The Great Pretender–India’s Economic Past and Future: Part 3, Political Atrophy

In the aftermath of the global financial crisis, optimists hoped that the BRIC (Brazil Russia India China) would drive the global economic engine. But China’s economic growth has slowed to its lowest rate in three years. Brazil’s economic growth has fallen from around 7.5% to under 3%.  Russia’s economy is heavily dependent on oil and energy prices. India also has stalled. This 3-part paper looks at the development and future trajectory of the “I” in the “BRIC”. The third part looks at the India’s inability to confront its current problems.

India’s growth has slowed to around 6%, high by the standards of developed countries but well below the levels required to maintain economic momentum and improve the living standards of its citizens. The demographics of a youthful population, the large domestic demand base and the high savings rate all remain positive. But increasingly, corruption and political atrophy threaten to overwhelm its future prospects.

Corruption Capital …

Petty corruption by poorly paid local officials has been common in India for decades. The real problem is a deep-seated and endemic corruption on a large scale, highlighted by scandals surrounding the issue of telecommunication licenses and also sales of coal assets.

A 9-month investigation by the auditor and Central Bureau of Investigation found that the Ministry of Communications and Information Technology sold licences for the use of spectrum for mobile telephony bandwidth at below market prices to telecoms companies in 2008. The report found that 85 of the 122 licenses were granted to companies that “suppressed facts, disclosed incomplete information and submitted fictitious documents.” The sale cost the Indian government and citizens lost revenues of around US$39 billion.

More recently, a draft report by the auditor accused the government of selling coal assets to major Indian industrial corporations at below market prices, resulting in a loss of (up to) $210 billion in lost revenues. There are even accusations of manipulation of the auction of licenses in the new Indian Premier league, a T20 cricket competition.

Commentators now compare some Indian businessmen to 19th-century American robber-barons.

Using corrupt means to access power and acquire influence over politicians, businesses have advanced their interest in several areas.  They have secured rich natural resources, especially land and minerals. They have ensured a favourable regulatory framework and restricted competition, especially foreign competition, where possible. The unauthorised biography of Dhirubhai Ambani, the founder of the Reliance Empire now split between his sons, euphemistically notes his skill at “managing the environment”.

The problem involves both businesses and politicians. Historian Ramachandra Guha tells the story of a burglary of a prominent Indian Politician which only yielded the miscreant a gold sovereign and Rupees 800 (about US$ 20). Today, the haul might be better.

The retired head of India’s anti-corruption watchdog stated that as much as 30% of his compatriots were corrupt. Favours, bribes and even shares of business are now commonly demanded in return for assistance in securing contracts.

A 2009 Newsweek article The House in Ill Repute recorded the history of some members of the Indian Lok Sabha, the lower house of parliament. Under new laws pushed through by a group of college professors after years of fierce resistance from dozens of political parties, candidates for the Lok Sabha were required to disclose their assets and criminal records. The disclosures recorded that 128 of the 543 winners had faced criminal charges, including 84 cases of murder, 17 cases of robbery and 28 cases of theft and extortion. One member faced 17 separate murder charges. As Indian law only bars convicted criminals but not alleged criminals from running for or holding office, even convicted criminals can continue to hold political office pending the hearing of appeals, a process that can take up to 25 years in India.

Insecure India …

India’s economic challenges are compounded by internal and external insecurity.

In the title of his 1990 book A Million Mutinies, writer V.S. Naipaul pithily captured India’s internal political disputes. Today, about a third to a half of India is affected by the Naxalites, a violent Maoist insurgency which has been active for over the 50 years. Active in remote forested areas which are coincidentally rich in mineral resources, the movement has prevented development and also tied up substantial government resources.

More peaceful separatist movements abound in many parts of India, with ethnically distinct groups seeking their own separate State. Over the last 30 years, many Indian states have been sub-divided to accommodate these movements at great national expense.

The threat of religious conflict between Hindus and Muslims is ever present. The Chief Minister of Gujarat, frequently touted as a candidate for future Prime Minister, is unwelcome in many countries that refuse to grant him a visa because of his alleged involvement in sectarian violence.

Ongoing border disputes with Pakistan and China and the instability of AfPak (Afghanistan and Pakistan) dictates large defence expenditure. This is compounded by regional competition with China for influence requiring the capability to project military power into the Indian Ocean and also South East Asia.

In 2012, Indian defence spending is forecast to be US$41 billion, around 1.9% of GDP or the 9th highest in the world. Financing this spending diverts resources away from other parts of the economy.

Political Atrophy…

Political paralysis is a major impediment to economic development. Successive governments of every political persuasion have failed to undertake meaningful reforms, necessary to foster growth, employment and development.

Required changes in land and property laws have not been made. Problems in acquiring land are a factor in 70% of delayed infrastructure projects. The land acquisition process under a 19th century law requires changes, which remain unlegislated almost 3 years after amendments were proposed.

Reform of tax laws, including introduction of a direct sales tax correcting cumbersome difference between individual states, have not been completed. Changes to mining and mineral development regulations to allow proper, environmentally controlled exploitation of India’s mineral wealth have not been made.

Other crucial areas remains unaddressed – rationalising unwieldy and economically distorted subsidies, implementing economic pricing of utilities, promoting foreign investment in key sectors or reforming agriculture, especially the wasteful and inefficient logistics system for transporting produce to market. Reform of labour markets and privatisation of key sectors has not been progressed.

Dealing with corruption and reforming government process for the grant of licenses or property rights also remains incomplete.

India’s political system is an obstacle to change. Complex coalition governments are a barrier to decisive action. The current government failed to implement its plans to allow limited entry of foreign retailers as a result of protests from its own coalition partners as well as the opposition. The government also failed to get a key anti-corruption bill through parliament.

The current governing Congress led coalition and the BJP led opposition is weak, both crippled by corruption scandals. All parties are dominated by political monarchies (such as the Nehru-Ghandi dynasty) or by geriatric politicians who cannot or will not embrace change.

India’s fabled democracy is an increasingly ossified domain, where a complete inability to make hard decisions or undertake reforms makes government futile if profitable for some.

The Great Pretender…

In good times, Indian economic weaknesses were covered by moments of positive actions and good luck. But the economy faces increasingly difficult times ahead as the luck has run out.

Indian disappointing response to the challenges is to disavow the problem or to look for short cuts. The overall tendency is for “spin”, ignoring the fundamental failures. The country seems unable to face the truth and undertake fundamental long term changes.

In the 1980s, Indian sociologist Ashis Nandy observed that “in India the choice could never be between chaos and stability, but between manageable and unmanageable chaos”. The observation is relevant today as India deteriorates through its failure to carry through crucial reforms exacerbated by corruption.

Without urgent changes, India may never be able to live up to its promise, remaining always the Great Pretender.

 

9 Responses to "The Great Pretender–India’s Economic Past and Future: Part 3, Political Atrophy"

  1. Amar   May 30, 2012 at 12:04 am

    Hi Satyajit,

    This is a beautifully done analysis and a fantastic summary (all three parts). Here're my thoughts – I have divided those into those I agree with vs. those I don't agree with.

    Don't agree
    You have well identified all the problems plaguing the nation ie. infrastructure, corruption, fiscal deficts, rupee fall, FCCB, sepratist movements etc. However I am not as pessimistic about impact of these problems as your analysis sounds. Every single one of these problems has existed for decades in India and most were much worse as recent as a decade back.

    During the 2008 crisis, I myself was surprised by the resiliency of the Indian economy, which grew by 5.8% in the Dec 2008 quarter, when the whole world was falling apart. And that quarterly growth was before any fiscal measure were even announced !

    Agree
    You have hit the nail right on the head when you say that political paralysis is a major impediment to economic development.

    I would go on to say that political will is make or break for India. India growth of last two decades was driven by a political will. Things like electricity, roads, infrastructure, sepratist movement and what nots have always been there, and in fact were much worse just ten years back. The differentiator has always been the political will. And going forward, what happens to economic growth would again be driven by political will

    Summary
    Based on the performance of Indian economy in good times and bad, my sense is that it has picked up some kind of base momentum, with a 8% growth rate being the ‘new normal’ so to speak. In fact I recollect an insightful study done by RBI which talks about the new long term average growth rate being in this 8% range. My sense is over a longer term, India is likely to continue to grow at this 8% kind of growth rate, notwithstanding any policial and economic issues. Of course, for the economy to grow at 10% range a much strong political will would be needed.

    Regards
    Amar Harolikar
    Unknown Insights

  2. guesty   June 1, 2012 at 5:56 am

    9.9% inflation.

    5% growth.

    Hooray. BEats all developed markets. Hooray. Hip Hip.

  3. Amar   June 11, 2012 at 12:28 am

    India’s Growth Story Intact: Interpreting macro numbers and trends the right way – Part II

    Current Economic Problems: More imagined than real
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    The U.S. economy faces some structural issues, which are very real. Meanwhile, in India, the challenges to the long-term growth trend are more imagined than real.

    The problems facing the Indian economy today are more tactical and cyclical rather than of a strategic or long-term nature. It’s not as if everything is hunky dory – no it’s not. There are challenges around fiscal deficit, current account deficits, governance and reforms. But all these challenges have pretty much existed for the past six years during which the economy continued to grow at a very healthy rate.

    So, Is India’s Growth Story Intact?
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    As of now, yes.

    As the chart clearly shows, the long-term trend in India GDP is fully intact and issues like the slowdowns in 2008 and 2011 are simply the business cycle playing itself out.

    So, is there nothing that can derail the growth story? Of course, there are many factors which can do so. But it’s only major structural changes that can derail India’s growth story, things like a significant fall in competitiveness in services exports, a rollback of reforms and such like. Not factors like dollar volatility, oil prices and minor variances in fiscal deficit.

    India has continued to grow at a steady pace for six years, a period characterized by a slowdown in reforms, the Lehman meltdown, dollar volatility, high fiscal deficits, high food prices and what not. Factors like these have only caused the normal ups and downs of a business cycle in India, and I forecast that they would only cause normal business cycles going forward, too.

    So, What Happens Next?
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    In the next phase of India’s business cycle, the continuing drop in commodity prices, oil prices and interest rates will speed up the recovery process. Corporate profitability, which has already improved significantly, would post some handsome growth numbers. All these would result in a continuing GDP uptrend.

    Amar Harolikar
    Unknown Insights

  4. Amar   June 11, 2012 at 12:49 am

    Hi Satyajit,

    Notwithstanding a difference of opinions on the India's long term story, I would like to state that your three part analysis is a brilliant piece of work.

    I have really loved reading all the three parts right from the hindu rate of growth to the current state of political atrophy and corruption. You have done an amazing work in summarizing the India story.

    Very nostalgic too when I read this part – "Mr. Singh ended his speech to parliament quoting French author Victor Hugo: “No power on earth can stop an idea whose time has come.”

    I remember that was the time I was studying for my CA and CWA qualifications and we had this act called the IDRA (Industrial Development and Regulation Act) – which was ultimately scrapped by the 1991 reforms. When I had first read that piece of law, I was shocked at the degree of control government had on private business operations. I just couldn't imagine how any industry could ever grow in India without paying bribes. I just don't understand how Tata's could have grown without paying bribes – or maybe they did.

    Your three part articles are a must read for anybody trying to understand what the India story is about.

    Regards
    Amar Harolikar
    Unknown Insights

  5. gunjan jha   June 22, 2012 at 2:53 pm

    When I go back and read articles written on or about China in 1990s, I read similar pessimism and nothing else. Some of it still continues. Yet China managed to get better. Tell me a country, which does not have a list of issues facing, in any era and in any geography. India has her own set of issues. This article has a laundry list of items that will certainly enthuse naysayers, but has less methodical economic rationale. Danger of Maoism is present, so what? We had danger of Punjab, Kashmir, Bodo and so on, but we managed to get ahead. Hindus and Muslims are not a new set of groups. Did it stop growing us at 7% over last 10 years?

    Beyond all of this, I feel you are inflicted with the virus of socialism, as most people from Bengal have been. It is futile to expect progressive economic perspective from you. So good luck to you. We shall march, take rest, and march again.

  6. Jag   July 5, 2012 at 2:26 am

    A very shallow piece of writing showing a very limited understanding of economics or political economy. The author seems to belong to the group of folks who were clueless when growth occurred and could not stand the fact that growth occurred and by-passed them.

  7. Nari   July 29, 2012 at 8:58 am

    Its not only a Great Pretender; iit just a Basket Case.Millions of educated and technocrats have already buried India. India has nothing to claim about. The cities are falling apart, and the whole country is filthy. To show export the rupee is on a free fall.What economy?
    No water, no power and millions starving. Just go around India and see and talk to the masses, for get what Indian government tells the world.
    It is Basket Case, and mark my words. It is aquestion of time.

  8. Balakrishna Khandadhi   August 22, 2012 at 4:07 am

    Coalition Government is not the real cause for non implementation of reforms, all parties are getting there share in corruption is a reality. the Constitution doesn't recognize the party politics, despite the coalition is recognized within the House is a big conspiracy which has to be unearthed by the Investigating wing.
    The FDI on the one hand and the Investors definitely inclined to maximize the returns,so that they can withdraw at will through Market cant be stopped by the Lobbyist Party politics running the Government is the real cause to be looked after for fast development of Economy.