames the coal minister for not arranging supplies; the coal minister blames the environment minister for refusing environmental clearances; the environment minister blames the coal minister for disregarding environmental laws.
Indian companies, fed up with the delays and murky regulatory environment, are expanding their businesses not at home but abroad. The latest figures show that foreign investment by Indian companies doubled in the past year from $18 billion to $43 billion. If Indian businessmen are voting with their feet, why would foreign investors stay the course?
Ordinary Indians feel a cruel joke has been played on them by a government that keeps trumpeting high growth rates of 8 or 9 per cent. They cannot afford even a kilo of lentils or tomatoes because inflation has pushed the price of such basic foodstuffs beyond what they earn in a day. In April, the Asian Development Bank warned that with poor families spending a sixth of their income on food, a 10 per cent increase in food prices could plunge 10 million Indians into poverty.
And why are food prices high? Mainly because Indias small farmers and the lack of cold storage facilities (40 per cent of all fruits and vegetables rot before reaching the shelves) cannot provide enough food to meet the demand. Here, too, the cause is the failure to bring about root-and-branch reform of the agriculture sector.
For the poor, the relentless pursuit of high growth rates is all the more painful because it has not been accompanied by jobs. During the period 2004-2009 when growth rates averaged around 8.4 per cent the economy generated just two million jobs. The number of young Indians who joined the workforce in that period was 55 million. Yes, 55 million.
Few people expect any bold policy decisions from Singh. Rather, the government is expected to focus on cleaning up its scandal-soiled image. Bimal Jalan, former governor of the Reserve Bank of India, was asked recently whether the current paralysis could derail Indias growth story. His reply: In the long run, it is bound to.
Amrit Dhillon is a freelance journalist based in India.
September 03, 2011
Amrit Dhillon
PUNIT PARANJPE/AFP/GETTY IMAGES
After years of basking in praise the second biggest economy in Asia, an emerging power, and an economic powerhouse India has hit a rough patch.
The most complimentary description these days of the Indian government is that of a rudderless ship being buffeted by storms with the captain missing and the compass lost.
This summer, India marked 20 years economic reform. It was on July 24, 1991, that the current prime minister, Manmohan Singh, then finance minister, presented a budget that transformed his country and began lifting it out of poverty. This same man now seems to have lost the plot and is presiding over drift and dithering.
This year, the seemingly unstoppable momentum of the Indian economy has faltered.
Some facts: Food inflation is the highest its been for 16 years at around 10 per cent or more; in its bid to tame inflation, the Reserve Bank of India has hiked interest rates 11 times in 16 months; the growth of GDP from January to March was the lowest in five quarters; the manufacturing sector which accounts for 80 per cent of industrial output grew at 5.5 per cent, the slowest in 18 months; and foreign direct investment fell 28.5 per cent to $19.4 billion in the year to March 2011 (although May saw a resurgence with an flow of $4.66 billion, the highest monthly inflow in 39 months).
The central cause of these troubles is the paralysis in leadership and decision-making. Having demonstrated extraordinary patience for years, foreign investors have grown weary of waiting for a new wave of economic reforms, such as allowing foreign direct investment in the retail, financial services and insurance sectors.
Everyone wants a slice of the Indian pie. Canada has 200 companies with investments in India, which it hopes to push to 750. Stewart Beck, the Canadian high commissioner to India, said in Kolkata this summer that he hoped the proposed Comprehensive Economic Partnership Agreement with India would increase bilateral trade from the current $4.5 billion to $15 billion by 2015. But for this pie to grow, the cook has to get his act together instead of sleeping on the job.
Foreign investors and Indian businessmen have watched with dismay as decision-taking has almost stopped because of corruption scandals that have erupted in the ruling Congress Party.
Frightened of media scrutiny over contracts for multi-billion-dollar projects, ministers and civil servants have hunkered down. Big infrastructure projects in roads, ports, railways, industrial corridors and airports are stalled because no one is prepared to make a decision.
The National Highways Authority of India set itself the ambitious target of building 20 kilometres per day last year. It succeeded in building only five per day. The department has not had a full-time chairman for the past six months. In a rare spasm of energy, Singh recently expressed displeasure at the inexplicable delay in filling the vacancy.
One of the key problems is government ministries working at cross-purposes. The CEO of a large infrastructure and power company told me of the frustrations of getting coal for his coal-fired plants: The power minister blames the coal minister for not arranging supplies; the coal minister blames the environment minister for refusing environmental clearances; the environment minister blames the coal minister for disregarding environmental laws.
Indian companies, fed up with the delays and murky regulatory environment, are expanding their businesses not at home but abroad. The latest figures show that foreign investment by Indian companies doubled in the past year from $18 billion to $43 billion. If Indian businessmen are voting with their feet, why would foreign investors stay the course?
Ordinary Indians feel a cruel joke has been played on them by a government that keeps trumpeting high growth rates of 8 or 9 per cent. They cannot afford even a kilo of lentils or tomatoes because inflation has pushed the price of such basic foodstuffs beyond what they earn in a day. In April, the Asian Development Bank warned that with poor families spending a sixth of their income on food, a 10 per cent increase in food prices could plunge 10 million Indians into poverty.
And why are food prices high? Mainly because Indias small farmers and the lack of cold storage facilities (40 per cent of all fruits and vegetables rot before reaching the shelves) cannot provide enough food to meet the demand. Here, too, the cause is the failure to bring about root-and-branch reform of the agriculture sector.
For the poor, the relentless pursuit of high growth rates is all the more painful because it has not been accompanied by jobs. During the period 2004-2009 when growth rates averaged around 8.4 per cent the economy generated just two million jobs. The number of young Indians who joined the workforce in that period was 55 million. Yes, 55 million.
Few people expect any bold policy decisions from Singh. Rather, the government is expected to focus on cleaning up its scandal-soiled image. Bimal Jalan, former governor of the Reserve Bank of India, was asked recently whether the current paralysis could derail Indias growth story. His reply: In the long run, it is bound to.
Amrit Dhillon is a freelance journalist based in India.
