Criticism about New Delhi’s economic management reaches a crescendo
Although he claims to have been misquoted, Kaushik Basu, the chief economic adviser at the Indian finance ministry, has only confirmed what has been readily apparent for quite some time. In Washington last week for the annual spring meeting of the International Monetary Fund and the World Bank, he told a think-tank audience that coalition politics has gummed up decision-making in New Delhi and that serious movement on much-needed economic reforms will have to wait until after parliamentary elections two years from now. He added that the best that can be hoped for until then is a sprinkling of minor initiatives.
The comments set off a political furor and Kasu, a respected academic on leave from Cornell University, now asserts that Prime Minister Manmohan Singh’s government will soon move forward on the reform agenda in a big way. Don’t bet on it. His words may have been impolitic but they faithfully represent what is now a consensus view in India and far beyond.
Indeed, a few days before Kasu spoke, a group of Mr. Singh’s friends and admirers staged what can only be described as a public intervention, warning the prime minister that continued policy stasis would imperil his legacy. The event was ostensibly a celebration of an updated book on India’s economic reform era, which was launched in the summer of 1991 amidst an acute balance of payments crisis. Singh, then serving as finance minister to Prime Minister P.V. Narasimha Rao, famously inaugurated the era by quoting Victor Hugo: “No power on Earth can stop an idea whose time has come.”
Leading things off was Isher Ahluwalia, head of a prominent economic policy institute, who warned of “a deteriorating macro-economic environment and a downturn in the investment climate,” as well as the “unsustainability” of the government’s fiscal policies. What made her criticism all the more poignant is that she is the wife of Montek Singh Ahluwalia, who currently serves as the prime minister’s economic policy czar.
Duvvuri Subbarao, head of the central bank and a former adviser to Singh, also weighed in, cautioning that the dangers that sparked the 1991 crisis – ballooning fiscal and current account deficits – are once again lurking about. Raghuram Rajan, a former chief economist for the IMF and now an honorary adviser to the prime minister, called attention to the “paralysis in growth-enhancing reforms.”
Singh reportedly attended the event against his better judgment and on the condition that he would not be called upon to make extended remarks. He ended the discussion merely by saying that “I am confident that with determination we will overcome.” But he gave no indication he was a man capable of mustering any fortitude at all. Far from channeling Victor Hugo, he nowadays gives every evidence of being trapped in Samuel Beckett’s absurdist play, Waiting for Godot.
The themes articulated by Singh’s alarmed friends are part of a crescendo of criticism about New Delhi’s economic management. As Kasu’s statement demonstrates, even officials inside the Singh government now feel it necessary to join in. Commerce Secretary Rahul Khullar told a group of business leaders last week that present economic indicators were provoking “a sense of déjà vu.” Worried that conditions were ripe for a replay of the 1991 crisis, he exclaimed:
Why are we dodging these [policy challenges]? In 1991, we were candid enough to take these decisions. The quicker we take these decisions, the better it would be, instead of acting like ostriches.
Besides partaking in the intervention with Singh, Subbarao at the central bank last week tried to jumpstart the sagging economy with an unexpectedly large cut in interest rates. But he also warned in a policy statement that further delays in instituting key reforms would jeopardize growth prospects and specifically urged the government to rein in swelling fiscal and current account deficits. The fiscal deficit, which reached 5.9 percent of gross domestic product in the April 2011-March 2012 fiscal year, is caused in large part by the government’s ever-growing penchant for populist welfare spending in the form of large food and fuel subsidies. Far from being an exercise in fiscal discipline, the budget plan introduced two months ago by Finance Minister Pranab Mukherjee was chock full of handouts and goodies, causing the Financial Times to liken it to a Christmas gift list.
Indian business leaders also have chimed in, warning that with the lack of reforms domestic companies are better off focusing their investments overseas. A year ago, Mukesh Ambani, the usually-reticent chairman of Reliance Industries and the country’s richest man, publicly rebuked the small-bore reform agenda pursued by Singh’s government. He challenged the prime minister to undertake the type of “disruptive policies” that Singh unleashed as Finance Minister at the start of India’s growth trajectory two decades ago and asserted that “India needs a bold new vision and a feasible action plan.” Last summer, India Today punctuated this point with a cover story titled “India Inc. goes global as government chokes economy.” Other prominent business leaders have taken to writing open letters to Singh as a way of conveying their urgent concerns.
The provision for retroactive taxation on capital gains arising from overseas purchases of Indian assets that Finance Minister Mukherjee unveiled in his proposed budget has set off alarm bells among foreign investors. The Financial Times quotes one foreign investor as saying that the unpredictability of India’s tax regime is on par with that of the Democratic Republic of Congo. According to the Wall Street Journal, net foreign capital flows into India dropped from $7.2 billion in February to a paltry $387 million in March, following the budget’s presentation. So far in April, there has been a net capital outflow of about $27 million.
In an unprecedented move, business associations from the United States, the United Kingdom, Canada, Japan and Hong Kong issued a joint letter to Prime Minister Singh, warning that the provision “has undermined confidence in the policies of the government of India toward foreign investment and taxation and has called into question the very rule of law.” The Asia Securities Industry and Financial Markets Association likewise complained in a letter to Mukherjee, while six financial industry groups in the United States wrote Treasury Secretary Timothy Geithner asking him to raise the issue with Mukherjee. Meanwhile, the departing chairman of the U.S.-India Business Council, a unit of the U.S. Chamber of Commerce that is usually bullish on bilateral economic relations, has fired off a letter to the White House lamenting that a leadership vacuum in New Delhi is allowing anti-reform “forces in government to move on issues that are harmful to India’s investment climate.”
The latest vote of no-confidence came this week courtesy of the Standard & Poor’s rating agency, which citing the stalled reform agenda cut its outlook on India’s long-term sovereign debt to negative and warned of a possible credit downgrade to junk status. For their part, the Moody’s and Fitch ratings firm have assigned their lowest-investment grade ratings to Indian government debt, with Moody’s cautioning that “The single biggest factor weighing on the [economic] outlook is the Indian government.” Amazingly, senior Finance Ministry officials reportedly were looking forward to having the country’s status upgraded.
Beyond the immediate issue of the Singh government’s manifest dysfunctions and inconstancies, a key factor that blocking the cascade of reforms the country desperately requires is the assumption among the political class that the so-called “demographic dividend” will continue to power the country’s economic ascent. But India’s vast human capital potential is rapidly turning into a wasting asset. The World Health Organization a few weeks ago reported that the country’s elderly population will start to eclipse the number of young children by 2017.
Kasu in Washington assured his audience that the reform bandwagon will start rolling again in a few short years. But the real issue is whether India can even wait that long.