Bureaucracy and other spanners in India’s works

By DAVID LASCELLES / Business Day

THE world has become so accustomed to labelling India as one of the world’s great engines of growth — alongside China — that it comes as a bit of a shock to discover that the reality is a little less dazzling.

Concrete and chaos are the best words to describe India today, as I discovered from a visit earlier this month. The concrete is the building activity you see everywhere, the chaos is the sense you quickly get that things are barely under control.

A typical Indian scene is a large construction site, cement mixers grinding and cranes toiling, while sacred cows munch the grass alongside and a torrent of battered cars, rickshaws and filthy trucks crashes by on the pitted roads. The air is full of noise and grit, but out of it will rise the gleaming headquarters of some new Indian corporate giant.

India’s economic progress is far from smooth, and its future is not assured. The country has suffered from the global crisis: growth is down from 8% to 6%, and its banks are bracing themselves for a wave of bad debts as the downturn takes its toll on high levels of personal and business borrowing. The government hopes to get growth back up to 7% by the end of the year, but the pessimists see more shrinkage ahead. Any major slowdown would be a disaster for a country so hooked on growth, and for its world image as a model emerging economy.

But it is not just the near-term business outlook that clouds India’s future. Structural problems have to be sorted out before the country could be said to be on a sustainable economic path.

The boom India has enjoyed so far has come from its decision in 1991 to “deregulate” its stagnant economy and make a dash for growth. The architect of the deregulation was Manmohan Singh, then India’s finance minister and now its prime minister, which is why he has a reputation as a “reformist”.

But after the initial boost, there has been little further reform. The Indian economy remains far from open: there are tight caps on foreign investment which protect inefficient — often monopolistic — domestic industries, and discourage the inflow of capital and technology. Large parts of the economy — notably the banking system — remain under state control. And the whole country labours under the dead weight of a large bureaucracy.

At the same time, the disparity between the economic winners and the millions of losers scratching a living in the slums and on the land, continues to grow. Only last week, the charity Save the Children reported that India had the worst child mortality rate in the world. This in a country that sends rockets into space and builds nuclear submarines.

Why is Singh not pressing ahead with his reforms? Opinions differ. Some argue that he is, though in a low-key way designed to minimise disruption, and win support within India’s federalised political system. Others think he has yielded to his conservative instincts: his policies strongly favour rural communities at the expense of the towns, which holds back change. A huge problem is farmers’ refusal to sell land for industrial development. AcelorMittal, the world’s largest steel company, has just joined the lengthening list of companies that are threatening to move elsewhere because it cannot build a 20bn plant.

This rural resistance must be symptomatic of a country that is growing too fast, where social change has to catch up with economic progress.

Of course, if India only manages 6% a year for a couple of years instead of 8%, that will still put it at the top of the world growth leagues, and with 1,2-billion people that counts for a lot. But the big difference between India and China is that the Chinese leadership is bent on development and can deliver, while the Indians seems more hesitant, and less able to bring the country along with it.

That may explain why, from a position 20 years ago where they were about equal, China’s gross domestic product per capita is now twice that of India’s and its economic clout very much greater. When people talk about India as a global economic power, that prospect is still some way off.

Lascelles is senior fellow of the Centre for the Study of Financial Innovation in London, and a former banking editor of the Financial Times.

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