HONG KONG — Which country is growing at close to 8 percent a year but has the potential for double digit-growth, is already in the world’s top 10 industrial powers but should be in the top three or four, has the best demographic profile of almost all developing countries but faces immense social and environmental constraints to its development, and has consistently been let down by shortsighted and almost nannylike behavior of successive governments?
Not China, where growth has been spectacularly good, thanks to the government’s high ambitions. It is India, where once again this year Finance Minister Pranab Mukherjee has presented a budget that proclaims bold intentions but lacks imagination, constrained as it is by political vision. Elections are the only distinguishing features on the economic landscape.
Almost unnoticed by the global economic punditry, India has had “a good crisis,” as one leading bureaucrat put it. Growth of gross domestic product in the fiscal year ending is estimated at 7.2 percent after 6.7 percent last year.
This is very good by any country’s standards except those of China. Given also that the annual monsoon rains, on which much of agriculture depends, were poor, it is an indication that India has shaken off the sluggish growth rates that were the norm — the so-called Hindu growth rate — not long ago.
The government took prompt action in stimulating the economy when the global crisis started, but now there is a bill to pay in the form of the fiscal deficit. The central government’s fiscal deficit has leaped from 2.6 percent of GDP in 2007-08 to 6.9 percent. If you add in the deficits of state governments, then the total climbs from 4 percent to almost 10 percent of GDP.
Accumulated general government debt has increased to 82 percent of GDP, according to estimates by the International Monetary Fund. These are manageable figures, but would be helped if the government had a bold vision for how to curb spending and increase revenues.
The minister promised to bring down the central government deficit to 5.5 percent of GDP next year, but Shankar Acharya, former chief economic adviser to the government, criticized the measures for concentrating on a handful of one-off items rather than establishing a basis for fiscal consolidation. He lamented that the minister had given too much away in tax cuts.
On both the expenditure and revenue sides, the government could do much more, but it must have a bolder vision beyond election politics and payoffs to putative voters.
On the expenditure side, the government spends too much on subsidies, principally on food, fertilizers and fuel. The ostensible reason is to help the poor, but too much of the money goes to middle- and high-income households, as well as in providing sops to civil servants. Giving direct cash benefits to poor families would be more productive. Fuel subsidies also help to increase dependence on imports, besides encouraging the dangerous motor car cult.
There was a constructive moment when Mukherjee promised that there would be a new direct and indirect tax code. India has a hodgepodge proliferation of taxes, assessments and levies at central and state levels. Economists urge a general sales tax, arguing that it would be more efficient and could be introduced at a low level with the abolition of the other taxes. A broad general tax would also reduce opportunities for corruption.
In concluding his budget, Mukherjee made a stirring claim: “This budget belongs to ‘Aam Aadmi’ (Hindi for the common man). It belongs to the farmer, the agriculturalist, the entrepreneur and the investor. The opportunity is great. The time is right. I have placed my faith in the hands of the people who, I know, can be depended upon to rise to any occasion in national interest.
“I have placed my faith in the collective conscience of the nation that can be touched to scale undreamed of heights in the coming years.”
But some amusing details belied the highflown rhetoric. For example, the budget exempts toy balloons from a central excise duty because, Mukherjee said, of the joy that mothers feel when their children play with balloons. It was a touching concern, but what was such a small detail doing in a supposedly imaginative budget?
Rajeev Mantri, head of a leading venture capital firm, writing for Nouriel Roubini’s Global Economics, complained correctly that “There are no bold pronouncements and no liberalization in this year’s budget. All in all, it was devoid of vision and rather stale.”
Mantri is also right that India should not be content with growth at 7 or even 9 percent. The country’s potential is 12 percent-plus, both because of the low base from which it is starting and the fact that India has a better demographic profile than its rivals, including China.
In the next 20 years, India will have the boost and the handicap of 240 million new entrants to the labor force. That is a million new jobs a month to be found — a monthly opportunity or a crisis, depending on whether the government gets its economic policies right.
To lift growth, the government needs to get out of the large section of the economy that it still controls and concentrate on the things that only a government can do best, such as improving education and health care and ensuring that infrastructure matches growth.
At the same time, the government has to inspire and cajole more people into the modern economy. While hundreds of millions of Indians enjoy buying designer goods in air-conditioned shopping malls, send their children to expensive schools and dream of new cars, hundreds of millions more can only dream of a proper house or safe water, let alone electricity or schooling for their kids.
My old friend, Prime Minister Manmohan Singh, once said his own dream was to wipe the tears from the eyes of impoverished Indians. This is still his biggest task and his biggest failing.
The government also must try to encourage a healthier lifestyle than the consumerism followed in the West. As the editor Prabhash Joshi lamented, “If India grows rapidly but only copies the wasteful West, we will suffocate to death before we exhaust the Earth’s essential resources such as oil, minerals and water.”
Kevin Rafferty is the former executive editor of the Indian Express newspaper group.