India never fails to confound, amaze or disappoint
India is a country with multiple personalities within each of its social, political
and economic layers. The palpable extreme contrasts, and the day-to-day
decision making and outcomes often appear to challenge logic, but never fail
to confound, amaze or disappoint - sometimes all in a single snapshot. Even
on a good day, there seems to be crisis somewhere in the folds of this chaotic
democracy. On a bad day, one often wonders how it functions at all, let alone
how it evolved to be Asia’s second-fastest growing economy.
Economic rise has been uneven
But despite its multinational character and the baggage of vast size of
uneducated and poor population, India has defied doomsday predictions.
However, its economic rise has been far from smooth or even, and continues
to have its share of uncertainties. This has more to do with the evolving local
endogenous political cross-currents than with the country’s democratic
foundation. The irony that the world’s largest democracy has a selected - not
popularly elected - prime minister should not be overlooked.
India is following a different economic path
A late bloomer, India’s economic evolution is following a different path
compared to other Asian economies. The differences are underappreciated
and often misinterpreted. Unlike the Asian authoritarian political regimes that
favoured political openness after becoming economically open, India is
moving ahead with the reverse combination, and with the additional liability
of weak coalition governments. To be sure, unlike Deng Xiaoping in China,
Lee Kuan Yew in Singapore or Mahathir Mohamad in Malaysia, India has no
effective visionary reformist-politicians who can ably negotiate political
consensus on reforms. Prime Minister Manmohan Singh, who is in office but
does not seem to be in power, is an accidental reformer at best.
Product markets reformed before factor markets
Still, trend economic growth has accelerated despite a lethargic reform
agenda since 2004, when the Congress-led UPA-1 came to power. UPA-II has
been embroiled in corruption scandals and is balancing the trade-off between
environment issues, corruption, growth and vote-bank politics. Admittedly,
the government’s policy paralysis in the last year has added to the cyclical
slowdown, but the attractiveness of a strong structural story does not
eliminate cyclical headwinds. The current challenges with land and labour are
another rude reminder that India’s topsy-turvy approach to reforms has
reformed product markets before fixing its factor markets. It appears ironic
that land and labour, which are both in surplus in India, have become
liabilities for growth but capital, which is scarce, has had a smoother ride.
Global export share has risen despite low reliance on FDI
Unlike other Asian economies, India’s global merchandise export share has
been rising without a comparable jump in FDI, without the aid of a superundervalued
currency, and despite the embarrassing infrastructure deficit.
Living with chronic twin deficits will remain challenging but globalisation is
also forcing Indian governments to do some right things, eventually.
There is nothing preordained about India’s economic rise
There is nothing pre-ordained about India’s economic rise, despite the scope
for unlocking of the structural tailwinds, which will be affected by the pace
and nature of reforms. The evolving demographic dividend, which has already
been contributing to economic growth, is also fuelling rising aspirations across
rural and urban areas and calls for greater accountability. Governments will
have little choice but to attempt better delivery, or Indians will vote with their
feet. In the final tally, India remains a glass half-full story that cannot be fully
appreciated by assessing it through the lens used for other Asian economies.
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