India flunks its growth test
The world's largest democracy needs economic expansion at a much faster rate.

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Indian prime minister Manmohan Singh, holds a bilateral meeting with Chinese president Hu Jintao (Not pictured) on Apr. 13, 2011 in Sanya, Hainan province,China. Leaders from Brazil, Russia, India, China, and South Africa met for the 2011 BRICS Summit, an annual gathering of the worlds five leading emerging nations.

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  • #India's once red-hot economy is feeling increasingly lukewarm @dhume01

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  • India's economy grew 6.1% in the quarter ended Dec. 31, the slowest in nearly three years

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  • India's slowing growth challenges two views cherished by leaders in New Delhi @dhume01

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India's once red-hot economy is feeling increasingly lukewarm. Government figures released Wednesday showed the economy grew 6.1% in the quarter ended Dec. 31, the slowest in nearly three years and the seventh successive quarterly slowdown. The government has already downgraded expectations of growth in the fiscal year ending March 31 to 6.9%, well below the nearly 9% in the latter part of the last decade that helped cement India's reputation as an emerging economic power.

From the vantage point of North America or Western Europe, nearly 7% growth looks robust. But it's anemic for a country whose per capita income is only $1,500. When they were at a comparable level of development, East Asian economies such as South Korea and China sustained high growth for long periods.

This slowing growth challenges two views cherished by leaders in New Delhi: that the country will effectively eradicate poverty within a generation, and that it will assume its rightful place in the front rank of global powers. Both goals depend on an economy that generates enough resources to fix glaring deficiencies in health and education and to build a muscular military. India must also generate jobs to ensure that a youthful population is employed productively rather than drawn to the myriad violent movements--from Maoism to ethnic separatism to religious radicalism--that dot large parts of the country.

Though the global economic slowdown hasn't helped, India's politicians are mostly to blame for the country's state. Instead of using the bounty of the boom years to double down on reforms, the ruling left-of-center coalition led by the Congress Party has sacrificed an opportunity to transform India into a middle-income country on the altar of shortsighted populism.

Nobody embodies this sorry state of affairs more than Prime Minister Manmohan Singh. Although he was once touted as a great reformer--thanks to having been the finance minister who unleashed the "Big Bang" reforms amid a balance-of-payments crisis in 1991--his tenure as prime minister has been very different. Most recently, the first sign of political opposition was enough for him to abandon a plan to lift restrictions on foreign investment in retail.

Nor do Mr. Singh's cabinet colleagues inspire confidence. Human Resource Development Minister Kapil Sibal will be remembered either for a ham-handed attempt to muzzle the Internet in the name of social harmony, or for a quixotic quest to build a cheap Indian tablet computer that nobody wants to buy. Jairam Ramesh, a leading intellectual voice for liberalization in the 1990s, used his stint heading the environment ministry (2009-11) to gum up development projects. As rural development minister, he's now piloting a populist land acquisition bill that would inflate the prices at which private companies can buy property.

The government's flagship National Rural Employment Guarantee Act promises each rural poor person 100 days of work per year. This distorts labor markets, encourages widespread corruption and has helped--along with fuel and fertilizer subsidies--to balloon the federal fiscal deficit to an estimated 5.6% of GDP this year instead of the budgeted 4.6%. A proposed food-security bill would pour billions of dollars more into a public distribution system already notorious for graft and waste, and create a new entitlement future generations will find difficult to kill.

India's slowing growth rate does not have to continue if its leaders change course. The savings rate, at about 32%, is nearly at East Asian levels, and about 10 percentage points higher than a decade ago. India's burgeoning middle class values education. Its entrepreneurs have learned to thrive under tough conditions and have begun to spread their wings in overseas markets. An increasingly federal structure lessens the damage a meddlesome central government can do. India's democracy, messy as it is, also gives the country a deep structural stability. Nobody need live in fear of leadership purges or military coups.

The question now is, how quickly will Indian politicians heed the alarm being sounded by slowing growth and undertake reforms to unleash the country's potential?

Sadanand Dhume is a resident fellow at AEI. Follow him on Twitter @dhume01



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