LONDON — Yet again, India’s voters confounded the pundits and comfortably returned the Congress party alliance to power. Now the question is whether leader Sonia Gandhi, Prime Minister Manmohan Singh and their colleagues can return the compliment and get to grips with the immense problems and the enormous opportunities of the economy without being constantly diverted by petty political bickering.
It is not as easy as it seems, not least because India faces deep social divisions and institutional constraints and because the global turmoil and the need for continuing economic reforms may be pushing India in conflicting directions.
India’s growth will fall to about 6 percent this year, demonstrating that the country is not immune to the global cataclysm. But the damage has not eaten as deeply into the fabric of the economy as has happened in the West: The banks are still sound and India is not as export dependent on developed markets as other fast-growing countries, notably China.
Recent years of rapid growth have shown both India’s great potential and some potentially devastating flaws. P. Chidambaram, finance minister and then home minister in the outgoing government, declared that “the best is yet to come” when he announced record growth of more than 9.3 percent for 2007.
Various think tanks estimate that India’s economy could grow to $30 trillion or $40 trillion by 2050, with per capita income coming close to $20,000. At these levels it would be vying with the United States for the second-biggest economy in the world after China.
Growth, averaging 8.6 percent annually from 2002 to 2007, has led to the rapid rise of a middle class that is demanding cars, televisions, refrigerators, not as status symbols, but as the ordinary assets of their households, along with good health care and better schooling.
The size of this middle class is expected to grow to 580 million by 2025 or almost 40 percent of the population, giving optimists hope that India will benefit from a virtuous circle of growth leading to more growth. But there are also some uncomfortable factors that are twisting toward a vicious spiral.
India’s considerable middle class is dwarfed by the immense numbers of the poor. The government has glossed over the size by setting modest standards of income of 18 rupees in urban areas and 12 rupees in rural areas (¥36 and ¥24, respectively) per day to mark the poverty line, by which measurement only 28 percent of Indians are in poverty. But if the World Bank yardstick of $2 a day is used, 86 percent of Indians are poor. By the government’s minimum standards for food and nourishment, about 70 percent of Indians fall below the poverty line.
More than 65 percent of Indians are dependent on agriculture, which contributes only 18 percent to gross domestic product. Unlike China and other countries where a rapid rise in growth was accompanied by a revolution in agricultural methods, India is still waiting for its revolution.
India particularly lags China in education. This means that the strength of a growing labor force is a potentially crippling weakness. Fewer than 20 percent of India’s 14 million new job seekers each year have had any sort of vocational training. India’s literacy rate is still only 67 percent (against 90 percent in China). And while India boasts that it turns out the third-largest number of engineers after the U.S. and Russia, the quality of the universities below the excellent top tier is poor.
Infrastructure is yet another critical area where India is a long way behind China. Thanks to strong central decision-making, Beijing laid the foundations for a modern economy in everything from roads, railways and airports to electricity and telecommunications. But India has struggled against revenue constraints, corruption, diversion of funds and constant political infighting between the central and state governments and between state and local authorities, so that it is still ill-served by both fast highways and local roads from villages to market.
The re-election of the Congress alliance only a few seats short of an overall majority, which it should easily achieve with the help of a few independents, creates a government that can pursue a coherent policy. For most of his previous term in office Singh had to work with and against leftist party allies, which spent their time and energy trying to undermine the economic reforms he was working on.
Even so, there are plenty of barriers. The global gloom means that India will be hard-pressed to climb above (an optimistic) 7 percent growth this year and next — but annual growth of 8 to 10 percent is needed to make a dent in the intractable poverty, along with specific measures to advantage the poor.
The country has room for maneuver. The amount of private credit relative to the size of the economy is only 47 percent against a global average of 137 percent. But advocates of financial reforms to provide greater competition for the cumbersome state-owned banks face the double hurdle that now is not a good time to suggest giving more freedom to banks and the shibboleths of the Congress party. Only recently Gandhi declared her support for the 1969 bank nationalization done by her mother-in-law, Indira Gandhi.
India should do more to encourage exports from their still modest 21 percent of GDP, but it will run into a maze of problems, including India’s own protectionism in an increasingly protectionist age, the jungle of labor laws that mean that only 10 percent of India’s manufacturers employ more than 10 workers, and the poorly educated workforce.
Certainly no one knows the economy and the issues better than Singh, who has successively been chief economist, central bank governor, planning chief, finance minister confronted with only enough reserves for a few days of imports, and then prime minister. But in the 35 years I have known him, he has been both modest and all too conscious of the constraints on him.
Even as prime minister of a majority government, it is not clear how much power Singh will have. Gandhi is still leader of the Congress and her main eye is on ensuring the succession of her son Rahul to be the fourth generation leader of India from the Nehru-Gandhi dynasty (his great-grandfather Jawaharlal Nehru, grandmother Indira Gandhi and father Rajiv Gandhi). Singh has promised Rahul Gandhi a Cabinet post, and there are plenty of fawning courtiers to encourage the 38-year-old on his way to power.
Power in New Delhi does not easily translate into power to bring change to the poor villages, not least when it has to be filtered through greedy and corrupt state politicians and local officials and through ingrained caste and culture that do not always welcome change. Commenting on ingrained corruption, an old Indian friend said the choice in many constituencies was between merely corrupt and outright criminal candidates.
The biggest question for Singh, who has a history of heart problems, is whether he has the heart to stand firmly against the corrupt and courtiers, and the family dynasty if necessary, to implement the reforms he knows are essential if the still lumbering elephant that is India is to make the giant leap not merely to become a world power but to fulfill the expectations of its own 1.25 billion people.
Kevin Rafferty was executive editor, Indian Express newspaper group.
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