WHEN Narendra Modi’s Bharatiya Janata Party won a thumping majority for its pro-growth promises in India’s elections in May, hopes swelled that the new government would adopt economic reforms that had proved beyond the brittle coalitions of the past. Yet in defiance of the maxim that the boldest steps are best taken early, Mr Modi has so far eschewed dramatic change.
Cuts to subsidies (such as on fuel and fertilisers), which cost 2.3% of GDP last year, have been deferred at least until a committee of experts produces a fresh report to add to the existing library of studies on the subject. There is no firm timetable for a national goods-and-services tax, which would boost GDP substantially by removing barriers to trade between India’s many states. Caps on foreign direct investment in many areas, including supermarkets, remain in place. Instead the government has taken a series of small steps, ginning up India’s sluggish bureaucracy, for instance. Is the chance to reshape India’s economy slipping away already?
India was as badly shaken as any emerging market last year, when the Federal Reserve first hinted at slowing its bond purchases, raising the prospect of higher yields in the rich world, reducing the attraction of investing elsewhere. It is now on a sounder footing. The economy grew at 5.7% year-on-year in the second quarter. That is not a sparkling rate for an economy that until a few years ago was growing at 9% a year, but is a good deal better than in most places. The foreign money that washed out of India last year has returned. The stockmarket has risen to record levels. Inflation is too high, at 7.8%, but no longer in double digits. The current-account deficit has narrowed; the rupee is steady. But the impetus for reform has slowed.
The small measures taken so far have at least focused on some big problems. One cause of the slowdown was a sudden drop in investment, as big projects, such as power plants and roads, got snarled up in bureaucracy (see chart 1). Sajjid Chinoy of JPMorgan Chase, a bank, attributes almost 30% of the peak-to-trough fall in the growth rate to this backlog. Civil servants were already struggling to keep up with the paperwork before a rash of corruption scandals made them especially cautious.
Mr Modi has cracked heads. Shocking tales of civil servants working late have become commonplace. Many permits can now be obtained online. By the start of September the government had approved 175 stalled projects, according to Citigroup, another bank. But this good work was set back when, on September 24th, the supreme court cancelled 214 of the 218 coal-mining licences sold between 1993 and 2010. The government has pledged to auction new licenses quickly.
Meanwhile, small changes at the central bank have helped curb another blight: inflation. As it rose, Indians put their savings into gold, still a common store of value. As imports surged, the current-account deficit widened to more than 6% of GDP, sapping the rupee and so exacerbating the problem. Raghuram Rajan, the head of the Reserve Bank of India (RBI), is inching closer to a formal inflation target. He hopes to limit rises in consumer prices to 8% by the start of next year and 6% in 2016.
To that end Mr Rajan has raised rates, although they are still only barely higher than inflation (see chart 2). They will come down, he has said, when it is clear his targets will be met. This strategy has done much to stabilise the rupee and calm financial markets. When funds began to flood back into India in anticipation of Mr Modi’s election victory, the RBI seized the opportunity to add to its foreign-exchange reserves.
The new stability should help growth to pick up, from around 5.5% this year to perhaps 6.5% next. The recovery would be quicker but companies are weighed down by the debts they ran up in the go-go years. Happily, many with weak balance-sheets have taken advantage of the rising stockmarket to raise equity. But unless the government does its part by adopting more radical reforms, the 9% annual growth that India briefly enjoyed before the financial crisis is hard to imagine. The world economy, after all, is much more sluggish now.
Mr Modi’s defenders say the big reforms to taxes, subsidies and labour laws that would boost growth require the co-operation of India’s states. His party is hoping to win more local seats (see article). But getting states’ support takes time. Then again, that is a good reason to start soon.
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A festschriftin honour of Montek Singh Ahluwalia, this brings together essays by economists who have been closely associated with him in college, the World Bank, or in government. There is palpable adulation over his role in the reform process.
India's reform process has not been smooth. It has indeed been subject to the vicissitudes of coalition politics. The nature and content of reform are being debated endlessly.
If, against this background, a reader expected to get from the festschriftan insight into the contribution made by the person being honoured to the reform process, he will be in for disappointment. Some of his personal qualities have come in for praise by some of the writers.
There is internal evidence that these articles were done in 2008, much ahead of the Lehman collapse. It is clear that the chapterson the financial sector had undergone a hurried revision and post-scripting aided by post-Lehman hindsight. This can also be said of the chapter discussing stock markets. They reflect the rethinking on financial reforms. “Calibration” and “gradualism” of bank reforms and capital-opening are respected clichés now. Truly, this is not what ‘red hot' reformers wanted in the pre-Lehman era.
Those who have been following closely the reform process are well aware of the differences between the Government of India and the Reserve Bank of India and the intense pressure the former mounted on the RBI to speed up financial opening. Fortunately, the RBI stood firm and saved the banks from the crisis. It would have been instructive if any of the authors who were ‘insiders' had spoken about Ahluwalia's contribution to the policy deliberations during that time.Surprisingly, there are only three references to the views of Venugopala Reddy, then Governor of the RBI.
On ‘infrastructure', there is a strident attack on the public sector undertakings, — their inefficiency, corruption, et al. It fails to give credit to the PSUs for their role in creating investment demand, filling production gaps, and so on. Unfortunately, the various instruments of privatisation — PPP, BOT, etc. — have not been successful in promoting infrastructure.
In fact, the chapter provides a doleful account of failures in infrastructure areas such as power, roads, and airports, where the private sector involvement was tried out as a part of reforms. The author goes on to narrate how the change ended up in replacing the “licence permit raj” by a new “contract raj” and nurtured rentier class. On the ‘power' front, there is a reference to the Enron debacle, but the role played by Ahluwalia in promoting it is glossed over.
In his article on “inequality and growth,” Suresh Tendulkar provides, rather strangely, an apologia for inequality during years of high rates of growth — this, at a time when the government's avowed policy is for ‘inclusive growth.' Sadly, his work is based on studies that have since been set aside by new research which takes the view that inequality might hinder growth.
Ashok Gulati's piece on ‘accelerating agriculture growth' is provocative. At a time when the country is worried about the state of agriculture, he is upbeat — a mood that stemmed from his studies. He dismisses concerns over food security, including those expressed by Dr. M.S. Swaminathan, as media ‘hype.' He calls for a shift in emphasis from the “farms” to “production chains” backed by a support structure and linked ultimately to the retail chains.
In Isher Judge Ahluwalia's essay on ‘public services', there is no recognition that public services have been constrained by the fiscal reduction enforced under ‘reforms.' The suggestion that education and health services could be improved through a coupon system engaging the private sector is unrealistic. Can the States underwrite a bottomless pit, given the current levels of capitation fees and medical charges in the private sector?
When work on this volume started, the authors would have been in a celebratory mood, and understandably so. Sadly, the financial crisis has played spoilsport in the intervening year. In the event, what we are left with is a collection of musings tempered by the crisis, nothing much about Montek Singh Ahluwalia's contribution in various areas.
INDIA'S ECONOMY— Performance and Challenges: Edited by Shankar Acharya and Rakesh Mohan; Oxford University Press, YMCA Library Building, Jai Singh Road, New Delhi-110001. Rs. 795.