Can things go wrong in a jiffy? In India, they can. Three years ago, India was the darling of the world. Even two years ago, when investors gathered to buy stakes in various emerging economies, India was the flavour of the month.

Now, India is back to where it was in the 1960s and 1970s, a developing country enjoying, at best, very modest growth -- which the late Raj Krishna had termed “the Hindu rate of growth”.

Has the Indian economy sunk deep into a quagmire of historical decline from which it cannot easily extricate itself? Can policymakers make rapid amends?

One gathers not. Contemporary Indian growth statistics have excited Finance Minister P. Chidambaram and Gujarat’s Chief Minister Narendra Modi so much that debate, which has included the trading of barbs, concepts and facts, has degenerated into a bitter stand-off. But ideas to ameliorate the situation are not forthcoming.

Chidambaram has suggested that Modi is “trying to stage a false encounter with facts”. Former Finance Minister Yashwant Sinha responded: “We had given them a very healthy economy, which they have turned into a sick child; and from 8.6 per cent, they have brought the growth rate back to 4.8 per cent. That is a fact that the whole world knows, and Chidambaram cannot deny that fact.”

Unfortunately, things are much worse. India’s growth situation in the past couple of years, as revealed by the latest World Bank statistics ( see graph ), is a complete disaster. From this disaster, no way out has been proposed.

Real Growth Statistics

The World Bank has recalculated India’s GDP growth rates, adjusting them for inflation and exchange rate variations.

The resulting purchasing power parity (PPP)-based growth rates suggest that the growth rate for the years ending March 2011 and March 2012 have been abysmal.

On a PPP adjusted basis, India’s growth rate had been 3.9 per cent in 2008, and had risen to 8.5 per cent in 2009, rising further to 10.5 per cent in 2010. When compared to global data, India had achieved far higher growth rates.

By 2011, however, the situation dramatically reversed, and the GDP growth rate fell to 6.3 per cent. By 2012, the growth rate was 3.2 per cent, and that has been lower than the average growth rate during the worst days of the Licence Raj.

In my book, India’s late, Late Industrial Revolution: Democratising Entrepreneurship , I have tracked India’s GDP growth rate in the 20th century.

The average GDP growth in the 1960s had been 3.96 per cent, and in the 1970s was 2.94 per cent.

Thus, by 2012, India’s GDP growth rate has come back to an average of 3-4 per cent, exactly what it had been in the 1960s and 1970s.

All the policies of industrial liberalisation, implemented by P. V. Narasimha Rao, A. N. Verma and L. Mansingh, now mean nothing.

The financially-progressive policies that V. L. Kelkar had introduced in transforming the Foreign Exchange Regulation Act to the Foreign Exchange Management Act now mean nothing.

The regulatory policies put through by P. Baijal, leading to the diffusion of wireless communications in India, have come to nothing. These were some major institutional changes that had transformed economic growth in India.

Most of these policies were initiated during the NDA regime. The 1998-2004 NDA government had built the foundation for a period of sustained and substantial growth, because the policies spilt over into the UPA-1 regime.

Sinha is right in suggesting that the NDA government had taken growth to a high level, which UPA-1 took advantage of, and now the Indian economy is a sick child. The sickness is acute.

Cause of India’s Malady

There are numerous factors leading to the slowdown of growth. All of them are endogenous. It is absolutely no use blaming external factors. After the 2008 global crisis, India’s economic growth should have been hammered.

Instead, the World Bank data shows a massive spurt in growth in 2009 and 2010. After 2010, India’s growth collapses, rather like its batsmen in a test match. Why? Many things have happened, but one vital factor has been the decimation of the institutional environment. This decimation is self-inflicted.

A litany of corruption scandals has altered the terms of discourse between the businessman and the State, and led to a 180-degree change in the incentives that motivate businessmen to act.

India’s growth catastrophe is endogenous, for which no outside agency is to blame. In the last few years, India has been closed for business, because of institutional crises and administrative sclerosis.

FDI flows

Another indication of the crises is in the amount of foreign direct investment (FDI) India receives. Annual FDI flows were $5 billion in the mid-1990s. They went up to $45 billion in the mid-2000s, but have crashed to $25 billion by 2013. Why?

All human beings have the desire to increase material wealth. But, businessmen will not innovate, and at the margin will desist from engaging in activities yielding advantage with available opportunities, because the psychological barriers created by institutional crises are so great.

The human factor is of paramount importance. The will to make individual progress has been severely dampened and needs to be revitalised.

The massive slowdown of investment and entrepreneurship in India in 2011 and 2012 is due to uncertainty brought about by institutional crises. How does India’s GDP growth rate of 3.2 per cent, or less in 2013, become 10.5 per cent by 2016? Is it unthinkable? Is it impossible? In the 1980s, average growth was 5.58 per cent; in the 1990s it was 5.68 per cent and in the 2000s it was 7.3 per cent.

Thus, the Hindu rate of growth took 30 years to double. India cannot afford to wait for that process to occur again. It will be too late!

Messrs Chidambaram and Modi have to articulate a compelling story as to what makes the Indian economy attractive, and risk-free, such that entrepreneurs’ aspirations are fulfilled.

Future Challenges

These gentlemen have to articulate a compelling story about how to eradicate the miasma generated within India’s current institutional environment.

What is each person’s vision of an appropriate institutional environment?

What are the policy changes forthcoming, either from a possible NDA-2 or UPA-3, such that the transformation of currently-organised institutional systems leads to the re-activation of entrepreneurship?

There is a deafening silence, from Chidambaram and Modi. Such silence implies an impoverishment of ideas to extricate India from its economic and institutional mess.

The author is Professor of Technology Strategy, University of Texas, Dallas.

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