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Technocrats always say what investors want to hear. Political reality is different.
It seems like just the other day India was the toast of global investors. The economy was thrumming along at near double-digit growth rates and a gusher of foreign capital poured into the country, driving up everything from real estate prices to hiring bonuses. Jimmy Choo stores sprang up in Mumbai and Bangalore.
Indian intellectuals cautioned against the excesses of a so-called gilded age, as though a country long a byword for poverty suddenly had the luxury of worrying about too many billionaires. At international watering holes like Davos, Oxbridge- or Ivy League-educated Indian technocrats held forth on the “India story,” the dramatic transformation of the world’s second-most populous country from socialist basket case to global economic powerhouse.
Well, guess what. Apparently India hasn’t quite put its past behind it. In recent weeks, investors have fled, the rupee has plunged in value against the dollar, growth has slowed yet again, and the government has resorted to measures such as import restrictions on televisions in an effort, failing so far, to restore some semblance of economic order.
With the Indian economy on the skids now, perhaps it’s time to ask how so many people managed to get it wrong. To be sure, the proximate cause of this rush to the exits can be traced to the U.S. Federal Reserve’s plans to scale back bond purchases, which makes America more attractive to investors than most emerging markets. Recent fears of oil prices spiking if the U.S. strikes Syria haven’t helped either.
But the problems go beyond that. What we really see now is that far too many observers took at face value the soothing promises made by India’s “Davos men” while disregarding the populism and anti-business sentiment of political bosses in the ruling Congress Party.
People misread India because its technocrats sell one thing to investors while its politicians peddle quite the opposite to voters. This is going on even now. Investors are pinning great hopes on the incoming central banker, Raghuram Rajan, who undoubtedly espouses sensible views on many areas of economic policy. But he’s a technocrat, and while he was getting settled in Mumbai, politicians in New Delhi spent last week approving a populist food-security bill that adds billions of dollars of spending to an already stretched budget, and a land bill that will make it harder for investors to acquire property for factories and other projects.
The problem is that neither major political party can agree internally on the need for pro-growth policies, let alone build broader consensus behind them. Within the ruling Congress Party, Finance Minister P. Chidambaram has pushed vigorously for reforms such as opening retail to foreign investors. But he has also acquiesced to the expensive handouts favored by his boss, Congress President Sonia Gandhi. Meanwhile, the party also has room for Mani Shankar Aiyar, an unvarnished socialist who makes no bones about his nostalgia for the so-called license raj days of near-impenetrable red tape.
Nor is the opposition Bharatiya Janata Party any better. Its standard bearer, Gujarat Chief Minister Narendra Modi, enjoys a reputation for being a can-do, business-friendly administrator. But his party colleagues can’t stop talking about how BJP-ruled Chattisgarh state implemented food subsidies even more generous than those in the $20 billion food bill. When the bill came up for debate in parliament, the BJP’s main objection was that it didn’t go far enough.
These internal contradictions mean India’s economic future will depend as much on jockeying within the country’s major political parties as on which party wins the next election in 2014. Unlike in western democracies, India’s parties aren’t divided as much by economic thinking as by the identity groups (caste or religion) they happen to represent. Indeed, politicians whose economic views are polar opposites, but who share an allegiance to the same family, caste or clan, often find themselves in the same party. In a Western democracy, Mr. Chidambaram and Mr. Aiyar wouldn’t be seen dead together. In India, they share the same big tent of fealty to the vote-catching Nehru-Gandhis.
All of which is a sobering dose of reality as investors weigh New Delhi’s various attempts to respond to recent turmoil. Mr. Chidambaram may manage to pare the current account deficit to 3.7% of GDP from 4.8%. But it will be difficult for him to restrain populist spending provisions, so he’s unlikely to meet his target of keeping the fiscal deficit down to an already high 4.8%.
With India effectively in campaign mode nine months ahead of elections, no politician will stick his neck out for reforms and risk being labeled “anti-poor.” The country may still end up with a reformist government by accident. But the sign to look for isn’t who becomes prime minister, or even finance minister, but whether the political leader of the ruling coalition backs reforms, and has the parliamentary numbers to make this count. So the safest bet may be to quit trying to read the economic tea leaves until a new government is in place next year.
Mr. Dhume, a resident fellow at the American Enterprise Institute, is a columnist for WSJ.com. Follow him on Twitter @dhume.
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