Dec. 20 (Bloomberg) -- India’s slowing growth and mounting resistance to pro-market reforms are putting its 20-year economic miracle at risk. To extend the past two decades’ success, Prime Minister Manmohan Singh and his allies must maintain their commitment to liberalization and do a better job of defending it to the public.
Last week, for the first time since the spring, the Reserve Bank of India chose not to raise interest rates at its monthly policy meeting. The central bank has been trying to bring inflation, currently about 9 percent, under firmer control. Weaker growth has made the Reserve Bank pause. The economy expanded at a 6.9 percent annual rate in the third quarter, the slowest in more than two years. Industrial output in October was 5.1 percent lower than a year before.
Those numbers caused a stir because India has become accustomed to annual growth of 9 percent. Since the dismantling of industrial licensing and the Soviet-style planning system in 1991 -- an overhaul that Singh helped design and execute -- India has made a joke of the once-popular notion that the “Hindu rate of growth” was maybe 3 percent a year.
Unfortunately, though Indians now take rapid growth for granted, they still doubt the policies that are responsible. Too many voters and politicians continue to view freer markets and vigorous competition with suspicion, despite their demonstrated success in accelerating the economy and attacking poverty. Just as official statisticians were confirming the growth slowdown, Singh, in a major political setback, was forced to suspend plans to open Indian retailing to foreign investment.
Need to Modernize
Don’t blame slower growth entirely on the weak international economy or the central bank’s efforts to check inflation. Unfinished reforms and a failure to modernize India’s infrastructure are also holding the economy back. Food distribution, especially, is an undeveloped sector in India, dominated by small traders and layer upon layer of middlemen. Lack of technology and modern logistics cause waste on a notorious scale, with government reports of up to 40 percent of fruit and vegetables rotting before being sold. Supply-chain bottlenecks worsen inflation -- and with hundreds of millions still in poverty, the country is especially sensitive to food-price spikes.
Continuing to block investment by Wal-Mart, Tesco and other international supermarket chains is therefore doubly perverse. It not only denies India the new investment and modern technology the country still needs across the board, but holds back a sector that could directly lower food prices and raise living standards.
In an interview with Bloomberg last week, Singh said he will keep trying. He predicted success in letting foreign companies take majority stakes in Indian retailers once regional elections have been held early next year and slower inflation bolsters his government’s standing.
It might take more than that. Singh’s Congress Party-led coalition lacks a secure parliamentary majority and has seen its energy sapped by corruption scandals. It was losing momentum, and Singh’s leadership was being questioned even before the economy slowed. The main opposition group, the Hindu-nationalist Bharatiya Janata Party, was once pro-reform but now sees opportunity in rallying small traders, fearful of foreign investment, to its side. The political winds are blowing in an unpromising direction.
It would be hard to exaggerate how much is at stake -- and not just because India is home to 1.2 billion people. This latest of many setbacks to modernizing India’s economy revives an old question about the country’s longer-term prospects: In its keen economic rivalry with China, is its vibrant democracy an asset or a liability?
During the past 20 years, India has shown that democracy, bold economic reform and staggering rates of economic progress can go hand in hand. Meanwhile China’s uncertain political future remains, for many economic analysts, a major risk. It would be nothing less than a tragedy if India’s ambivalence about capitalism, and over reforms that have served it so well, handed victory in this race to its authoritarian rival.
Democratic countries cannot easily have reform imposed upon them. They can be persuaded, though, that reform is in their interests, so long as their leaders rise to the challenge. Manmohan Singh, one of the great liberal reformers in the history of the modern world, has little to prove in this regard. His allies, his rivals, and voters at large, however, all need to ask themselves whether they sincerely want India to succeed.
To contact the Bloomberg View editorial board: firstname.lastname@example.org