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Indian economy doing better, but not good enough

Alan Wheatley in New Delhi | May 01, 2003

To its admirers, India has made giant economic strides in recent times by whipping its industry into shape and showing it is no longer afraid of globalisation.

To its critics, India is condemned to under-perform because of stultifying bureaucracy, rigid labour laws and a deficit-addicted government that soaks up money desperately needed for investment.

Both are right.

India is doing better, but on current policy settings even officials admit that Prime Minister Atal Bihari Vajpayee's eight per cent growth target, deemed the minimum needed to make a dent in widespread poverty, is likely to remain just that -- a target.

"We may not reach the eight per cent that the prime minister wants, but certainly we'll give it a go," said Vijay Kelkar, a senior finance ministry adviser.

"We would certainly expect to hit six per cent this year unless we have a very bad monsoon," added Prodipto Ghosh, Vajpayee's economic adviser.

It is India's success in coping with last year's monsoon -- the rains were the weakest in 20 years -- as well as a surge in oil prices in the run-up to the Iraq war that lies behind a palpable confidence in the ministries and think-tanks of Delhi.

To be sure, growth slowed to around 4.4 per cent in the year to March. But in 1991 the Gulf War and global recession sparked a balance-of-payments crisis. Today, foreign exchange reserves are a record $76.08 billion, the current account is in surplus after 23 years of red ink, the rupee is rising and granaries are full.

As elsewhere in Asia, banks are chasing retail customers for the first time. Sales of mobile phones and cars are booming.

Amit Mitra, secretary-general of the Federation of Indian Chambers of Commerce and Industry, says India is reaping the benefit of what he calls phenomenal change in the private sector.

"This is an aspect which has not been noticed. Indian firms have become much slimmer, sharper, more entrepreneurially professional," Mitra said.

Legitimate aspirations

Industry's improved health despite greater competition makes it all the more frustrating to reformers like ex-Finance Minister Manmohan Singh that there is no political consensus to remove the obstacles holding India back from scaling much greater heights.

Singh, who leads the opposition Congress party in the upper house of parliament, credits Vajpayee for good management of the external sector of the economy but is critical that savings and investment rates have stagnated in recent years.

"The economy is therefore performing well below the legitimate aspirations of the people," Singh said.

Such an underperformance inevitably invites comparisons with over-achiever China.

The two enjoyed the same standard of living in 1980. Today, the average Chinese is 70 per cent better off than the average Indian and China is attracting 10 times more foreign direct investment every year than its fellow giant.

Indians seem ambiguous about the China challenge. Many talk confidently about competing -- India's bilateral deficit is narrowing -- while accepting that their noisy democracy gives their authoritarian neighbour a head start.

"Politics is the art of the possible. Development cannot be imported and India cannot become China," Singh said. "In the next two to three years, six to seven percent growth is not unattainable and would not be considered a bad performance."

Democracy tax

Even if what Commerce Minister Arun Jaitley calls India's "democracy tax" militates against the pace of liberalisation, the government can point to progress in economic reforms.

Labour laws that are a big deterrent to investors are as stringent as ever, but the number of industries reserved for small companies -- which hobbles productivity by preventing economies of scale -- is falling slowly.

Tariffs are still the highest in Asia but they are on course to come down to the Southeast Asian average within three years, while the government says it is determined to resume its stalled, 12-year-old privatisation drive.

Despite rowdy objections by lawmakers and unions, officials say at least one of two big oil companies, Hindustan Petroleum Corporation and Bharat Petroleum Corporation, will be sold before the fiscal year ends in March.

"We have a 13-party coalition government, so when you take a decision there is enough consideration of the pros and cons," said Ashok Lahiri, adviser to Finance Minister Jaswant Singh.

"It's unlikely the battles are going to be reopened again. There may be some skirmishes on the way but no major war."

Proceeds from the sales would be especially welcome given the limited chances of narrowing India's huge general government budget deficit of 10-11 per cent of GDP.

Lower borrowing costs -- the central bank cut its main interest rate on Tuesday to a 32-year low of six per cent -- will help, as will plans to refinance old, high-yielding debt.

"No guts"

But critics despair of politicians' unwillingness to take the axe to subsidies and the public sector's wage bill or to enforce compliance of porous tax laws. As the government's own Economic Survey put it, "fiscal consolidation remains intractable".

"At the end of the day, a government that doesn't have the will to curtail expenditure isn't going to have the will to impose taxes on those sections who have not been paying taxes thus far. They don't have the guts," said Saumitra Chaudhuri, economic adviser to ratings agency ICRA Ltd.

If he's right, current government spending will continue to squeeze out investment and India will risk perpetuating what one financial diplomat called a "low-level growth equilibrium".

Private industry has shown it can thrive in such adversity. But for the quarter of a billion Indians who live in poverty, not bad will not be good enough.


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