Where is the growth?

Prime Minister Manmohan Singh

In the debt-ridden eurozone, an annual growth rate of 5.3% would be a cherished prize for politicians. Not so for the Bric giant India, as it is the lowest rate in seven years and is symptomatic of a deeper malaise affecting Indian politics. Add to this high inflation, growing fiscal and trade deficits and negative investment sentiments and India’s economy no longer appears so rosy.

India’s economic situation came to the fore after the ratings agency Standard and Poor’s (S&P) warned it that it may strip the country of its investment grade status, unprecedented among the Bric group which also includes China, Brazil and Russia. The report, entitled “Will India Be The First Bric Fallen Angel?” blamed the division of roles between the “powerful” Congress party president Sonia Gandhi and the “unelected” Prime Minister Manmohan Singh as the principal reason for the sickly state of the economy. The deficient political system leads to “political roadblocks to economic policymaking” which have stalled the necessary reforms, such as the Goods and Services Tax and one facilitating foreign direct investment (FDI). The agency continued saying that the outlook would not be so bleak for the Asian giant if it cut energy subsidies, which eat at its budget deficit, and raised petroleum prices.

"If things remain the way they are, in terms of policy decisions, investments and sentiments, I would go to the extent that the [growth] figure may be 3%," said a senior economist with a leading business association, echoing the doubts of Indian economists over S&P’s estimate of 5% growth for 2012-13. The low growth is worsened by high inflation, with food inflation at double-digit levels and wholesale price inflation at 7%. Furthermore, the government has systematically failed to tame the fiscal deficit it ran up in order to cushion the effects of the global financial crisis, fuelling irresponsible spending. The fiscal deficit, which stood at 5.9% of GDP in 2011-12, could rise further because of the sluggish growth, lower-than-estimated government revenues and higher expenditure on welfare schemes and energy subsidies. Just as worryingly, the trade deficit went up by $185 billion in 2011-12, as imports rose more than exports. The ailing economy and dithering politicians have thus led to a drop in the business confidence in India. Many firms in the domestic private sector delayed or postponed plans to invest in expansion, further contributing to the sluggish recovery. Certain tax provisions in the 2012 Budget have also put a dampener on FDI inflows.

One government official, giving his explanation of the slowdown, claims that the state machine reached a paralysis from mid-2010, when the public revelations of graft left the government in “an effective state of siege”, such that it was unable to pass reforms or tackle problems such as the shortage of electricity. Reforms are further stymied by the lacklustre performance of the government, which only tends to pursue reforms that are acceptable to its partners and which do not require it to bang heads together. As such it has gone ahead with the easier bits of infrastructure development, such as roads, whilst sidelining more contentious projects such as the power sector, which presents problems throughout the supply chain.

As the former governor of India’s central bank, Bimal Jalan, said, “you can import as much oil as you want, you can pay for it because your reserves are high, and your exports are doing reasonably well even though they may not have done so well in one or two quarters. Your current account deficit is higher than you expected, but still we can afford it, there is no great problem. So what is it that's lacking and that we don't have?” Once again the arrow points towards politics, as India lacks a mature, bipartisan political consensus on the future of its economy. This lack of a political vision is compounded by the marginalisation of India’s main political parties, the ruling Congress and the opposition Bharatiya Janata Party (BJP), who are losing support to regional parties. Mr Singh’s strategy of reforming by stealth has had the harmful effect of not fostering a popular consensus around the need for reform, such that the government faces endless protests when trying to proceed with its program. Congress’s hands are further tied by the electoral timetable before the general elections in 2014, which make it even more loath to take risks.

Global economic crisis aside, India’s recent slowdown seems firmly rooted in its broken politics. Unless it can usher in change at the top, which for too long has seen the beleaguered Mr Singh fudging along, or garner the necessary public support for reform which would propel it to tackle the red tape and widespread graft, India seems set on a path of sluggish growth for years to come. Perhaps not a Bric Fallen Angel, but not a rising Asian giant either.