<html> <head><style type ="text/css">body { font-family: "Bloomberg Prop Unicode I", Verdana, sans-serif; font-size:125%; letter-spacing: -0.3pt; color: #FF9F0F; background-color: #000000; text-align: left; } p {line-height: 1.25em; max-width:900px; width:expression(document.body.clientWidth > 900? "900px": "auto" );} h1, h2, h3 { text-align: left; font-weight: normal; color: #FFFFFF; } h1 { font-size: 130%; } h2 { font-size: 115%; } h3 { font-size: 100%; } #bb-style { font-size: 90%; max-width:900px; width:expression(document.body.clientWidth > 900? "900px": "auto" ); } b, strong { font-weight: bold; } i, em { color: #FEC54A; } pre { font-family: "Andale Mono", "Monaco", "Lucida Console"; letter-spacing: -0.3pt; line-height: 1.25em; } table { border: 0; font-size: 90%; width: 100%; margin-left: auto; margin-right: auto; } td, tr { text-align: left; } td.numeric { text-align: right; } a:link { color:#53B2F5; text-decoration: none; } a:visited {color:#53B2F5} a:active {color:#53B2F5} a:hover {color:#53B2F5} </style> </head> <body> <p>By Chandrahas Choudhury</p> <p>We learned <a href="http://www.indianexpress.com/news/indias-gdp-growth-rate-plunges-to-5.3/956089/">last week</a> that India's economic growth in the quarter from January to March was 5.3 percent, the slowest in 36 quarters, though not bad by world standards.</p> <p>The news may signal the end of growth rates between 6 percent and 9 percent that have radically refashioned the consumer landscape of the country in the two decades <a href="http://www.bloomberg.com/news/2011-07-26/20-years-later-india-s-transformation-is-incomplete-world-view.html">since the liberalization of the economy in 1991</a> and have lifted a few hundred million people out of poverty. Growth was never this slow, even during the <a href="http://en.wikipedia.org/wiki/2007%E2%80%932012_global_financial_crisis">world financial crisis of 2008</a>.</p> <p>The news, while dispiriting, <a href="http://www.telegraphindia.com/1120601/images/01zzfallbig.jpg">wasn't especially surprising</a>. Analysts of the Indian economy were quick to point out that the slowdown wasn't so much the result of global economic conditions, such as economic trouble in Europe, as it was a consequence of poor economic management by the governing United Progressive Alliance coalition. Since returning to power in 2009, that government has set back the country with a combination of fiscal populism and policy paralysis, with some big corruption scandals thrown in for good measure.</p> <p>A particularly revealing instance of the government's inability to take a clear line on policy occurred late last year when it cleared a long-awaited <a href="http://www.bloomberg.com/news/2011-11-29/india-mostly-opens-to-wal-mart-choudhury.html">move to open up the country to foreign investment</a> in the retail sector, a change that would have given the economy a large booster shot of investment, some of it in much-needed infrastructure such as an improved cold chain for Indian agriculture. That decision was <a href="http://www.bloomberg.com/news/2011-12-07/india-s-reform-by-stealth-derails-wal-mart-choudhury.html">rescinded</a> when opposition out around the country. Something similar happened earlier this year, when Railway Minister Dinesh Trivedi <a href="http://www.bloomberg.com/news/2012-03-20/india-s-railways-claim-another-reformer-s-job-choudhury.html">lost his job</a> after raising passenger fares in his budget.</p> <p>As an American who used to have interests in India said to me in Washington last week, what businesses dislike even more than high taxes or stringent labor laws is an unstable policy environment, as this makes it impossible to formulate long-term plans and projections. He cited an example from March, when the government proposed the alarming idea of <a href="http://www.dnaindia.com/india/report_vodafone-issues-notice-to-govt-over-tax-issues_1677113">imposing retrospective taxes</a> on foreign companies in India. Meanwhile, too much new Indian capitalism, he suggested, tended to be of the <a href="http://www.bloomberg.com/news/2012-04-10/mumbai-s-mighty-cash-in-on-a-real-estate-boom.html">crony kind</a>, which meant that entrepreneurial energy was being directed less toward economic innovation than to cultivating connections and paying bribes. Capitalists were being trained not in learning how to play by the rules, but in how to set up special rules for themselves.</p> <p>The present government has often mumbled, when criticized, about "the compulsions of coalition politics" and "the need to carry everyone along in a democracy." Yet it hasn't seemed to understand that its job isn't just to work out a clear direction for policy, especially economic liberalization, but also to create an intellectual climate for such moves, which are hardly unambiguous and need to be set in a frame that emphasizes the complex trade-offs involved. One wouldn't know from the events of the past year that the government is led by an accomplished economist, Prime Minister Manmohan Singh. It doesn't help either that the next general elections aren't until 2014 and that Singh's heir-in-waiting, should the UPA return to power, is <a href="http://www.deccanherald.com/content/73037/rahul-gandhi-enigma-wrapped-legacy.html">Rahul Gandhi</a>, the scion of the Gandhi dynasty and a politician who has never provided a clear statement of his views on economic issues.</p> <p>In an editorial titled "<a href="http://www.livemint.com/2012/05/31141035/Ourviews--Oh-what-a-lovely-m.html?h=B">Oh, What a Lovely Mess!</a>" the business newspaper Mint said:</p> <blockquote> <p>India has made the same mistake that many Latin American countries made in earlier times. For example, Brazil was the darling of the development crowd in the 1950s and 1960s, but it failed to tackle problems of economic stress, growing inequality, corruption, crony capitalism and inflation. The Brazilian economy more or less stagnated between 1980 and 2005. [...]</p> <p>The economics is inseparable from the politics. The division of powers between Manmohan Singh and [the president of the Congress Party, the largest party in the ruling coalition] Sonia Gandhi has not worked; it needs to be junked right away. But even more pernicious has been the fundamental ideology of the UPA, which is likely to leave a sorry legacy of declining growth, high inflation, huge deficits and loss of business confidence. Pretending that all would be well but for the crisis in Europe is convenient, but also untruthful.</p> </blockquote> <p>And in a piece in The Economist, "<a href="http://www.economist.com/blogs/newsbook/2012/05/indias-economy?scode=3d26b0b17065c2cf29c06c010184c684">A BRIC Hits The Wall</a>," said:</p> <blockquote> <p>A 6%-growth-India raises three issues. For one, the old orthodoxy was that after liberalisation India had been on an accelerating path, driven by demographics and its high rate of savings and investment. A rival view is now likely to take hold. It notes that India has grown pretty consistently at 6% since the mid 1980s, with the exception of a faster period in 2004-2007. What looked like a step up in trajectory now looks like a one-off blip driven by a global boom, an uncharacteristic bout of tight fiscal policy and an unsustainable burst of corporate optimism. Political history may have to be rewritten too. The reformers of 1991, who include the present prime minister, have turned out to be not visionaries, but pragmatists without a deep commitment to liberalisation who have been unable to build a lasting consensus among voters and the political class in favour or reform.</p> <p>The <a href="http://www.livemint.com/2012/05/10173101/The-rupee-saga.html">rupee has already slumped</a> by almost a fifth in the last year. But India, which lacks a big export industry other than technology, and which finds it hard to ramp up production of physical goods quickly, is unlikely to see a sudden bounce in exports as a result. With a large current account deficit it needs to attract $50-70 billion of foreign capital a year at present oil prices. That's going to be tough given the gloom and the government's inept and ambivalent handling for foreign investors. Once again the central bank can come to the rescue by propping up the currency, but its firepower is finite.</p> </blockquote> <p>In the Financial Times, James Crabtree remarked that "as India’s growth slumps, delegations of aggrieved business titans are becoming an increasingly common sight in New Delhi." But he saw something positive in the slowdown, pointing out in "<a href="http://www.ft.com/intl/cms/s/0/aa6814e4-aee9-11e1-a8a7-00144feabdc0.html#axzz1wyWXGqCy">Bollygarchs at Bay</a>":</p> <blockquote> <p>A ferocious media driven by deep public anger have played a part, too. “Newly assertive institutions such as the press, the [comptroller and auditor general] and the judiciary have started uncovering the massive nexus between the oligarchy and the politicians and bureaucrats that built up during the go-go years,” said Raghuram Rajan of the University of Chicago, an adviser to India’s government, in a recent speech.</p> <p>This is not just an Indian story. In other leading emerging economies, such as China and Russia, increased transparency and growing anger over corruption have brought cosy relations between political insiders and industrial giants into question. But India alone is burdened with the legacy of the “Licence Raj” that preceded the reforms that opened the economy after 1991. That system was replaced, says Prof Rajan, by a uniquely Indian “Resource Raj”, in which politically connected industrialists built empires by gaining access to public goods such as coal, minerals, land and telecoms spectrum.</p> <p>It is this system that is unravelling, undermining in turn the ability to produce an investment-led recovery. While other factors have played a role –- including high interest rates and lack of access to capital -– in this era of more intense scrutiny it is ever harder to give access to resources to even the best-connected groups. This, in turn, has created an attitude of risk aversion in government, and gummed up much of the system of industrial investment.</p> <p>In the long term, this is likely to be a welcome development, signalling a rejection of behind-the-scenes co-operation -– a move that could be hastened by moves to a system in which all natural resources are openly auctioned at market rates. “Because of democratic public scrutiny, crony capitalism is bound to recede,” says Ashutosh Varshney of Brown University, “but its end will take longer.” In the short term, the result is much less welcome: a toxic mixture of government inaction and business caution.</p> </blockquote> <p>Indeed, there is one sector of the economy that is still reliably growing at double-digit figures: the asset base of the Indian political class, as declared by politicians themselves. The journalist P. Sainath reported on some of these stories last year in a great piece called "<a href="http://www.thehindu.com/opinion/columns/sainath/article2470835.ece?homepage=true">The Union Cabinet Gets Healthier</a>."</p> <p>And a most interesting paper published in the Economic and Political Weekly last month, "<a href="http://www.epw.in/system/files/pdf/2012_47/21/Unravelling_the_Anatomy_of_Legal_Corruption.pdf">Unravelling the Anatomy of Legal Corruption</a>," demonstrated that both winning and losing candidates in elections reliably beat the market over a period of time in the growth of their assets, and that the weighted average market growth rate for the winners of the 2004 general election was 97 percent, and it was 164 percent for the state election. Small-time retail investors (such as myself) who have got no joy from the Indian stock market recently -- the <a href="http://www.google.com/finance?q=INDEXBOM:SENSEX">BSE India Sensitive Index</a> has lost more than 10 percent in the last year -- await the introduction of a mutual fund that invests purely in politicians, thereby allowing investors to tap the trickledown effect that critics of the Indian economic story say is still missing. Some good material for satire there. Still, what's happening on the ground in India is no joke.</p> <p>(Chandrahas Choudhury, a novelist, is the New Delhi correspondent for World View. Follow him on Twitter @Hashestweets. The opinions expressed are his own.)</p> <p>To contact the author of this blog post: Chandrahas Choudhury at Chandrahas.choudhury@gmail.com</p> <p>To contact the editor responsible for this post: Max Berley at mberley@bloomberg.net</p> </body> </html>