What is the problem with India’s economy?
The answer comes from the very man who first put the economy on top of the agenda of the government, and has since been spearheading the economy’s drive to global scale and competitiveness —Manmohan Singh.
These are his words: “The origins of the problem are directly traceable to large and persistent macro-economic imbalances and the low productivity of investment, in particular the poor rates of return on past investments. There has been an unsustainable increase in Government expenditure.
“Budgetary subsidies, with questionable social and economic impact, have been allowed to grow to an alarming extent. The tax system still has many loopholes. It lacks transparency so that it is not easy to assess the social and economic impact of various concessions built into its structure.
“The public sector has not been managed in a manner so as to generate large investible surpluses. The excessive and often indiscriminate protection provided to industry has weakened the incentive to develop a vibrant export sector. It has also accentuated disparities in income and wealth. It has worked to the disadvantage of the rural economy.
“The increasing difference between the income and expenditure of the Government has led to a widening of the gap between the income and expenditure of the economy as a whole. This is reflected in growing current account deficits in the balance of payments.”
On the nail, wouldn’t you say? The trouble is, he said this in 1991. The quotes are the opening remarks of his Budget speech that year, widely considered to be one of the most important and epochal Budget speeches of independent India. That speech went on to lay the route-map for transforming the Indian economy, unshackling it from the chains of Government controls and restrictions, and achieve a quantum shift in growth.
And it worked like a dream. Within a decade, growth had shot up to levels unimaginable earlier. From the middle of the 1990s, the economy logged a growth rate of 7.5 per cent or more — about twice the average rate during all the years since Independence — the much mocked ‘Hindu rate of growth’. For a decade, it averaged over 8 per cent, prompting Singh to “raise the bar” to 10 per cent, and even share a dream which would come back to haunt him later — of turning Mumbai into Shanghai.
India’s remarkable transformation — especially of urban landscapes, with steel and glass office towers and extravagant apartment blocks dominating the skyline of India’s booming, bustling cities, their roads choc-a-block with shiny new cars and motorcycles manufactured in shiny new plants, teeming with millions of smart, energetic and above all, young people — has dominated both vision and discussion.
These cosmetic changes mask deeper, more profound ones. Per capita income rose from ₹ 8,091 in 1991 to ₹ 41,189 in 2011. The number of telecom subscribers rose from five lakh in 1991 to over 90 crore last year. And there has been a real, and measurable decrease in poverty, although there is plenty of squabbling going on about how exactly to measure it.
Perhaps the single greatest achievement of the two Congress-led coalitions which have ruled the nation for the past decade — although, paradoxically, it is not one which Singh himself likes to talk about — is the rise in rural wages and incomes. Between 2004-05 and 2011-12, nominal (not adjusted for inflation) rural wages grew at 16 per cent per year, even faster than the face-value growth in gross domestic product (GDP), which clocked in at 13.7 per cent per annum during this period.
This, combined with a transformation in rural connectivity brought about by massive road-building programmes both at the national highway and village level, as well as an explosive growth in rural services and enterprise, have provided the heft to move GDP growth up, while India’s much-touted middle-class provided the icing. So why then, does the 1991 Budget speech read like it had been made yesterday? That is because, somewhere between the elephant and the tiger stage, we lost the plot. There was the belief that the reform battle had been fought and won, when in reality, it had just begun. Five years of near-China growth rates somehow brought about the impression that a China-like transformation could be wrought simply by chucking money at massively populist schemes.
Instead of fixing the core problems underlying poverty, education, infrastructure and healthcare, grand legislative ‘solutions’were found — right to education, right to food… The other big change was in the world around India. The world in 2013 is nothing like the world in 1991. The USA is showing signs of just about starting to get out of its slump, the Eurozone is in turmoil, China is slowing and the erstwhile ‘tiger’economies of Asia are grappling with their own problems of sustaining growth.
And critically, the tap was turned off on the flow of cheap money from the West which fuelled the spectacular bull run in emerging economies like India after the 2008 crisis.
Meanwhile, politics of compromise, rampant corruption, near paralysis in policy and decision- making, and India Inc’s reckless, debt-fuelled spree which now threatens to derail the banking system, have all combined to change the roaring tiger to a crawling tortoise.
Everybody is hoping that the upcoming general elections will somehow fix all of the economy’s problems. But even a brief look backwards suggests that unless mandates are used to deliver action, history will repeat itself.