"India's Growth Is Inevitable."
No. When India began to liberalize its economy after the 1991 financial crisis, many analysts concluded that the country was on a glide path to growth. The sheer size of India's market, its wealth of entrepreneurial talent, and its functioning legal system all seemed to herald economic success.
Sadly, these sunny assessments overlooked key hurdles. Many Indian politicians remained wedded to an anachronistic model of state-led growth. Powerful groups with vested interests in the existing economic order -- from well-subsidized farmers to well-entrenched industrial labor unions -- opposed reform. And the rise of coalition politics, with all their uncertainties, threatened coherent government action. These factors have now come together to create a perfect storm for India.
In the last quarter, India's economy grew at a mere 5.3 percent -- its worst performance in nearly a decade. In April, industrial growth was a paltry 0.1 percent. Many Indian policymakers are attributing this downturn to the European fiscal crisis and the global economic slowdown. But the real problems confronting the Indian economy are indigenous.
Indian politicians of all ideologies have supported unsustainable spending in an effort to placate the country's increasingly politically mobilized population. Farmers in significant parts of India pay little or nothing for electricity, but officials refuse to challenge their subsidies. Politicians fret about raising gasoline prices for fear that the middle class will revolt. And to avoid student unrest, they have allowed the university system to reach a breaking point, because the fee structure cannot meet even a fraction of operating costs. The result of all this pandering has been a fiscal deficit of about 6 percent of GDP.
India's leadership has also failed to reform the country's behemoth public sector. For example, the state-owned Air India requires routine infusions of cash, but the government refuses to privatize the company lest it anger organized labor. On the flip side, entrepreneurs are hobbled by antiquated legal regimes and idiosyncratic rule-making. Outdated land-acquisition laws have stopped a range of industrial projects, and quirky policy shifts have undermined growing fields like telecommunications.
What's more, some analysts are now arguing that the absence of transparent regulatory and legal frameworks has opened new vistas of corruption. Indeed, the lack of a clearly defined legal regime led to an ad hoc auction of the 2G spectrum in 2008. The flawed auction may have cost the treasury as much as $40 billion, according to an independent government watchdog. A new scandal is brewing which suggests that in 2004 state-owned coal seams were sold at well-below-market prices. Unsurprisingly, the specter of legal uncertainty combined with rampant corruption has had a chilling effect on foreign investment. All this makes India's future growth seem far from assured.