Why India keeps failing at reform

 

With the rupee falling and economic growth at a nine-year low, the last thing India needs is a credit rating downgrade to junk status. But that's precisely what Standard & Poor's warns of in a new report this week that suggests that India may become the first "fallen angel" among the BRIC economies (Brazil, Russia, India and China).

New Delhi's response has been to plug its ears and proclaim that everything is A-OK. Finance Minister Pranab Mukherjee declared himself "fully seized of the current situation" and "confident that there will be a turnaround in our growth prospects in the coming months." How exactly this will happen is anybody's guess.

By now, pundits have churned out a small rainforest of newspaper op-eds and research papers on what needs to be done to revive India's economy. Suggestions range from implementing a long-awaited goods and services tax to slashing fuel subsidies.

But the deeper problem isn't policy but politics. India will not end its malaise until its national politicians learn to do something they've never really tried: sell the reform story in a way that's intelligible to the masses.

The historical record is not promising. India's first prime minister, Jawaharlal Nehru, was a Fabian socialist who was enamored with state planning. His daughter Indira Gandhi raised leftist rabble-rousing to an art form, campaigning as a messiah of the poor in the 1970s even as India's per capita income and human development slipped behind its East Asian peers.

Between them, Nehru and Gandhi, both of the Congress Party, ruled India for all but four of its first 37 years of independence. They created a political discourse centered on government intervention and largess that persists to this day.

Thanks to this legacy, no Congress-led government, including the one that launched reforms in 1991 against the backdrop of a balance-of-payments crisis, has treated liberalization as something to celebrate. Rather, it was something to be done by stealth to keep international creditors happy or a distasteful means to acquire the resources to fund welfare programs.

In 2004, a reasonably reformist Bharatiya Janata Party (BJP)-led coalition government broke the mold with its "India Shining" campaign—and was promptly turfed out of office. Indian politicians across party lines have since come to believe that endorsing economic reforms is political suicide. The Congress-led coalition that came to power in 2004 boosted welfare spending and slowed reforms. Its 2009 re-election reinforced the message that handouts are the most reliable route to success.

It's time to reconsider this conventional wisdom. In reality, nobody in India has tried to sell reforms on a national scale. Thanks to his freedom-fighter's halo, Nehru scarcely faced credible opposition in his lifetime. Indira Gandhi's right-wing opponents in the 1960s and '70s were more interested in defending hereditary privileges for princes and Hindu religious sensibilities than in making the case for free-market reform.

As for the infamous India Shining campaign, the BJP arguably lost the plot when it claimed that India had already arrived. That was a laughable assertion in a country still marked by widespread poverty. Things could have turned out differently if the party had campaigned on the promise of a better future.

So how should reforms be packaged in a country where about a third of the population lives on less than $1.25 a day?

Reformers can't afford to cede the language of poverty eradication to their opponents. Reforms in India make sense not because they place more Indian billionaires on Forbes magazine's rich list, but because only faster growth can pull millions into the middle class. According to World Bank estimates, high growth rates reduced the percentage of India's population living in poverty to 33% in 2010 from 42% in 2005. Without reforms this progress will sputter.

There's also no evidence that Indian voters care particularly about concerns like inequality that leftists regularly tout. This is why Communist parties have been confined historically to two states—Kerala and West Bengal. Passers-by from the slums of Mumbai gather outside Reliance Industries' chief Mukesh Ambani's $1 billion home to gawk admiringly, not to throw rocks. For most people, what matters is a chance to live productively, and that their children's lives are better than theirs.

What prevents politicians from explaining pro-market arguments is a failure of imagination and courage. Why not oppose the Congress Party's flagship rural jobs scheme by pointing out that it's unproductive and riddled with graft? A smart politician can make a moral case that New Delhi shouldn't pour billions into loss-making Air India that could be put to better use building schools and roads. Yet it's commonplace for even the smartest in parliament to spout the language of sops and benefits.

Some politicians at the state level are already demonstrating that growth and reforms work. Bihar Chief Minister Nitish Kumar and Gujarat's Narendra Modi have been re-elected because they delivered high growth, along with clean governance.

Pro-market voices will still have to fight statists and socialists, but the challenge lies in shifting tack from the intellectual to the political. So far, they've taken to India's English-language newspapers and air-conditioned cable TV studios to present their side. But their ideas will only gain traction when they're heard at election rallies and in average Indian neighborhoods. Until that happens, Standard & Poor's won't be the only ones tepid about India's prospects.

Mr. Dhume is a resident fellow at the American Enterprise Institute and a columnist for WSJ.com.

 

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