India’s Growth a Catalyst for Reform?

In its ‘World Economic Outlook’, released earlier this month, the IMF slashed its July predictions for Indian economic growth by 1.3%, to an expected 4.9% growth for 2012.

hile external factors such as the aftereffects of the global financial crisis and ongoing Eurozone chaos have certainly impacted Indian growth prospects, the IMF also identified various homegrown problems, such as policy uncertainty and slowing domestic demand, as being responsible for the comparatively sluggish growth.

Uncertainty over industrial policy is endemic in India. The fragmented reality of domestic federal politics means that the Indian National Congress (The leading party of the ruling United Progressive Alliance) is perennially bargaining with the 12 other members of the coalition over policy formation and implementation, creating a situation where inaction is often the most politically expedient course.

At any given time, the cost of energy in India relative to GDP per capita is around 20 times higher than in the US

Infrastructure, crucial to support industrial growth, is visibly lagging behind other high growth economies such as China. The condition of roads and ports is largely substandard, and problems with power supply are notorious. In July India suffered what was reported to be the biggest blackout in history, affecting over 620 million people. At any given time, the cost of energy in India relative to GDP per capita is around 20 times higher than in the US. With such a huge comparative disadvantage in the provision of a good as essential as energy it is very difficult for Indian businesses to achieve high levels of global competitiveness.

These doubt producing domestic factors have led to what is probably the single biggest threat to Indian economic performance, the severe downturn in capital investment. The torrent of cash that fuelled growth from the early 2000s up to 2008 has been reduced to a trickle, as firms have become reluctant to pump cash in to an economy that is burdened by such high levels of government corruption and ineffectiveness. If capital investment continues to ebb, the likelihood of a return to the kind of growth figures India has enjoyed over the past decade are slim indeed.

the economic slowdown may in fact be just what India needs to jumpstart a long overdue economic reforms program

However, due to the idiosyncrasies of Indian governance the economic slowdown may in fact be just what India needs to jumpstart a long overdue economic reforms program. If the economy were to chug along at 6 or 7 percent growth , the government would have little incentive to undertake reforms that will inevitably alienate some political allies, and a large part of the electorate. A persistently worsening economic climate is perhaps what is required to instill legislators with the impetus to enact policy that will restructure the economy, and probably result in some short term political pain in pursuit of long term economic gain.

The signs emerging over past weeks have been promising. The once great reformer Manmohan Singh finally seems to be returning to form. His government is once again pushing for the opening of the retail food sector in India. Under this plan foreign supermarkets would be permitted to operate in India. Streamlined supply chains would replace India’s Byzantine system of food industry middle-men, who contribute to high levels of food inflation and even higher levels of agricultural wastage, as produce spoils while navigating their various storehouses before it can reach the consumer.

If everything went to plan infrastructure would improve, tax revenues would increase, and the consumer, and probably the farmers too, would receive far better prices. Hopefully success in this area will give the government the courage to pursue similarly beneficial reforms across the economy.

by Stuart Rollo

 

Leave a Reply

Your email address will not be published. Required fields are marked *