A few more words about corruption. India ranks 95th on Transparency International's Corruption Perceptions Index, behind such paragons of virtue as Liberia, Sri Lanka, and Jamaica. That hasn't stopped businesses that can afford to grease the palms of politicians and senior bureaucrats from progressing; indeed, it helps them by raising the barrier to would-be competitors who don't have the cash or the knowhow to spread the baksheesh.
But it is ferociously frustrating to everybody else: According to the World Bank, India ranks 182nd (that's right, 182nd) on a list of 183 countries in terms of the difficulty of enforcing contracts. And the resulting pent-up fury has recently fueled a powerful populist reaction to the social displacement that is inevitable in a rapidly growing economy. As a result, pro-growth elements in the current ruling coalition (led by now Prime Minister Manmohan Singh) have been severely weakened.
Consider the issue of foreign investment in retailing. Singh wanted to allow foreign "big box" retailers like Walmart and Tesco to set up shop in India fuel the spectacular sorts of efficiency gains in consumer services that have swept through India's business-service sectors -- and to reduce the portion of crops that rot on the way to market. But the coalition required support from Mamata Banerjee, the chief minister of West Bengal who came to power defending farmers against attempts to take over their land in order to build an auto factory. Banerjee also proved to be an equally tenacious defender of shopkeepers as well as incumbent wholesalers who controlled the movement of fresh food from rural areas.
The rejection certainly jolted the perceptions of foreign businesses, which had begun to regard India as a must-invest economy, like China and Brazil. It wouldn't be a make-it-or-break-it issue -- if it didn't reflect the larger reality that the country's economic culture isn't yet up to the challenge of supporting Asian-tiger rates of growth.
This is neatly illustrated in the confluence of factors that have limited the growth of manufacturing in India. Every East-Asian economic success story has been built around manufacturing exports. But, in spite of its vast supply of cheap, surplus labor and relatively strong management, only about 15 percent of Indian GDP is in manufacturing.
One of the most striking obstacles are the rigid labor laws created by independent India's first governments. South Asia's manufacturing juggernaut is fed by an endless, rapidly-churning supply of unskilled rural laborers seeking a better life in cities. But in India, once a worker is hired by a medium- or large-sized business, it's almost impossible to fire him or her. So multinationals selling labor-intensive goods ranging from shoes to low-end consumer electronics are now gravitating to countries like Vietnam, where labor is malleable and where 40 percent of the GDP consists of manufactures.
Nor are labor laws the only obstacle. India, home to 1.2 billion in a land less than one-third the size of the United States, is a very crowded country; not surprisingly, siting a factory can be a legal and political ordeal. By World Bank tally, India ranks 181st out of 183 countries in difficulty of obtaining a construction permit. (As alluded to above, Mamata Banerjee rose to power by stopping construction of a factory that was slated to build Tata Motors' ultra-cheap, breakthrough car, the Nano.)