Is India’s Government Killing its Economic Miracle?

  • Share
  • Read Later
Getty Images

In a recent special issue of TIME, I argued that India would eventually overtake China as the world’s premier emerging market. It’s a prediction that often produces snickers. How, skeptics ask, can India’s fractious democracy and inept governance overcome the clinical efficiency of China’s tight-fisted state? But I have always stood by that conviction. 

My reasoning was that India’s superior and more commercially run private sector is stronger than China’s, and that ultimately, economic development is propelled forward by entrepreneurship and healthy, innovative private companies and banks, not by government planning and state-driven industrialization. India’s private enterprise, backed up by the freedoms of democracy, would come to trump China’s state-led, authoritarian growth model. Not only is history on my side — name one authoritarian regime that fostered vibrant, creative industries — but I also have my doubts about the perceived competency of the Chinese state. (That’s a subject for another post.) Yes, the Indian state may underperform the Chinese state, but, I felt, at the end of the day that wouldn’t hold back India’s economic miracle.

Yet watching what’s going on in India right now is making me second-guess my analysis. I still believe that democratic capitalism will win out over authoritarian state capitalism. But there is always the chance that a government becomes so inept, its management so faulty, that the state can become a major drag on economic development, even if the economy boasts a highly professional private sector. Is that what’s happening in India today?

The history of Asia’s economic miracle has often been portrayed as a triumph of state-led capitalism over free markets. The heavy role of Japan’s technocrats, or South Korea’s president, or China’s policy mandarins has often been seen as decisive in generating the region’s lofty growth rates. I argued against this thinking in my history of Asia’s economic development (The Miracle: The Epic Story of Asia’s Quest for Wealth). I argued that the real secret to Asia’s success could be found in its private sector – the entrepreneurs who brilliantly discovered ways to capitalize on an increasingly interconnected global economy to produce jobs and higher incomes at home. Rather than crediting China’s state for driving its tremendous economic ascent, we should instead credit the withdrawal of the state through economic liberalization. In India, too, the country’s miracle was sparked by a dismantling of state control (the License Raj) over the economy, not through government action itself.

Yet that doesn’t mean governments in Asia have played no role at all in the region’s rapid development. They put in place the pro-business policies that allowed the private sector to work its magic. Generally, the governments of the high-powered economies of East Asia (Singapore, Hong Kong, South Korea, Taiwan, and to a lesser extent China) did a good job providing the education systems, infrastructure and stable macroeconomic and policy environments crucial for supporting economic advancement.

So here we get to the problem in India. We’ve all known that India’s growth has come not because of its government, but in spite of it. India’s IT entrepreneurs joke that they’ve been successful because the government didn’t understand their newfangled industry and thus left it alone. They are right. Whatever India’s government touches seems to wither. The slow pace of infrastructure development should be considered a crime. The level of corruption is infamous; the inefficiency of the bureaucracy the stuff of tall tales. Reform has usually come in fits and starts. Yet India has powered on nonetheless. The loosening up of government control allowed the Indian entrepreneur to excel and create wealth.

But we have to wonder if India’s government is becoming not just an inconvenience, but an actual obstacle to the country’s future. An economy can’t thrive without a minimum degree of policy predictability and direction; the government has to offer up at least the basics of a business-friendly environment. Is India doing that? Based on recent events, it’s a good question to ask.

In December, the ruling Congress government bowed to opposition outrage and shelved plans to open the retail sector to foreign supermarkets and department stores like Wal-Mart. Earlier this month, it reversed course a bit – loosening up regulation on single-brand retailers — but that’s really a half-step at best. Though I’m sympathetic to the small shop owners who believe they’ll be bulldozed by the Wal-Marts of the world, the Indian government, by prohibiting modern, big-box retail, is causing the economy to miss out on the giant gains in efficiency and costs such distribution networks can create. But most of all, it is worrisome how quickly Congress back-tracked on a major reform as it felt the heat of public disapproval. That doesn’t foster the most reliable policy environment or boost hopes for further reform.

Then there’s this whole fiasco with the anti-corruption bill. Though Prime Minister Manmohan Singh promised to get an anti-corruption law passed through parliament by the end of 2011, the last legislative session ended without a vote after one of Singh’s coalition partners refused to back the bill. Singh thus failed to address a problem seen as a huge hurdle to Indian development, both by foreign investors and most Indians themselves.

We’re also waiting for a court ruling that could negatively influence foreign investor sentiment in India. The Supreme Court is set to rule as to whether or not Vodafone owes $2.6 billion in taxes on a deal it struck to enter the market in 2007. Vodafone claims that the Indian government has no authority to tax the deal, since it took place between two overseas investors. If Vodafone loses the case, it could scare off other M&A activity in India. This is, of course, outside of the jurisdiction of Singh’s policymakers and a matter for India’s judicial system. But it shows once again how shortsighted India’s authorities have become. By claiming taxes in deals like Vodafone’s, India could be raising a bit of revenue for the bloated government, but losing far more in future investment.

And the country can ill-afford to scare off investors. Growth has been slowing, foreign investment has been falling. The rupee, unlike many other emerging markets currencies, has been losing value. The government is likely to miss its budget deficit target. To keep India’s growth going, the government is going to have to improve its performance, remain consistent on policy direction and appeal to, not frighten, foreign money. That takes guts – guts the current administration seems to lack. Singh famously launched India’s economic miracle by fearlessly taking on entrenched interests and dismantling the License Raj beginning in 1991. He needs to get some of that combative spirit back if the miracle he started is to continue.

The big question hanging over China is whether its overbearing state will crush the development of the vibrant private sector the country needs to keep growth humming. In India, the question is whether the state will so spoil the business climate that its already vibrant private sector suffers, and so does development. Where India stands in the global economy in 20 years will very much depend on whether or not its government gets its act together today.

0 comments