Saturday, January 28, 2012

India not shining any more

It's a testimony to the lingering effects of a four-decades-old socialistic economy. Each time India makes a policy move towards creating wealth, it does so with a grudging sense of sacrifice and insistence it's doing the world, specifically the United States and the West, a favour.

The most recent example came in November when India's coalition government, headed by the Congress party, attempted to liberalise investment by foreign companies in organised retail. Protests from the opposition soon had the government retracing its steps.

Such backtracking and a logjam on reforms explain how India, in three years, has gone from being globali-sation's poster child to becoming the laggard among the major emerging economies. In 2008-09, India and China were the standout survivors of the financial crisis, invited to the Group of Twenty high table and expected to steer the course for 21st century commerce. As the sun sets on 2011, however, key stakeholders in the Indian economy are contemplating rough, cold nights ahead.

Prime Minister Manmohan Singh's government had proposed that 51% foreign direct investment be allowed in the multi-brand retail space. This would have let companies such as Walmart and Carrefour, banned from investing a dollar in front-end retail stores in India, set up shop in Asia's third-largest economy. The Singh government also announced a decision to enhance permissible FDI in single-brand retail -- Marks and Spencer or Apple outlets being examples -- to 100% from the previous 51%. With the government's retreat, the multi-brand decision is off, though the single-brand policy change will go ahead.

The FDI-in-retail controversy is telling for three reasons. First, it's a reminder that despite the country being among the biggest beneficiaries of the globalisation process over the past two decades significant sections of Indian society remain deeply suspicious of foreign investment and are too willing to believe downright bizarre conspiracy theories. In the past fortnight, several public figures -- including Gandhian activist Kisan Baburao "Anna" Hazare, who has emerged in 2011 as India's leading anti-corruption crusader -- actually compared multi-brand retail chains like Walmart to the East India Company. Arriving in India in the early 17th century as a trading entity, the East India Company eventually raised its own army and government and became India's paramount power by the mid-18th century.

Second, the outcry has pointed to the difficulties of pursuing even fairly obviously needed economic reform and policy change in India's extraordinarily competitive and fractious democracy. Limits to foreign equity in retail are decided by executive order and do not require parliamentary approval and legislation change. 

Nevertheless facing broad opposition -- ranging from the Communists to the notionally rightwing but economically confused Bharatiya Janata Party -- and blackmail by junior parties in the ruling coalition, particularly the Trinamool Congress regional party that runs the eastern state of Bengal, the government had to capitulate.

Finally, the episode renewed pressure on the Singh government to restore India's momentum. Growing at close to 10% three years ago, the economy is showing alarming signs of slowdown. GDP growth in 2011-12 -- the Indian financial year runs from April to March -- is likely to fall below 7%, against the government's target of 9%. The fiscal deficit is certain to overshoot the 4.6% figure promised in the 2011 budget and could be closer to 6%. The rupee is sliding at a historic low vis-à-vis the dollar.

Statistics released by the government report that in October 2011 industrial production declined 5.1% compared to the same month in 2010. The contraction in the capital goods sector was an astonishing 25.5%, indicating business pessimism and wariness in investing in new capacities. Declining FDI and investor confidence in India's capital markets are also causing concern.

Unremitting inflation and the government's use of fiscal measures to check it -- the Reserve Bank of India has raised interest rates 13 times in the past 20 months -- have created a vicious circle. "The economy," Anand Mahindra, managing director of the Mahindra Group and among India's best-known business tycoons, tweeted on December 12, "is in a perfect storm."

To optimise the advantages of an interlinked economic system, a country needs to keep its eyes not just on globalisation, but another "g" word -- governance. This is where India has faltered. Complacent about the inevitability of rapid growth, the Congress-led government has an internal dilemma as to the necessity and political legitimacy of deregulation, decontrol and market-friendly reform. While Prime Minister Singh is clearly a believer, his party president and political boss, Sonia Gandhi, does not see growth as an overriding priority -- and the mounting bill of a range of welfare and dole programmes she favours have combined to leave a devastating impact. Paradoxically, the rural constituency she is keen to protect would have benefited the most from the now botched reform. One Indian economist warns that India could easily become another Brazil: "We've been hearing about Brazil as the next great power since the 1960s. Every few years it offers hope, but never does take off."

The initiative to allow greater FDI in retail came after a considerable reformist lull. It was an attempt by Singh to break the perception of policy paralysis. As it happens, his government has been buffeted by a series of corruption scandals for the past year and depleted its reserves of political capital. As India's finance minister admitted while putting the FDI decision "on hold," to persevere with opening up retail at this stage was to risk a midterm election. Essentially the government waved the white flag.

Ironically, a robust presence of big retail could provide India medium-run solutions to some notably trenchant challenges -- food inflation, the lack of agricultural productivity and produce wastage. Deploying the wage-arbitrage principle, as exploited, for instance, by India's information technology industry, could have someday made Indian farmers meaningful exporters of food. That aside, the transcontinental supply chains of retail behemoths such as Walmart would also bring gains to Indian consumers, given half of India's gross domestic product is driven by private consumption.

Instead, the perennial chicken-or-egg conundrum has been used to thwart FDI in retail. Critics have argued global manufacture will swamp Indian markets and under-mine Indian manufacture. Others have claimed that a network of politically influential intermediaries -- who end up squeezing both food producers and consumers -- will lose out and deserve protection. The truth is every piece of policy change presents immediate losers and winners. Yet without short-term turbulence and risk-taking, the long-term potential may never be reached.

India's politicians, 20 years after their country opened its economy to the world, should have come to grips with this basic verity of policymaking. For some reason they haven't, or more likely wilfully refused. As a result, there is an unwillingness as well as inability to sell economic reform and globalisation to a broader domestic constituency using an idiom with expansive appeal. In their smugness, India's political leaders expect the rest of the planet to wait until they fine-tune that idiom. Meanwhile, the rest of the planet may decide to just get on with life and pass India by.

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