India Gets Another Chance to Succeed

Sept. 26 (Bloomberg) -- Indian Prime Minister Manmohan Singh spoke to the country on television last week, amid national protests over unexpectedly bold economic reforms his government had just announced. A coalition partner has defected, leaving Singh without a majority in Parliament, so the prospects for his proposals aren’t good.

“If we have to go down,” he’s reported to have said, “we have to go down fighting.”

The truth is, Singh no longer had much to lose. He could have surrendered to paralysis. That would have meant worsening economic underperformance, erasing altogether his faded reputation as India’s chief modernizer. Or he could start and probably lose a fight to put the economy back on the high-growth track he first mapped out.

Unlikely as he is to succeed, choosing this battle was his best bet, and India’s as well.

As finance minister in the early 1990s, Singh was the main architect of India’s breakthrough reforms. Before that first “big bang,” India was the most micromanaged democracy in the world. Bicycle manufacturers needed the government’s permission to use a different kind of tire. When I visited the Planning Commission in New Delhi back then, officials proudly showed me the input-output tables they used, so they thought, to direct the economy down to the last bicycle spoke. Imagine Soviet-style central planning run by the British civil service.

Phenomenal Results

In economic terms, the dismantling of the so-called License Raj was an event on the same scale as Gorbachev’s perestroika, though less dramatic because it didn’t require a political revolution. The results were phenomenal. The fiscal crisis that had sparked the reforms was brought under control. The traditional Hindu rate of growth -- call it 4 percent a year, assuming a fair monsoon -- was replaced by an East Asian pace of expansion. Entrepreneurs appeared from nowhere and built world-class businesses. Poverty retreated faster over the next decade and a half than at any time in the country’s history.

There were two problems, however. First, sweeping as the reforms had been, they weren’t enough to make the new growth trajectory secure. There was too much unfinished business. Choke points such as weak infrastructure, erratic power supplies, unaffordable subsidies (mainly benefiting the middle class), and entrenched inefficiency in distribution and other sectors gradually throttled the expansion.

Second, and more important, too many Indians failed to notice the miracle happening around them -- or, if they noticed, only resented it.

Although two decades of rapid growth have improved the lives of India’s poor, the gap between India’s successful new business class and the rural masses has widened. This pattern is pretty much universal when developing economies take off, and it’s hard to see how it could have been avoided. But a main strand of India’s political culture remains exuberantly sensitive to the disparity. It’s Indian exceptionalism -- the idea that the world’s most populous democracy should prefer growth that’s slow, stately and fair over vulgar capitalist excess. Add a political elite whose cynicism would startle even Washington, and Singh has his work cut out for him.

Despite the proven success of the big bang, economic reform in India is still like pulling teeth. The changes Singh’s government has again taken up -- having tried and failed to push most of them through before -- shouldn’t be controversial. But they are.

Open Retailing

The government especially wants to encourage inward investment, so it’s trying again to open India to foreign retail chains such as Wal-Mart Stores Inc. Small traders, a group with political clout, are threatened by the move and call it anti-poor. It’s the opposite, of course. Indian retailing is notoriously inefficient. The big foreign retailers can reduce waste, drive down prices and, as Singh explained, give suppliers an alternative to dealing with rapacious middle men.

Singh’s program also cuts diesel subsidies, puts shares in some state-owned enterprises up for sale, opens domestic airlines to foreign investors, lowers the tax on Indian businesses that borrow from abroad and encourages small investors to put money in the stock market. Finance Minister Palaniappan Chidambaram, another veteran reformer, says he wants to create an “equity culture.” Remote as that prospect may seem for much of India, the goal makes sense, because reconciling India to capitalism is the real challenge.

Singh told his television audience that the measures just announced were only the beginning. “We need to do more,” he said, “and we will do more.”

He’s certainly right about the first part. The World Bank and International Finance Corp. carry out an annual survey of the ease of doing business around the world. India ranks 132nd out of 183 economies. (China is 91st.) It ranks 166th on “starting a business,” 181st on “dealing with construction permits,” and 182nd on “enforcing contracts.”

Much as I would like Singh to succeed, I wouldn’t bet on it. Sonia Gandhi, president of Singh’s Congress party and its most potent public figure, doubtless gave tacit approval to the new reform effort, but she hasn’t been conspicuous in advocating it to the country. Opposition to the reforms -- especially to the opening of retailing to foreign competition, on which the prime minister has now staked his reputation -- unites all points on India’s political spectrum.

The supposedly pro-business Bharatiya Janata Party speaks for small retailers, and sees an opportunity to bring down Singh’s now-depleted Congress-led government. And Sitaram Yechury, leader of the opposition Communist Party of India (Marxist), was quoted by the Financial Times as saying, “Congress wants Indians to be slaves and foreigners to be our masters.”

The question all along has been whether India sincerely wants to succeed. Don’t take the answer for granted. They’re still thinking about it.

(Clive Crook is a Bloomberg View columnist. The opinions expressed are his own.)

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