Regional News
Without structural reforms, India can’t keep growing as fast.
With GDP growth rates topping 9% in recent years, and the Davos crowd feting them for creating an “economic powerhouse,” it’s not surprising that India’s politicians became complacent about reform. Now growth is slowing, and the cost of that complacency is coming due.
Data released last week show that India’s economy grew by 7.7% on an annual basis between April and June this year. That sounds impressive compared to anemic growth in the developed world, but by India’s standards it is a disappointment. This marked the slowest quarter in 18 months.
The pace of manufacturing expansion has slowed for four months in a row. Corporate revenue is trending downward. Auto sales have plunged 16% from a year before, while mining and construction have taken a hit. Morgan Stanley’s Chetan Ahya warned on these pages last month that, thanks to regulatory overreach and the lack of further liberalization, the trend level of growth for the foreseeable future will remain lower than the 9% Indians have grown accustomed to.
The economic problem is set to become a political headache in short order. For much of the last decade, Indians have heard politicians predicting double-digit growth. Voters are now going to see a slowing of job creation.
The question is whether New Delhi will understand why growth is slowing and what to do about it. Politicians seem to have assumed that because growth clocked in above 9% for around 24 of the 36 months between 2006 and 2008, they were already doing the right things. So it became politically acceptable for Prime Minister Manmohan Singh’s government to not pass any big-ticket reforms since he came to power in 2004, despite widespread business support for them.
That was a mistake. India’s GDP expanded at a blazing pace over the last decade in large part because a high savings rate helped channel capital to corporations. This capital contributed to growth as long as there were avenues for investment, which earlier rounds of reforms in the 1990s had opened up. But by late 2007 and 2008, there were fewer productive opportunities to invest in.
The global financial crisis of late 2008 muffled the sound of that speed-bump. When the rest of the world slowed sharply or went into recession, slower growth in India was less conspicuous. Lower interest rates, short-term tax breaks and large spending increases subsequently created the impression India was booming again, allowing politicians to ignore calls for liberalization.
Now it’s becoming clearer that the stimulus has not contributed to a sustainable boom. On the contrary, pumping too many rupees into the market has contributed to 8%-plus inflation for nearly two years, ravaging savings and investment. At least policy makers are starting to realize the stimulus is unsustainable and have begun to dial back some of it. The central bank is tightening money to constrain inflation.
That leaves New Delhi with its growth problem. If the economy wants to enjoy a sustained boom, the key is structural reforms that remove government impediments to private investment and noninflationary growth. Yet draft legislation to rationalize big chunks of the tax code, increase investment caps in some industries, and reform pensions and insurance have all been gathering dust.
Twenty years ago Mr. Singh expanded and accelerated economic reforms to avoid a financial crisis. Today, when the data are worrying though not terrifying, he has an opportunity to renew the reform effort to fend off a deeper slowdown.
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Source: The Wall Street Journal, Sept. 6, 2011
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