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Delhi's political class needs a dose of realism. It can't afford welfare schemes without growth.
Just when you thought India’s economic story couldn’t get any more depressing, it does. In the World Economic Forum’s annual Global Competitiveness Report released Thursday, India fell three spots to 59th among 144 countries surveyed. Over the past three years, India has plummeted 10 places, slipping behind fellow BRICS economies South Africa and Brazil. It now trails 30 places behind putative rival China.
Meanwhile, foreign direct investment fell 67% year-on-year in the quarter ending June 30, to $4.43 billion, a disquieting sign that long-term investors are voting with their feet in response to a series of high-profile corruption scandals, a retroactive amendment to tax laws that hammers companies for acquiring Indian assets, and a deepening sense of policy drift. Economic growth this year is expected to slow to below 6%, a far cry from the nearly double-digit rate investors and the government alike had come to expect.
Those expectations make the current malaise especially disappointing. Over the past decade, India largely changed the way the world views it, transforming itself in foreigners’ eyes from a land of mendicants and slum dwellers into one of software parks and shopping malls bursting with middle-class consumers. Against this backdrop, the July electricity blackouts that affected 600 million—the largest such outage in history—came as a rude surprise.
To be sure, it hardly makes sense to replace one form of exaggeration with another. India suffered from huge problems in infrastructure and human development when it was the developing world’s flavor of the day. Though the glass now appears half empty, the country retains certain enduring strengths, including a large middle class and dynamic companies. There’s still room to capitalize on these, but first New Delhi will have to change its mindset.
The central problem is that political elites have come to take growth for granted. At Davos and G-20 summits, Indian politicians such as Prime Minister Manmohan Singh presented themselves as the stewards of a fast-growing economy bursting with entrepreneurial energy.
And at home, he and his left-leaning coalition govern as if India already were a developed economy, dreaming up grandiose welfare schemes for the masses while ignoring reforms to push growth. The political left in the West likes to pretend that such policies don’t dampen the incentives for growth in developed America or Europe. That hasn’t turned out to be true, but at least when those economies stagnate they do it at a higher level of income.
So over the past two years, as India’s growth receded, the fiscal deficit widened, and investment began to dry up, it has become clearer than ever that New Delhi’s social welfare and regulatory policies are thwarting the growth India will need to pay for those policies over time.
A hefty dose of realism is in order, starting with India’s own sense of self. Even though it has pulled tens of millions out of poverty since the advent of liberalization in 1991, Delhi has much left to do. By virtually any measure of human development and income, India continues to lag not just the rest of the BRICS but much of Southeast Asia. Indonesia, written off by many in the late 1990s, now sits a comfortable nine places ahead of India in the WEF competitiveness rankings.
Next, Delhi has to acknowledge that the only way to move up the per-capita-income and human-development ladders is by, well, growing. One look at other Asian nations that made the transition from poor to less poor or even to rich shows that those countries’ first priority was growth.
Japan, South Korea and Singapore didn’t start seriously expanding their social welfare programs before they were well into middle-income status—at which point growth had begun addressing the major woes. Without growth, India can’t hope to afford the dreams of the motley crew of do-gooders and activists around Congress Party leader Sonia Gandhi, the driving force behind the government’s policies. That includes the rural-employment guarantees and food subsidies that number among the government’s top initiatives.
Meanwhile, Delhi has to start talking the language of the country’s aspirational urban middle class. Here, meaningful pro-growth, pro-middle-class policies, such as ensuring that farmers pay market prices for electricity, won’t be possible as long as a majority of politicians remain wedded to a backward-looking political lexicon of subsidies and handouts. Indians ought to hear how the government can empower them to fend for themselves, not how the government will bail them out. The classic backdrop of an Indian election rally will also have to expand beyond the farm to include the factory and the software park.
This kind of reform will also have to mean bringing business out from the shadows of Indian politics. For too long, firms and entrepreneurs have been exploited by parties to generate slush funds and personal fortunes. India’s recent corruption scandals have only reinforced this perception. Transparent policies for allocating natural resources, for instance, would have prevented the $34 billion “coalgate” scandal that has paralyzed Parliament and tarred the image of Indian business.
On this note, consider that one reason for India’s decline in global competitiveness is the loss of “public trust in politicians.” The WEF ranks India 106th in the world in this measure, 30 places behind Putin’s Russia and a staggering 80 places behind Communist China. Democratic India can start rebuilding that trust by being honest with itself about its current standing and the best way to improve its prospects.
Sadanand Dhume is a resident fellow at the American Enterprise Institute in Washington, and a columnist for WSJ.com. Follow him on Twitter @dhume01
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