What’s Troubling India? by Kenneth Rogoff
Read more at http://www.project-syndicate.org/commentary/india-s-economic-slowdown-by-kenneth-rogoff#242EwhrFwC9AhQIw.99
CAMBRIDGE
– India’s recent fall from macroeconomic grace is a lamentable turn of events.
After many years of outperformance, GDP growth has slowed sharply. Annual output
will most likely rise by less than 5% this year, down from 6.8% in 2011 and
10.1% in 2010.
Read more at http://www.project-syndicate.org/commentary/india-s-economic-slowdown-by-kenneth-rogoff#242EwhrFwC9AhQIw.99
Reform has stalled amid profound
political paralysis. All of the major emerging economies face weakening external
demand, but India’s slowdown has been exacerbated by a drop in investment that
reflects a deeper loss of official direction and business confidence. Even
the International Monetary Fund’s forecast of a
modest improvement in 2013 is predicated on the government’s ability to breathe
life into a spate of stalled economic reforms.
India’s recent torpor has
underpinned a remarkable shift in global opinion. Just a couple of years ago,
India was developing a reputation as the cool place to invest. Heads of state
tripped over one another to meet business leaders in Mumbai, hoping to pave the
way for a significant expansion of trade and investment. Now their interest has
faded, along with the macroeconomic numbers.
And yet changes currently afoot
might just turn things around. India’s octogenarian prime minister, Manmohan
Singh, has recently awakened to the desperate need for renewed momentum.
Economists around the world have taken note of the arrival of Raghuram Rajan as chief economist in the finance ministry.
Rajan is a superstar academic researcher, a brilliant writer on political
economy, and a former chief economist for the IMF. But it is far from obvious
that Sonia Gandhi, President of the Indian National Congress and the country’s
most powerful politician, shares Singh’s reform agenda.
True, the cabinet is being
reshuffled to elevate younger ministers. But the process points to a
continuation of the tradition whereby most ministers are appointed on the basis
of their loyalty to the Gandhi family rather than their merit and
accomplishments.
Unfortunately, for a country as poor
as India, only sustained rapid growth can lead to enduring development gains.
India’s poverty rate (an indicator that is admittedly both conceptually and
practically difficult to measure) fell by half between 1981 and 2010, to just
under 30% – a remarkable achievement. But faster-growing East Asia has
experienced significantly greater progress, with the poverty rate falling from
77% to 14% over the same period.
Why has
India’s growth acceleration fizzled? For many years, India benefited from the
long-lasting impact of economic liberalization in the early 1990’s. Back then,
Singh, as finance minister, played a central role. He could count on the IMF –
which had real policy leverage, owing to India’s need for a bailout program in
1991 – to provide external support to counter the huge internal obstacles to
reform. Today, however, there is no external counterweight to the domestic
political pressure that is stalling further liberalization.
True, India’s government must now
consider growing threats to the country’s investment-grade credit rating. The major ratings agencies are increasingly
complaining about the country’s lack of a growth strategy and its outsize budget
deficits. But the impact has been
limited, owing to the authorities’ ability to stuff debt down the throats of
captive local banks, insurance companies, and pension funds.
Indeed, this “financial repression” tax on domestic
savers remains a huge opaque source of funding for India’s debt-ridden
government. It also prevents funds
from being channeled to private-sector investment projects with far higher rates
of return than the government can offer.
The good news is that, from an
economic perspective, there is still plenty of low-hanging fruit for restoring
growth. Although India is right to avoid
taking financial liberalization to the extreme that the United States did in the
decades before the recent meltdown, it can do quite a lot without assuming
inappropriate risks, as a commission headed by Rajan detailed a few years back.
The retail sector is a huge source
of inefficiency that effectively places a massive tax on India’s poor by driving
up prices. Instead of suing foreign retailers
like Wal-Mart, India should be finding ways to emulate and benefit from their
hyper-efficient methods. Infrastructure is slowly improving, but roads,
ports, water access, and the electricity grid are still horrific across large
parts of the country.
Of course, India’s democratic
government cannot simply bulldoze through people and the environment to create
infrastructure. But the obstacles also include layers of corrupt bureaucrats and
politicians – a vast network of resistance to reform.
Some argue that central-government
paralysis is inevitable in a democracy of 1.2 billion people, and that the only
way to re-energize India is to establish a looser confederation of its
constituent states. Devolution would unshackle the economically more successful
states. And, by combating the culture of aid dependency in economically weaker
states, India’s poorer regions might benefit in the long run as
well.
As dysfunctional as a decentralized
Europe seems to be these days, India might benefit from moving a few steps in
that direction, even as Europe itself struggles to become more centralized.
Devolution might sound unrealistic, but once upon a time so did the European
Union. If Singh’s new reform agenda is again blocked, perhaps it will be time
for a more radical assessment.
Read more at http://www.project-syndicate.org/commentary/india-s-economic-slowdown-by-kenneth-rogoff#242EwhrFwC9AhQIw.99
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