Not surprisingly, the government of India’s public relations machine continues to predict blue-sky growth rates in the mid-seven per cent range – claiming that the current policy paralysis in the country is temporary – even against the backdrop of an anaemic global economic recovery and a continuing European crisis.
In fairness to these spin doctors, looking back 20 years, the current political challenges in India appear as a mere blip on a very impressive, upward trajectory. That said, the country needs a trillion dollars worth of infrastructure over the next five years, has no long-term debt market to fund this, foreign institutional investors are fleeing as a result of recent retrograde tax pronouncements, and India’s fiscal deficit is steadily rising.
Eighty per cent dependent on hydrocarbon imports, a mere $10 spike in oil prices spoils India’s fiscal consolidation.
India is between a rock and a hard place. The incumbent coalition government, already beleaguered by scandals, straddles the tight rope of choice between reverting to populism ahead of 2014 national polls and taking on tough economic reforms, which are bound to offend major vote banks.
Like Greece and other countries in Europe, India is at a historic inflection point. What sets it apart are India’s extraordinary fundamentals: a young and eager workforce, a functioning civil service, an impressive savings rate, and “rule of law” guided by an autonomous judiciary.
If only politics could be temporarily tamed, India needs to demonstrate persuasively that reforms are on track: that organised retail will be invited to invest in India’s farm-to-market supply chain, that global capital and expertise will be welcome to participate in India’s insurance and pension sectors, that tax policies will be aligned with international best practices and that tax changes, if any, will be prospective and not retroactive.
What disappoints is that the government has not effectively leveraged the country’s IT prowess to fix the leaky public welfare system and broadened the tax net, into which only 10 per cent of the population pays, and instead is fixated on squeezing more revenues from the private sector that has single-handedly powered India’s economy to world-class status.
The biggest challenge: India’s mega-infrastructure and education build-out must be converted into opportunity. This will require massive domestic as well as foreign investment, and skilful implementation.
India, therefore, needs to be mindful of declining investor sentiment and take all the necessary steps to create a welcoming environment that attracts investment. The myth of single-window clearance and speedy implementation requires honest introspection. Multi-year gestation of important projects warrants a serious review in which the Centre-state dysfunction can no longer be excused. Mandating manufacturing in a command-control fashion, taxing transactions retroactively, compulsorily licensing intellectual property, re-opening long-closed legal settlements, abrogating contracts, eliminating competition, stipulating price controls, barring foreign law firms from assisting in cross-border transactions, and insisting on local sourcing and content are all measures that send chilling signals.
India’s leadership must acknowledge that globalisation now presents investors, including domestic multinational corporations, with myriad alternatives. India must compete for capital. It is not enough this time to assume that the investment community will suck it up and persevere because of their hunger for India’s market.
The hunger is now with India’s youth, and youth will not be patient as growth slows and unemployment rises. Gone are the days when seven per cent growth was good enough. India’s youthful population has little memory of India’s economic past and will not be assuaged by any comparison.
The blessing of this fact is that the majority of India’s population, which is all under the age of 25, feels rightfully entitled to a bright future thanks to their awareness aroused by the internet.
Self-awareness can avert a second macroeconomic train-wreck.
Clearly, democracy is no cake walk, but is the very essence of India’s ascendancy. How triumphant!
Now, no political leader can take for granted that voters have any gratitude for the vision and fortitude exerted these past two decades supporting economic liberalisation. Now, people expect opportunity and insist on progress. And progress will only come as a result of effective governance and genuine economic reform.
The headline of this column has been modified.
The author is President of the US-India Business Council, the premier business advocacy organisation promoting deeper US-India commercial ties
