Challenges ahead for India reforms

  • 27 July 2011
  • From the section South Asia
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Woman and child walk past Giorgio Armani poster in India
The new India is unrecognisable from 20 years ago

Twenty years ago Manmohan Singh, an Oxford trained economist, invoked Victor Hugo to usher in economic reforms in India. "No power on Earth can stop an idea whose time has come," he said. Mr Singh was the finance minister in a wobbly minority government and an unlikely agent to set off seismic economic changes in a country used to an appalling 3.5% "Hindu rate of growth".

But, as with most things in India, Mr Singh's reforms in 1991 were a response to a grave crisis. The country was wilting under a $70m debt, foreign exchange reserves were down to two weeks of imports, and the central bank was pawning gold as collateral for a loan. Earlier in the year Rajiv Gandhi had been assassinated by a Tamil Tiger suicide bomber on the general election campaign. It was also a time, as leading analyst Swaminathan S Anklesaria Iyer writes in a terrific paper, when India was viewed "globally as a bottomless pit for foreign aid, periodically hit by food and exchange crises and hamstrung by an immense web of controls imposed in the holy name of socialism and then used by politicians to line their pockets and build patronage networks". The country was variously described as a caged tiger and a sleeping elephant. China was already a tiger economy.

Mr Singh cut taxes and dismantled tariffs, scrapped business licences and quotas, removed and relaxed controls on imports, technology and foreign exchange, and liberalised the tightly-controlled financial sector.

Twenty years on, most believe that the reforms have done a world of good to India. The economy has quadrupled in size. Per capita income has grown nearly six times. Inflows of foreign investment have risen exponentially. Reserves are upwards of $300bn now, up from a paltry $5.8m. Exports have shot up from $18bn to $245bn. There are more than 800 million telephone subscribers today, up from fewer than a million. India makes nearly 3 million passenger cars, up from less than a million. The number of domestic air passengers has grown six times.

What will the future be for hundreds of millions who live in poverty?

The reforms also unleashed the entrepreneurial spirits of the "caged" Indian. The new economy has thrived - software has become a powerhouse industry. Most importantly, a substantial middle class has come into being between what one political scientist called a "small elite and a large impoverished mass". The newly confident middle class have gleefully abandoned Gandhian austerity for hearty consumerism, splurging on goods and services. India has produced the cheapest car, and offers the cheapest telephone calls, as well as heart and eye surgeries. It weathered the recession gamely, clocking nearly 7% growth during the worst of the downturn. Domestic savings remain robust.

That is where the India reform story comes to a halt, many say. These days, the world's 10th largest economy - which aspires to become the world's third largest by 2030 - is hobbled by what many call "policy paralysis", runaway inflation (nearly double the government's own "tolerable" estimate of 5%-6%) and is snowed under an avalanche of corruption scandals which smack of crony capitalism. Rising oil prices haven't helped matters. Interest rates have risen nearly a dozen times in almost an equal number of months. Spending is down.

But the bigger challenges lie ahead. Many believe that they will eventually decide whether India becomes a highly iniquitous and restive society or a more inclusive, stable one. How fast will the country be able to lift its poorest of the poor - mainly its tribespeople and Dalits (formerly untouchables) - out of poverty? Or will India continue to be a land where there are people "who sell newspapers they will never read, sew clothes they cannot wear, polish cars they will never own and construct buildings where they will never live", as Eduardo Galeano had once said evocatively, writing on a Latin American city.

A third of Indians still live below the poverty line, according to various estimates. A study by C Ravi of the Centre for Economic and Social Studies in Hyderabad actually found that poverty levels in 2009-2010 were 32%, an increase over 2007-2008, possibly due to the recession and severe drought. Other estimates point to a modest drop in poverty in recent years. Even the chief of India's Planning Commission, Montek Singh Ahluwalia, agrees that the drop in poverty is well below the government's own targets.

There are more worries. Half of Indians earn most from their farms, where growth has slowed down worryingly. Lack of access to basic services remains the most worrisome malaise, dragging down India's social indicators. Some 40% of children are suffering from severe malnutrition, more than 45% of them are not fully vaccinated and 41% of women are unable to deliver their children safely. There are worries, too, over the quality of education, with 43% of children dropping out of elementary school by their early teens, according to figures for 2007-2008. More than a third of 8-9 year-olds in villages cannot pass simple tests in reading and arithmetic. So the picture of inclusiveness, in the words of Montek Singh Ahluwalia, remains "mixed". He concedes that "both the extent of poverty and the lack of access to the essential services remain a serious problem".

Manmohan Singh faces a host of new challenges

India urgently needs to crack down on graft to make sure social spending doesn't end up in the pockets of politicians, officials and contractors. It needs to create lots of jobs in industries and services. It needs a trillion dollars to ramp up infrastructure. All this will be enabled by a shot of second generation structural reforms - from electricity to labour to land - which are stalled due to lack of political will and consensus.

As with many things, India lives with one feet in the past and one in the present. Crony socialism, many say, has been replaced by crony capitalism. In new India, says economist Vivek Dehejia, it is marked by a "new group of super-rich corporate titans whose cosiness with the politicians and bureaucrats who make the rules that they are supposed to live under vitiates and damages the credibility of the entire regulatory structure".

Clearly the problem is not of too much reform, but of too little. When will the critical second generation of reforms happen? Will it happen sporadically, almost by stealth? Or will it happen when India faces another crisis? If that is the case, then India's "unfinished revolution", as the Economist calls the 20 years of reforms, will stumble on.