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SectionsJanuary 2 2013

India: still solid as a BRIC?

India stands at a crossroads. The country's potential remains huge, but its growth of late has been hampered by political infighting and weak governance, leading some to question if it is still worthy of its 'BRIC' status.
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India: still solid as a BRIC?

India was a slowpoke economy for 30 years after independence, registering a growth rate of barely 3.5% between 1950 and 1980. Things began to improve, albeit slowly, in the 1980s when the growth rate averaged 5%. Following liberalisation measures by the government of Narasimha Rao and Dr Manmohan Singh in 1991, however, the country has taken off. Between 1980 and 2010, the growth rate was 6.5%. In the first decade of the 21st century, as India joined the select club of 'miracle' emerging economies and was put in the exclusive BRIC club with Brazil, Russia and China, gross domestic product (GDP) growth rate averaged 8% for 2007/08 to 2011/2, and inflation was below 5% between 2001 and 2008. There was a spate of books extolling 'the elephant that could gallop', the 'incredible India', 'shining India'.

Now, as would happen in the post-interval half of old Bollywood films, all is gloom and doom. India's growth rate has slipped to 6% and is predicted to slide further while inflation is hovering just under double digits, exceeding the quarterly growth rate for 10 consecutive quarters since 2010. Industrial growth is erratic month on month and the Reserve Bank of India (RBI) is refusing to relax monetary policy. The United Progressive Alliance (UPA2) government led by Manmohan Singh, which was re-elected in 2009, has faced stormy protests about corruption both in and out of Parliament.

Is India dropping out of the BRIC club? Should the ‘I’ in BRIC be Indonesia, not India? This is the burning question about the Indian economy as we begin the end run of five quarters before the next general election: Is India sliding down the growth league to 6% and below or will it bounce back to the high single-digit territory?

Blame game

The slowdown has been blamed on a policy paralysis rather than any structural factors. In 2009, Mr Singh’s UPA coalition was re-elected with an enhanced seat count for Congress (206 compared to 145 previously), the largest party in the coalition, and the traditional left-wing parties were out of the government.

It seemed the perfect chance for an accelerated reform process. Instead, the government has got mired in a series of scandals concerning corruption in the allocation of spectrum and coal mining rights and defence procurement. It threatened to enact retrospective legislation to punish Vodafone for a case Vodafone had won. It was stymied by its coalition partners from pursuing long-debated reforms such as allowing foreign direct investment (FDI) in multi-brand retailing. The country's inflation rate began to climb after a drought in 2009 and it failed to take supply-side measures to bring food grain prices down. The many subsidies which pre-existed and new ones introduced by the UPA were supposed to be the redistributive measures to spread the gains of reform to rural and deprived communities.

Their effect has been  to stiffen up rural wages, which grew at 6.8% in 2007/08 to 2011/12, add to demand pressures and worsen the budget deficit, which is likely to exceed 6% this year. Household savings have declined as families dip into their savings to cushion against inflation. The RBI has had to put up interest rates several times to check inflation and is not likely to relent until the government indicates that it is doing something to bring the deficit under control.

In mid-2012, opinion polls were showing that the Congress Party stood to lose 80 seats out of its 206 in the forthcoming elections in 2014, giving it a slim chance of forming the next government. But its rival Bharatiya Janata Party (BJP) is expected to gain only half of those 80 seats (taking it up to 145) and therefore also a long way from being able to form a government, as 273 seats are required for a majority. The prospect has opened up a weak coalition of ‘third parties’ with outside support by one of the two main national parties. This would result most likely in a weak government.

Action at last

Since these polls, there has been some movement. The UPA was able to get its candidate finance minister Pranab Mukherjee elected as president, though Mr Mukherjee was rumoured to be unenthusiastic about reforms. The new finance minister, P Chidambaram, has accelerated the reform process, and the government has won parliamentary approval for FDI in multi-brand retailing. This has reassured the markets.

To tackle the deficit the government has embarked upon an asset sale programme which, if successful, will give it breathing space. It is hoping to settle differences with opposition parties about legislation on insurance, banking and pension funds, which would liberalise these sectors. Given the proximity of the election, opposition parties may not want to co-operate with the government, meaning that there remains a risk that while it has become active again, it may not be able to reap the fruits of its reforms by the time the polls open.

Perhaps the most innovative change the government has initiated is a bold experiment for direct cash transfer for some of its pro-poor subsidy programmes, using the newly devised unique number identification system which can be linked up to a bank account for the person holding that number. This, if implemented, will reduce leakage and corruption in its redistributive policies. Indeed, the savings it will make are estimated to be Rs400m ($8m), which is the size of its rural employment programme budget. The government is hoping that the direct cash transfer scheme will be a game-changer in its election campaign. It will also create an instrument that can be used for the delivery of insurance, healthcare and pensions. Indeed, it will put India on the map for being a leader in innovations in identification technology, which may be exportable globally.

Shining states

Perhaps the most interesting development in the Indian economy in the past 10 years has been the diverse performance of its individual states. These states are larger than many countries and there has been a sea change in local politics. The previous clientelist, caste politics has been replaced by politics of development and the public delivery of good governance.

Two states have stood out in this respect. Bihar in north India, which used to be a by-word for backwardness, has been turned around over the past seven years by its chief minister Nitish Kumar. His party is in an alliance with the BJP. Under Mr Kumar's stewardship, Bihar’s GDP growth rate has been in double digits and its budget has been in balance. Of course Bihar still has a lot to do to catch up with even the average per capita income in India, yet the transformation of the state's image has been India's success story of the 21st century. If India does end up with a third-party coalition in the forthcoming election, Mr Kumar is the most likely candidate for the prime ministerial job.

In western India is Gujarat, which has been performing at an above average level in terms of income and industrialisation. Narendra Modi, its chief minister, is considered one of the stars of the BJP and mentioned as a possible prime ministerial candidate. He has been handicapped by riots that took place under his watch in 2002, when several hundreds of Muslims were killed. Yet the development performance of Gujarat has also been among the best in India.

A strong position?

India is at an interesting cusp in its trajectory. Its medium-term prospects are very good. It has a demographic dividend to reap when its young population reaches a peak in the middle of the next decade. China is about to find itself climbing up the dependency ratio curve while India will be still sliding down it. Many forecasters predict India to be in a better position than China by 2030.

But whether India will fulfil its promise depends on the quality of its political leadership. In this respect, the world’s largest democracy is similar to one of the world’s oldest democracies. Like the US, India has a politics which can be gridlocked or be an instrument for a dynamic transformation, depending on the quality of leadership available at any time. If India succeeds in electing a leadership that is united in the urgent task of conquering poverty and taking the country into the elite club of maximal growth countries, it will fulfil its promise. If it fails, it will confirm the worst fears of the world about India. We shall see the outcome in the coming two years.

Meghnad Desai is emeritus professor of economics at the London School of Economics and a Labour peer in the UK’s House of Lords. 

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