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Rejuvenating India’s Growth

Photograph by Pankaj Nangia/Bloomberg; Illustration by Bloomberg View Close

Photograph by Pankaj Nangia/Bloomberg; Illustration by Bloomberg View

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Photograph by Pankaj Nangia/Bloomberg; Illustration by Bloomberg View

Is India’s growth miracle coming to an end? Sadly, and despite the nation’s vast untapped potential, the answer may well be yes.

Prime Minister Manmohan Singh had a chance to dispel the pessimism on Wednesday, and wasted it. His address from New Delhi’s Red Fort to celebrate India’s 65th birthday as an independent nation was a moment to convince the country of the need for a new round of economic reform, the cause he first championed 20 years ago as finance minster. Nobody was surprised that the speech was low-key: Singh is calm and quiet to a fault. Even so it was a letdown. Heavy on generalities and devoid of details, it conveyed no sense of purpose or urgency, two things India badly needs.

Before the reforms that began in 1991, India had grown sluggishly for decades, even as China’s economy had soared. Complacent politicians blamed democracy. Change was hard, they said. India couldn’t hope to match an authoritarian state when it came to growth.

Singh and the other reformers proved them wrong. They dismantled the so-called License Raj -- a system of permits and controls that told the country’s industrialists exactly what to make and how -- and they eased restrictions on foreign trade. The growth rate doubled to 9 percent and stayed there. World- class companies appeared from nowhere, and poverty retreated faster than ever before.

The miracle began to fade in 2009, not just because of the global recession. Last year the economy grew by 6.5 percent -- halfway back to the “Hindu rate of growth” that an earlier generation of leaders deemed depressingly adequate. The World Bank and other development agencies, and many Indian business leaders, say the country should still be growing at 9 percent or 10 percent a year, and they’re right.

Growth is faltering because the first great surge of reform petered out. The public sector remained a crushing fiscal burden, through an unfathomable array of badly targeted subsidies. The direct cost of food, energy and other supports is nearly 10 percent of gross domestic product. Their indirect cost is enormous, too. Subsidies on such a scale invite corruption, which is worsening, spurring the populist reform movements of Anna Hazare and others. Subsidies can also deter private investment, a main cause of the power cuts that blacked out half the country this month.

Crowded out by the cost of subsidies, pressing infrastructure needs go unmet. The tax system is complicated and unpredictable. Recently the government broke its promise to let foreigners compete in retailing, a sector crying out for modernization. Many industries continue to be heavily regulated.

Singh understands all this and made glancing reference to it in his Independence Day speech: “To attract foreign capital, we will have to create confidence at the international level that there are no barriers to investment in India.” Yet he offered no specifics.

Far from promising to unravel the Subsidy Raj, he took credit for the outlays needed to advance it: seed subsidies, fuel subsidies, housing subsidies, you-name-it subsidies, a bank account for every household, electricity for every household. Oh yes. There’ll also be room in the budget for a Mars orbiter mission.

The prime minister blamed a lack of political consensus for recent policy reversals and slowing growth -- an echo of the favorite excuse from the pre-reform era. He’s right. He leads a turbulent coalition, shares de facto power with Sonia Gandhi, and is opposed at every turn by the Hindu-populist Bharatiya Janata Party.

It’s hard to be India’s prime minister, all right, but leaders have to build consensus, and Singh is failing. In the early 1990s, an economic crisis provided the initial momentum to the reform program. Today’s sluggish growth is disappointing, but it isn’t an emergency, so a different case for reform is needed, one based on an undisguised commitment to market forces and private enterprise. A constituency receptive to this case now exists thanks to the flowering of Indian business since 1991.

Two recent appointments offer a glimmer of optimism. Singh has reinstated Palaniappan Chidambaram, a veteran reformer, as his new finance minister and hired Raghuram Rajan of the University of Chicago’s Booth School of Business as his economic adviser. Intellectually, this triumvirate is convinced of the need for fiscal discipline, investment in crumbling infrastructure and renewed economic reform -- and investors know it. They know, too, that turning those ideas into action is the problem.

India’s leaders solved it once, and must solve it again. The first step is for Singh to pick a fight he can win, and use it to announce a new phase of reform. Letting foreign investors enter retailing is the perfect place to start. The government’s retreat on the issue signaled weakness; that message needs to be reversed. The economic case in favor is strong and, crucially, can be cast in populist terms: A more competitive retail sector would drive down prices of food and other goods, so the policy is pro-poor.

It won’t be an easy fight, but settling for paralysis could unwind the achievements of the past 20 years. Avoiding that tragedy is worth a few risks.

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Today’s highlights: the editors on the messy Medicare debate; Jonathan Alter on Paul Ryan’s gift to Democrats; Caroline Baum on why conservatives don’t mind meddling in private affairs; Ezra Klein on how Ryan could be Democrats’ worst nightmare; Jonathan Mahler on the U.S. popularity of European soccer; Adam Kirsch on the politics of personal destruction in “Advise and Consent”; Russell G. Ryan on giving the Securities and Exchange Commission too much power.

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