Satyajit Das: Problems galore put the brakes on India's economic potential

Economic Outlook: Successive governments of every... persuasion have failed to undertake meaningful reforms
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The Independent Online

With developed economies mired in debt, the ability of the Brics (Brazil, Russia, India and China) to drive the global economic engine is increasingly in doubt. China's growth has slowed to its lowest rate in three years. Brazil's growth is down below 3 per cent from about 7.5 per cent. Russia is heavily dependent on oil and energy prices, which are falling. India has stalled, leading cynics to state that "I" was probably meant to be Indonesia.

India's GDP rose by 43 per cent between 2007 and 2012, slightly less than that of China, which increased by 56 per cent. In late 2011, the Indian government's 12th five-year plan forecast growth of 9 per cent between 2012 and 2017. But India's growth had slowed to below 6 per cent, high by the standards of developed countries but well below the levels required to maintain economic momentum and improve the living standards of its citizens.

Elements of the Indian growth story remain intact – the demographics of a youthful population, the large, domestic demand base and the high savings rate. But India's problems – poor public finances, weak international position, structurally flawed businesses, poor infrastructure, corruption and political atrophy – threaten to overwhelm the country's potential.

In March 2012, India brought down a budget forecasting a fiscal deficit of 5.9 per cent, well above its previous fiscal deficit target of 4.6 per cent. India has consistently run a public sector deficit of 9-10 per cent of GDP, including the state governments and off-balance-sheet items. The problem of large budget deficits is compounded by poorly targeted subsidies for fertiliser, food and petroleum, which may amount to as much as 9 per cent of GDP. India's strong rate of recent growth (an average rate of 14 per cent between 2004-05 and 2009-10) made large deficits, in the order of 10 per cent of GDP, relatively sustainable. Slowing growth will increasingly constrain India's ability to run continuing large deficits.

Indian government debt is around 70 per cent of GDP. As its debt is denominated in rupees and sold domestically, India faces no immediate financing difficulty. Instead, the government's heavy borrowing requirements crowd out private business.

India's domestic, private-debt bubble is starting to unwind, evidenced by rising bad loans requiring the government to recapitalise state-owned banks.

The country is running a current account deficit of more than 3 per cent of GDP trending higher, among the highest in the G20. The cause is slowing exports as a result of weakness in India's trading partners and higher imports, mainly non-discretionary purchases of commodities and oil (India imports around 75 per cent of its crude oil).

The sharp decline in the value of the rupee to record lows reflects India's weak external position. Indian businesses, which have unhedged foreign currency borrowings, have incurred significant losses with the value of their debt rising as the rupee falls.

India has around $270bn (£173bn) in currency reserves. But foreign debts that must be repaid in the current year are about 40-45 per cent of this amount, which if deducted highlights the increasing weakness in India's external position.

It is plagued by inadequate infrastructure. In critical sectors like power, transport and utilities, there are significant shortages. While its workforce is young and growing, there is a shortage of skills.

A major problem is a deep-seated and endemic corruption on a large scale, highlighted by scandals surrounding the issue of telecommunication licences and also sales of coal assets.

Using corrupt means to access power and acquire influence over politicians, businesses have advanced their interest in securing rich, natural resources, especially land and minerals and ensuring a favourable regulatory framework and restricted competition, especially foreign competition, where possible.

Political paralysis is a major impediment to economic development. Successive governments of every political persuasion have failed to undertake meaningful reforms necessary to foster growth, employment and development.

In addition, India's political system is a significant obstacle to change. Complex coalition governments are a barrier to decisive action.

The current government failed to implement its plans to allow limited entry of foreign retailers as a result of protests from its own coalition partners as well as the opposition. The government also failed to get a key, anti-corruption bill through parliament.

India's fabled democracy is an increasingly ossified relic, where a complete inability to make hard decisions or undertake reforms makes government futile if profitable for some.

Like Indian cricket, the country's economy seems destined to never fulfil its potential to the eternal disappointment of its long-suffering citizens, who deserve better.

Satyajit Das is author of 'Extreme Money: The Masters of the Universe and the Cult of Risk' and 'Traders, Guns & Money'

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