DELHIThe year 2001 marks a decade since India was propelled by a
foreign exchange crisis into an era of economic liberalization. Does it now need
another crisis, this time a fiscal one, to give reform new impetus?
At a recent World Economic Forum meeting
here, Prime Minister Atal Bihari Vajpayee talked optimistically about raising
India's gross domestic product growth rate from a current 6 percent to 8
percent. At the same time his minister in charge of asset sales, the outspoken
economist and journalist Arun Shourie, was admitting that a fiscal crisis has
already arrived. In addition to the central government's deficit of 5 percent of
GDP, the states are in the red to the tune of another 6 percent. The center
could no longer underwrite the states' excess.
The hope and the crisis say much about
the successes and failures of the decade of reform. The ending of central
economic controls was supposed to spur local initiatives by handing more
responsibility to the states as well as to the private sector. In practice,
state governments have proved at least as prone to political squabbling and
obstruction as the center. They have also accumulated ever bigger deficits by
making little effort to make users pay for services ranging from power to water.
The result is that the crisis in India's
infrastructure is as severe now as it was a decade ago.
New generating capacity is being added at
little more than half the intended rate, so power cuts remain frequent. Road
construction has been long delayed. Telecommunications have improved but much
more slowly than expected, and the railways desperately need new investment.
Infrastructure deficiencies are holding
back every other sector and the fiscal deficits are raising the cost of capital
for all. Sale of state enterprises has been minimal. In short, though the role
of the state has diminished, India is getting the worst of all worlds from its
The answer lies mainly in the weakness of
the political class.
There is little intellectual opposition
to reform, to which most major parties are in theory committed. The old
socialists are a diminishing breed and the Hindu economic nationalists now make
little impression on a nation proud of Indian entrepreneurs overseas. But the
rise of parties based on regional language or caste loyalties has resulted in
The need for complex coalitions has made
politicians susceptible to every noisy special interest group and at state level
prone to fiscally ruinous populism. So the decentralization that many hoped
would help India has had some negative results.
Meanwhile at the center, opposition for
its own sake is ever apparent, impeding change and reform of antiquated laws.
The Congress Party under the ineffective Sonia Gandhi has taken to criticizing
the very reforms her party's leader in the upper house, former Finance Minister
Manmohan Singh, devised.
Without massive improvements in the
ability of government to deliver infrastructure and much improved primary and
technical education, India will be lucky to maintain 6 percent growth, let alone
reach 8 percent.
But there are some encouraging signs.
Strategic sales of state assets such as Air India are starting in earnest, a
major road program is going ahead, and cash crises are forcing some states to
begin to reform their utility sectors. They may even see that delivery of power
and jobs can be as popular with the electorate as handouts.
The other side of the coin is how well
the Indian economy has performed in the face of the above obstacles. Next year
will see the end of all quantitative import controls. Indian industry may mostly
still need relatively high tariff protection, but it has made impressive
efficiency and modernization gains in the decade since the "License Raj" began
to be demolished.
Much of Indian industry now realizes that
it does not have to be afraid of playing in the international league, and
unsatisfied local demand is massive if costs can be reduced through labor market
liberalization, lower interest rates, utility price rationalization and the
removal of bureaucratic obstacles to production. These things are all happening,
but far too slowly.
Agriculture has continued to make steady
progress despite skewed input and output pricing, low public investment in
irrigation and the high costs of getting produce to market due to the lack of
roads. It is dawning on some that India does not need to fear imports but could
become a significant net agricultural exporter.
The success of the software industry is
well known. But the services sector generally is buoyant as it is less hampered
by regulations and relies more on human than on expensive financial capital.
Private initiatives and the explosion of mass media are partly making up for the
failures of state education.
The chances are that India will neither
advance to the 8 percent growth level nor fall back to its old ways of 4
percent. The inefficiencies of the political system, and of the petty
bureaucrats who run the administration, may be a necessary price to pay for
keeping such a diverse nation in one piece, but private initiative is now too
rampant to be again curtailed.
A decade of reform has given the best of
India a chance to shine, even if it has been accompanied by the advance of
poverty and lawlessness in places like rural Bihar. As in China, development has
widened regional inequalities. India's political structure makes it easier to
accommodate such diversity, just as it makes building roads and dams much more