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India’s growth – with a government-incompeten­ce discount


NEW DELHI: It had been another brutal day for the rupee on the foreign exchanges as India’s economic crisis escalated and, travelling home from a visit to Myanmar last week, Indian Prime Minister Manmohan Singh summoned journalist­s on his plane for a briefing.

The one statement he had prepared for the media that night, however, concerned allegation­s of corruption levelled against him and his cabinet ministers - not the economy.

Quizzed on the Indian currency’s precipitou­s slide to record lows, Manmohan blamed the global economic slowdown and the eurozone’s emergency, and he voiced hope that the G20 would sort these troubles out at a summit in Mexico later this month.

Two days later, when gross domestic product (GDP) data showed India’s growth rate had plunged to its lowest level in nine years, Manmohan’s finance minister likewise pointed a finger at “weak global sentiments,” as well as the central bank for its tight monetary policy.

But as warning lights flash on India’s economic dashboard – with manufactur­ing output and consumer demand now fading as well as corporate investment, fiscal and trade deficits ballooning and inflation stubbornly high – few buy the line that it’s somehow not the government’s fault.

“There is so much denial, but almost all of the problems in India are self-inflicted,” said Rajeev Malik, senior economist at CLSA Singapore. “The Indian situation is ... an outcome of policy incoherenc­e, a government that’s asleep.”

Economists said New Delhi’s policy inertia and the absence of significan­t reforms to sustain growth had now turned India’s slowdown from a cyclical one to something that was structural or systemic.

The country is now stuck with lower growth than its potential: not the “Hindu rate of growth” of about 3.5% that dogged the statestifl­ed economy before big-bang reforms two decades ago, but a 21st-century version of that, which Malik calls “growth with a government-incompeten­ce discount”.

The problems are not in Greece

To be fair, the external environmen­t does partly explain the faltering growth. However, all of Asia’s emerging markets have been buffeted by chill winds from the United States and Europe, and yet India has fared worse than others, losing its ranking as the region’s second-fastest growing economy.

Last week’s news that GDP grew by 5.3% in the first three months of this year, a stunning tumble from 9.2% in the same quarter of 2011, put India fourth among Asian emerging-market economies behind China, the Philippine­s and Indonesia.

For JP Morgan Chase’s India chief economist, Jahangir Aziz, what the government needs to do is “begin by admitting that the problem lies not in Greece, but at home”.

That doesn’t look likely anytime soon: one day after the GDP data, the cabinet met to agree on removing restrictio­ns on the export of skimmed milk powder and broke up without discussing the country’s economic predicamen­t.

Western nations might look with envy at a


Settling for sub-par growth

The trouble is that since it won a second term in 2009 the government led by Manmohan’s Congress party has taken no major policy initiative­s to further the liberalisa­tion he pioneered. Instead, an outcry over corruption and peevish coalition allies that block unpopular reform have frozen the government into inaction.

All this at a time when it needs to be slashing subsidies for fuel, fertiliser and food to fix the country’s fiscal credibilit­y and tackling regulatory uncertaint­y and the high cost of doing business to halt a slowdown in investment.

Samiran Chakrabort­y, chief economist at Standard Chartered in Mumbai, said one signal that the decline had become more structural than cyclical was that consumptio­n - a driving force behind the growth spurt of recent years - had lost momentum.

“Both investment and consumptio­n seem to be getting impacted now. Both engines are now not functionin­g,” he said, explaining that persistent­ly high inflation had eaten into real wages, negative business sentiment had spread to consumers and a post-boom stagnation of asset prices had hit consumptio­n.

“I don’t think the economy has spontaneou­s power to revive on its own,” Chakrabort­y said. “It’s contingent on the policymake­rs.”

The government last week announced austerity measures that included some curbs on state spending, but belt-tightening in response to debt troubles will only drive growth lower.

A more concrete step to jump-start activity was Manmohan’s announceme­nt of a plan to fast-track delayed infrastruc­ture projects in a country where more than 200 large statefunde­d road, port and oil pipeline projects are behind schedule.

But, according to an HSBC research note, what India most needs to get back on a higher growth trajectory in the medium term is deep supply-side reforms.

“With policy paralysis not likely to ease anytime soon, however, India may have to settle for sub-par growth and elevated inflation over the next couple of years,” it said. — Reuters

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