What happened to India?

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Emerging markets around the world – Brazil, China, India, and Russia, to name the largest – are slowing. One reason is that they continue to be dependent, directly or indirectly, on exports to advanced industrial countries. Slow growth there, especially in Europe, is economically depressing.
But a second reason is that they each have important weaknesses, which they have not overcome in good times. For China, it is excessive reliance on fixed-asset investment for growth. In Brazil, low savings and various institutional impediments keep interest rates high and investment low, while the educational system does not serve significant parts of the population well. And Russia, despite a very well educated population, continues to be reliant on commodity industries for economic growth.
Hardest to understand, though, is why India is underperforming so much relative to its potential. Indeed, annual GDP growth has fallen by five percentage points since 2010.
For a country as poor as India, growth should be what Americans call a “no-brainer.” It is largely a matter of providing public goods: basic infrastructure like roads, bridges, ports, and power, as well as access to education and basic health care. And, unlike many equally poor countries, India already has a very strong entrepreneurial class, a reasonably large and well-educated middle class, and a number of world-class corporations that can be enlisted in the effort to provide these public goods.
Satisfying the demand for such goods is itself a source of growth. But, also, a reliable road creates tremendous additional activity, as trade increases between connected areas, and myriad businesses, restaurants, and hotels spring up along the way.
As India did away with the stultifying License Raj in the 1990’s, successive governments understood the imperative of economic growth, so much so that the Bharatiya Janata Party (BJP) contested the 2004 election on a pro-development platform, encapsulated in the slogan, “India Shining.” But the BJP-led coalition lost that election. Whether the debacle reflected the BJP’s unfortunate choice of coalition partners or its emphasis on growth when too many Indians had not benefited from it, the lesson for politicians was that growth did not provide electoral rewards.
In any event, that election suggested a need to spread the benefits of growth to rural areas and the poor. There are two ways of going about that. The first, which is harder and takes time, is to increase income-generating capabilities in rural areas, and among the poor, by improving access to education, health care, finance, water, and power. The second is to increase voters’ spending power through populist subsidies and transfers, which typically tend to be directed toward the politically influential rather than the truly needy.
In the years after the BJP’s loss, with a few notable exceptions, India’s political class decided that traditional populism was a surer route to re-election. This perception also accorded well with the median (typically poor) voter’s low expectation of government in India – seeing it as a source of sporadic handouts rather than of reliable public services.
For a few years, the momentum created by previous reforms, together with strong global growth, carried India forward. Politicians saw little need to vote for further reforms, especially those that would upset powerful vested interests. The lurch toward populism was strengthened when the Congress-led United Progressive Alliance concluded that a rural employment-guarantee scheme and a populist farm-loan waiver aided its victory in the 2009 election.
But, while politicians spent the growth dividend on poorly targeted giveaways such as subsidized petrol and cooking gas, the need for further reform only increased. For example, industrialization requires a transparent system for acquiring land from farmers and tribal people, which in turn presupposes much better land-ownership records than India has.
As demand for land and land prices increased, corruption became rampant, with some politicians, industrialists, and bureaucrats using the lack of transparency in land ownership and zoning to misappropriate assets. India’s corrupt elites had moved from controlling licenses to cornering newly valuable resources like land. The Resource Raj rose from the ashes of the License Raj.
India’s citizenry eventually reacted. An eclectic mix of idealistic and opportunistic politicians and NGOs mobilized people against land acquisitions. With investigative journalists getting into the act, land acquisition became a political land mine.
Moreover, key institutions, such as the Comptroller and Auditor General and the judiciary, staffed by an increasingly angry middle class, also launched investigations. As evidence emerged of widespread corruption in contracts and resource allocation, ministers, bureaucrats, and high-level corporate officers were arrested, and some have spent long periods in jail.
The collateral effect, however, is that even honest officials are now too frightened to help corporations to navigate India’s maze of bureaucracy. As a result, industrial, mining, and infrastructure projects have ground to a halt.
Populist government spending and the inability of the supply side of the economy to keep pace has, in turn, led to elevated inflation, while Indian households, worried that no asset looks safe, have taken to investing in gold. Because India does not produce much gold itself, these purchases have contributed to an abnormally wide current-account deficit. Not much more was required to dampen foreign investors’ enthusiasm for the India story, with the rupee falling significantly in recent weeks.
As with the other major emerging markets, India’s fate is in its own hands. Hard times tend to concentrate minds. If its politicians can take a few steps to show that they can overcome narrow partisan interests to establish the more transparent and efficient government that a middle-income country needs, they could quickly re-energize India’s enormous engines of potential growth. Otherwise, India’s youth, their hopes and ambitions frustrated, could decide to take matters into their own hands.
Courtesy: Project Syndicate

11 COMMENTS

  1. jokes are for jokers like you whose entire country has become a joke in itself. A beggar terror enterprise failed state where so many die everyday that there is shortage of coffins…so much worse is happening that poverty is noteven on discussion list….

    • Hey Guest, better take care of ur own house! Naxalites running an independence movement in 12 provinces! Kashmiries, SIkhs, dilits, Shudars all unhappy with N.Delhi! So many human rights violations !! Even small kids are not safe in Delhi & Mumbi getting molested at the hands of criminals!! Politicians, Mitals & Ambanies stuffing all the buck and flocking to Switzerland, a dysfunctional political class sitting like lame duck in New Delhi, Indian rupee depreciating at speed of light, growth below 6% inflation above 12 % ! "Tera kia hu ga kalia"!! Out of ashes, a new Pakistan is rising that no one in India or West is looking for that! The educated bulging middle class of Pakistan has decided to take things in its hands! The next election will make you think twice about Pakistan! Pakistan is destined to become much like Turkey! See you in 2015 mate!!

      • Listen Joker,, These must be news from the channel that you run from your amm1's posterior that relays these news .. hahaha
        India is hope of this world while Pakistan is a curse by all means…
        There are no independence movement anywhere in India. The agitations are part and parcel of democratic society. Everything in India is under control. There is nt a single situation that India can not handle.. on the other hand:
        Pakistan is failed state by all means.
        One indian rupee can buy 2 Pakistani rupees
        There are multiple genuine independence struggles in Sindh as well as Baluschstan
        There is complete chaos, reflection of failed state, in Karachi where everyday dozens die and no one knows who is killing….hahah
        Pakistan is thoroughly infested with religious extremism, terrorism, violence, anarchy, lawlessness, total economic destruction and infact worse than Afganistan and Somalia..
        ahah You want more ??? I will give u more…Pakistan is not rising Pakistan's ashes are rising .. it will be good riddance for thr world..

  2. There are very strong indications that a new govt will come to centre after 2014 in India and that govt will be pro Afghanistan, pro China and anti Pakistan and anti America because the PM candidate of that new govt is Narendra modi, the accused of anti muslim riots. US has not granted him Visa for his alleged roles in riots whereas the same person has very good relations with China.

    He is currently CM of Gujrat in India. China has invested 1800 crores in his state.

    On Modi’s diplomacy, china govt released 14 Indian prisonors.

    Narendra Modi is anti Pakistan from birth. If sources are to believed, he is the mastermind of gurilla movements in Balochistan and Sindh.

    If he become PM, he will surely attack pak in the name of human rights violation in balochistan and sindh as India did for Bangladesh.

    Deteriorating economy of Pakistan, isolation from international community and terrorism…..all these things have created a sound ground for Pakistan to undergo partition again which is backed by India and US.

    • hey Republician Day Dreamer! Modi will not be attacking Pakistan! Instead, like his spiritual dad, Wajapai, he will visit Minar-e-Pakistan and praise Jinnah! Mark my words! BJP is more practical then the confused Congress whose only aim is to make Rahul the next premier and thats it!! Jaswant Singh, a stalwart from BJP already confessed in his book that Jinnah was a smart chap! Advani even paid homage to Jinnah's tomb in Karachi! Modi is a business man not an orphanage-runner just like congress! He will keep on fooling fools like you of attacking Pakistan but instead will strike a deal to settle the disputes including Kashmir once and for all! He is a Gujarati businessman my friend! Not an upper-caste Hindu Punjabi from Delhi, day dreaming about attacking while playing kiddy games like Command & Conquer Generals in ur living room!! The future of Pakistan & India is an EU if the region wish to move forward!! For all u hate-monger Indians, just pack ur bags and move to ur loveland USA!!

  3. Still India is 4th largest economy in world and 2nd most peacefull in Asia.
    Though we are following political and economic crisis but thats temporary.
    We too are waiting for 2014.

  4. If Pakistan was such great destination for investment how come investments are not flowing,not even the Chinese.,they just pulled out of $19 BILLION DEAL because of fear and instability.The world is waiting, Mr. lonelyplanet for the miracle to happen and if it happens it will be good!

    • Only a person sick in his head will compare PAkistan and India now. Compare Pakistan with Afganistan.

  5. There is slowdown in economy globally. India is no exception. Economies are interlinked these days. Even Chinese growth has slowed down considerably.

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