Hidden Tiger Crouching Dragon

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Sometimes, the forces that drive India forward are also the forces that deprive it of its dynamism

After four decades so near stagnation India has emerged a dynamic economy and a rising power in Asia. It was a sleeping cow until the 90s and its rise is prompting many to question its trajectory.

To study that one needs to begin 20 years ago and look at what began to happen with the economy.

By the mid 2000s, India’s economy was growing at nearly the rate of China’s. It was in fact the second fastest-growing economy in the world and its politics were in the process of being transformed, by social movements and the formation new political parties.

India was being described as the tiger that was uncaged and/or as the elephant dancing, pick your metaphor. India began seeing an affluent urban middle-class developing. But then the last few years have cast some doubt on our optimism about India and the headlines have changed to ‘goodbye India shining’, and ‘India Inc. loses the race with China’.

Will India regain its economic and social dynamism as a rising power or will it reduce global poverty in creating astable balance of power in Asia?

There is talk about India having a demographic dividend from the factthat50% of its population is today under 25.But I would submit to you there’s a possibility the dividend becomes a deficit.

Economy

India has clearly demonstrated that the so-called Hindu rate of growth, which was the phrase used by leading economists to describe India’s very slow growth in the first four decades after Independence. That period is behind us.

The real break came in 1991 when after a balance of payments, there was a crisis. India’s then Finance Minister Manmohan Singh decided to move onto reforms, which were, at the time, fairly straightforward. It was a macro economic liberalization. Indian state governments reduced interference over industries and business. India’s economy was opened to the world. Before that, India’s economy had been the most closed economy in the world, except for the Soviet Union.

After the first phase of the reforms, the dividends were starting to pay off from the millennium onward. But from 2003-2004, dividends were paid off richly. GDP growth begun to pick up dramatically– by 2009 India achieved over 9% rate of growth, similar to China’s growth; there was a trade increase from 10-15 % of GDP to 55% of GDP by2011; domestic savings increase from 26 % to nearly 40%in the same time period; foreign direct investment increased from $1 billion in 1992 over $40 billion in 2008; and very important, the percentage of Indians living in extreme poverty declined from about 55% in 1983-  84 to a little more than 30% in 2009 to 2010.

This clearly demonstrated India’s potential.

But almost as soon as India took off, it began to descend. Just only two or three years ago the economic growth began to slow down. While earlier on it was attributed to a financial crisis and the global recession, what was more important was the fact that the current UPA government had taken over power and in its first term in 2004, failed to follow through the promise of a second wave of reforms.

The result was a slowing growth, greater inflation, falling investor confidence and the sharp increase in current account deficit to almost 5%. This is the highest current account deficit India has ever experienced and one of the highest any major economy in the world has ever seen.

What are the second term of reforms missing?

These are much more politically difficult reforms such as Labour law changes; Land acquisition policies; Agricultural; Market liberalization; and Tax reforms in infrastructure investments.

All of these reforms would require for the government to stand up to a serious of very powerful vested interests circled in India. The Indian political system has fallen prey to the siren call of populism. It is easier to throw the “goodies” out to the voters especially before an election.

One of the “goodies” is the fuel subsidies in particular for kerosene and diesel, which together account for nearly 3.5% of the GDP. There are a number of subsidies for agriculture and food which account for about 9 % of India’s GDP. However most of them do not reach the intended beneficiaries — the poorest of the poor in Indian society.

India’s politics has become very fragmented; the power has flowed outward from the centre. From Delhi to regional states, every state has a political party of its own. As a result neither the two national parties — the Congress or the BJP — are able to put together a parliamentary majority.

With regionalization of Indian politics, it causes a lot of strain in terms of implementing a policy. Each regional party wants to have a seat in the cabinet. They don’t want to play an important role in the change of policies, but to earn money for their party and gain economic benefits. This is the dynamics behind the corruption scandals, several of which emerged in the last few years — for example, the selling of telecom spectrum licenses, which cost the Indian Exchequer about $30 billion dollars or the coal mining scandal.

India has a mixed record in attracting and retaining foreign investment. It’s very understandable that from Independence onward Indians were suspiciousof foreign investors. The current Indian Prime Minister Manmohan Singh famously once said:“The British East India Company came to India to trade and stayed to rule.”

Indians are suspicious of the motives of foreign companies. The climate for foreign investment remains mixed even today and as a result, India ranks at132 on the World Bank’s Ease of Doing Business Index. Over the last couple of years the new government has taken some measures regarding tax and patents that have further alienated foreign investors.

Politics?

When India’s founding fathers set out to create a democracy in 1947, they were engaging in “the most recklessly ambitious experiment in human history”, to create a functioning democracy in a very diverse, large and very poor society.

Many predicted this would not work, that India would disintegrate or fall prey to chronic unrest. They were wrong. What India has accomplished can be counted as one of the greatest achievements in the last 100 years. India is the only Asian nation that has emerged from colonialism and embraced democracy and remains one today.

India’s democracy is rated from the Economist Intelligence Unit as 38th out of167 countries. Now most of those 167 are in the Western Hemisphere, there are some in Asia, and very few in Latin America and Africa.

So India’s electorate today comprises 800 million individuals who are allowed and have the right to vote. India had 15 national elections in the last 66yearsand over 300 state elections.

India’s next national election is around the corner in 2014. And every single time, India’s election is the largest organized human event ever to have been held in the history of the world.

India has the most efficient electoral system in the democratic world, and they make it work, by the way. On the party front, India’s democracy began with one party — the Indian National Congress and they dominated for three or four decades. But over the last 20 or 25 years electoral politics have spawned a decentralization of power to new parties in new regions. These regional parties have provided a vehicle for even the lowest social groups in Indian society to organize themselves initially as movements.

India is dominated today by what many scholars call identity politics in that parties are formed not around policy preferences or ideologies but around identity whether it be a caste identity or a regional identity. Bringing together a majority of 22 or 23 parties that participated in a coalition — just imagine the complexity of trying to govern with that arrangement and frankly it has been harmful.

India’s elections are expensive and increasingly so, because of television, and unlike the United States, corporations in India are not permitted to give money to political parties. At least overtly, so the main way parties raise money is by offering specific benefits and services to specific groups.

Approximately a third of the members of the Indian Parliament have criminal records. The entire political system right now is an obstacle to India’s economic growth. India’s politics is not keeping pace with the aspirations of its young people.

The good news is the middle class is beginning to get mobilized. The middle class is following Anna Hazare movement, which started couple of years ago. It brought thousands of young men and young women out on the streets in New Delhi and later on in many other cities protesting rapes, scandals and scams, and the Indian government overall.

Governance

Politicians just have too much say over bureaucrats. Despite its reputation of heavy bureaucracy, almost every agency in the Indian government is understaffed under-equipped and yes even underpaid. Between 1991 and 2010, India’s population increased by $350 million people or by 41% over 20 years. During that same period the size of its elite Administrative Service(not the entire public services)in the public sector shrank by 10%.Now the two interpretations are that they either got much more efficient or there’s a misallocation of resources. I believe it is the second.

The law and order agencies as I’ve already mentioned are some of the worst-affected. The Indian Police Service which is the National Police Service has a 28% vacancy rate. And you all saw the inability of the Indian police to react effectively at the time of the tragic Mumbai terrorist attacks. Perhaps most importantly in the development sector India’s government has proved itself to bevery incapable of delivering quality services particularly in health and education to its people.

India’s ranking on the UNDP 2013 Human Development Index is 136.Its literacy rate has improved, but is still way below China. Its health spending per capita has increased modestly but remains very low among emerging and middle-income countries. Its infant mortality rate has declined but is among the highest in the BRIC countries. The most shameful statistic for meis that 40% of Indian children are malnourished by scientific standard.

Urban governance in India is an oxymoron. India’s major cities struggle to meet even the most basic needs of their residents of water, sanitation and transportation.

Still, despite it all, India is set on a path of optimism. And there are two grounds for this optimism.

The first is that India is unlikely to succumb to massive or widespread instability. There are stabilizing forces in the Indian system. India has no radical tradition as it did not have a revolution to become independent unlike China, Vietnam, Algeria and Tunisia. Democracy itself is an enormously legitimizing aspect.

The second is that India is a society capable of reinvention. Societies not governments ultimately shape the destinies of their nations.

You’ll remember that India achieved independence without any violence. It achieved it through a movement that was initiated by the elites, led by Mohandas Gandhi, but ultimately engaged the entire Indian people.

India’s capacity for reinvention, will once again carry it forward.

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