The author argues that policy paralysis and a lacking national consensus on matters related to FDI and investments are fast becoming a trademark identity of India. The solution would be building a national consensus, achieving a consensus-driven growth and then channelizing investments accordingly. From Bengaluru, Snehal Manjrekar.
Since the onset of 1990s India projected an almost intimidating image in global economy. Notorious practices like the License-Raj regime (a legacy that saw the light of the day in British India where in government reserved the right to offer licenses, set production limits and determine prices for the industrial produce) denied India a participation in the brightest era of globalization (1820-2000), which severely affected country’s business aspirations and significantly restricted its population’s living standards.
However, 1990s economic liberalization pushed by the IMF and the World Bank (note that the reforms were not proactively initiated by the ruling government) resulted in the collapse of India’s notorious growth-sapping License-Raj regime. Indian corporations powered by growth-hungry and inventive fleet of entrepreneurs helped India reclaim some part of its lost glory. Global investors looked at India as a growth market driven by its conducive demographics. It almost seemed as if India until the 90s (lethargic and inward-looking) was replaced by the post-90s aggressive and ambitious India.
Circa 2012 a policy paralysis and failure to hammer fruitful consensus on business and economic policies has endangered the existence of an aggressive and ambitious India. Her larger-than-life failures in telecom licensing, FDI in retail, lack of investments and large increases in shelved projects due to absence of land acquisition reforms is resurrecting the lethargic and inward-looking India mired in policy paralysis and deficient national consensus. Phrases like policy paralysis and a lacking national consensus on matters related to FDI and investments are fast becoming a trademark identity of India.
A gasping elephant
As I write this article India has recorded an abysmal GDP growth of 5.3% for the latest quarter.
It is interesting to note that between 2004 and 2011 Indian GDP grew at an average of 8.3% second only to China. The period 2006-2007 witnessed India’s GDP clocking an impressive 10.1%(i). This downfall in India’s GDP has meant none of the Wall Street banks carry an optimistic outlook about the country. Soon after the GDP numbers were released Goldman Sachs revised its outlook on Indian growth story from 7.2% to 6.6%, Merrill Lynch from 6.8% to 6.5%, Morgan Stanley from 7.5% to 6.8%(ii).
Years of policy paralysis has culminated in reduced investment by the businesses, which is below 30% and an abrupt shelving of industrial projects due to lack of reforms on land acquisitions. In a shocking report from Center for Monitoring Indian Economy (CMIE), an independent economic think-tank, during 2011-2012 investments worth INR 5 trillion were shelved with investment projects to the tune of INR 1.7 trillion annulled and INR 3.3 trillion stalled(iii). In aggregate over 500 investment projects were shelved in 2011-2012. Unsurprisingly lack of land reforms is choking myriad productive investments in the economy but little has been done by the ruling United Progressive Alliance (UPA) regime headed by Manmohan Singh. Some of the biggest projects hindered are the INR 450 billion Nuclear Power Corporation's 6,000 MW Haripur plant, West Bengal(iv).
It is important to note that provincial governments control more than half of the government spending.
India’s disjointed political system
India today is akin to the India characterized by the princely states (right from the era of Mogul Rule to British Raj). Indian political system is highly fragmented where provincial governments play a much bigger role than the central ruling power. In the recent past the capacity of the provincial parties to influence policies of national significance has grown unprecedentedly. This phenomenon has its roots dating back to the early 1980s. The decade between 1970s and 1980s was a turbulent one. The ruling Congress Party at the time led by charismatic and dynamic Indira Gandhi was on a tightrope of oil price shock and rising strikes and protests due to a crippling economy. In the mid-1970s a state court alleged Indira Gandhi of misusing government authority during 1971 elections and questioned her victory.
The move culminated in a “National Emergency” being declared all over India with dreadful and devastating ramifications. Scores of political opponents were jailed as political prisoners and the country was trapped in an unending mess of strikes, protests and violence. This was perhaps the time when the nation’s political system was nearing its inflection point. Predictably, during the 1977 elections the allegiance of Indian voters to the Congress Party was reversed and for the first time after 1947 a regional and a non-Congress Party assumed the responsibility of running a vast and highly-volatile country that India was. Since then regional parties proliferated at a breakneck pace and over a period of time assumed greater importance than the central governments. Add to this the economics of class and caste, which have been trademark attributes of India the reason why provincial politics gained precedence over a national one becomes easier to understand the phenomenon in its completeness.
Unfortunately, the rise of this fragmented political system reflected how confused or unsure an Indian voter is with regards to the nature and quality of governance anticipated. Ironically, Indians carry a fragmented identity where in they first recognize themselves as Punjabis or Gujaratis than as Indians. This is perhaps another reason underscoring the rise of provincial parties. However, it is important to note that provincial governments control more than half of the government spending. Interestingly, the expectations of the provinces from their provincial care-takers are varied in nature. Provinces like, for instance, Gujarat have demanded for greater industrialization and improvement of infrastructure. The ruling Bharatiya Janata Party (BJP) government under the auspices of Narendra Modi has responded quite brilliantly. The western state of Gujarat, home to traditional traders of textiles and diamonds, is undoubtedly India’s China. Gujarat, with 5% of India’s population accounts for 16% of India’s manufacturing output and a whopping 22% of India’s exports(v). Its capital Ahmadabad was rated as the third fastest growing city in the world in 2010 by Forbes Magazine(vi). The state of Gujarat has undergone impressive infrastructure development and rapid urbanization. In a country where the urbanization rate is a mere dismal 28% Gujarat boasts of an impressive urbanization rate of 43%. The success of Gujarat is a global phenomenon now owing to the local government’s annual event known as “Vibrant Gujarat”.
Source: Vibrant Gujarat - Constellation of Global and National Brands in Gujarat
Vibrant Gujarat summit is aptly defined on its highly informative and insightful website as “The event provides enormous prospects to the State to display its strengths, progressive stand, initiatives, investor friendly climate and culture of Gujarat”(vii). The event has been a great success among foreign and domestic business tycoons. During the 2011 summit of Vibrant Gujarat over 1,400 foreign delegates from 101 countries participated. The delegates signed over 7,500 MoUs valued at $450 billion bettering its 2009 figure of $240 billion(viii). Gujarat’s business-friendly and corruption-free functioning gained such massive attention on the global front that The Times magazine ran a complete cover story on Gujarat and its Chief Minister Narendra Modi earlier in the year. The Times magazine left no stone unturned in showcasing Gujarat’s dramatic rise in the following words: "What's certain is that during his 10 years in power in Gujarat, the state has become India's most industrialized and business-friendly territory, having largely escaped the land conflicts and petty corruption that often paralyze growth elsewhere in the nation"(ix). The US based magazine didn’t mince words while acknowledging his pro-business and pro-investment acumen in the following words: "His ability to get things done is in stark contrast to the Congress-led central government in New Delhi"(x). The magazine went on as “Gujarat's $85 billion economy may not be the largest in India, but it has prospered without the benefit of natural resources, fertile farmland, and a big population center like Mumbai or a lucrative high-tech hub like Bangalore. Gujarat's success, even Modi's detractors acknowledge, is a result of good planning - exactly what so much of India lacks”(xi).
One striking feature of Clinton’s India visit earlier this year was the one hour stopover meeting with West Bengal Chief Minister Mamta Banerjee.
It can be said with utmost certainty that the Southern Indian provinces of Bangalore, Chennai and Hyderabad made even gains in attracting foreign companies to set up shop and employ vast numbers of its better educated and skilled workforce. However, what differs Gujarat from some of its Western competitors like Maharashtra and Southern states is the quality of infrastructure and urbanization along with a state-level consensus of industrialization and political stability, which has ensured an inclusive growth materializing in Gujarat. While the boom in Gujarat lasted for over a decade the competitors like Maharashtra and Southern states of Karnataka and Andhra Pradesh witnessed frequent political upheavals and lacked a shared state-level consensus. It is thus not a surprise that these states are struggling to manage a crumbling infrastructure, chaotic cities, eroding political stability and investor confidence.
West Bengal – the rising importance of rebel states in policy making
One of the most striking features of the US Secretary of State Hillary Clinton’s India visit earlier this year, which astonished quite a few people in India, was the one hour stopover meeting with West Bengal Chief Minister Mamta Banerjee. Mamta Banerjee, who leads the Trinamool Congress Party, has great influence over the coalition powered ruling government of India United Progressive Alliance (UPA). The support extended by Mamta Banerjee is so crucial that without her party’s support UPA faces a mere existential threat. No wonder then the UPA had to revoke on their decision of allowing FDI in multi-brand retail just months ago thus damaging its image among the global investor fraternity. One of the primary reasons for India’s proverbial policy paralysis is Mamta Banerjee’s often myopic and ever mercurial disposition toward issues related to investments, trade and industrialization. It is worth recalling that Mamta Banerjee played a critical role in thwarting Tata Motor’s plan of rolling out a Tata Nano production facility in West Bengal (note that the Tata Nano project was bagged by none other than the state of Gujarat under the auspices of Narendra Modi). Also, as mentioned earlier, the INR 450 billion Nuclear Power Corporation's 6,000 MW Haripur plant, West Bengal was one of the myriad large projects scrapped by the Mamta Banerjee’s Trinamool Congress Party during 2011-2012.
Hillary Clinton lauded the investment and industrialization potential of West Bengal and promised of unconditional support to help the state stand on its own feet (The state of West Bengal has a debt of a whopping $40b as reported by India’s leading business daily Economic Times).
Astonishingly, American politburos have been clever enough to understand the functioning of political apparatus in India. Local political parties have far greater say in policy-making in India than the ruling regime. Hence, major decisions related to trade and investments are more likely approved and finalized by the local state parties than the ruling power in New Delhi. Hence, the one of the primary purposes of this visit was to acknowledge the shifting landscape of Indian political system by forging closer ties with the individual states that could play a meaningful role in America’s wider geopolitical interests.
The North-Eastern Ascendancy
Since the past five years the pace of development in India’s impoverished and crime-ridden provinces of North-East has been quite astonishing. Provinces like Bihar in the East, which was notoriously famous for murders, loots, police atrocities, kidnapping, and crony capitalism is working hard to reclaim its lost glory. Bihar, during its golden medieval past was center for religious and intellectual exchanges. Buddhism flourished in ancient Bihar as scholars from around the world frequented the place to quench their thirst for knowledge and spirituality. The rise of provinces like Bihar matters a lot for India’s long-term economic outlook because these places are rich in mineral resources and hence possess substantial potential of transforming India into a formidable exporter of natural resources if relevant policies are implemented. At a time when China’s appetite for mineral resources is unlikely to slow down dramatically improved economic and political profile of provinces like Bihar is a crucial development.
The government of Nitesh Kumar, Chief Minister of Bihar has invested substantially in infrastructure and education. The government has been tough against the law-breakers and has achieved great deal of progress on arresting the growth of corruption. Copying a leaf out of Nitesh Kumar’s book the neighboring province of Chhattisgarh, which shares close affinity with Bihar and Bhojpuri identity, has expedited key reforms on economy and politics. Not surprisingly then that Bihar’s GDP since 2005 has averaged an impressive 11%. On the other hand Chhattisgarh has managed to achieve an average GDP growth of 11% since 2010. There exists ample scope for economic collaboration between the resource rich North-Eastern provinces and China. This is imperative because trade is certainly a better way of resolving outstanding issues of discord between India and China. It makes humongous sense from an Indian perspective to step up investments in North-Eastern states as a pretext to engage China economically with India before attempting to resolve outstanding political impasse related to borders et al.
Source: Times of India - India’s top five economic Outliers and Laggards
Building a National Consensus – It’s time to make some tough choices
All the Asian miracles (China, Taiwan, South Korea, Japan, Singapore and Hong Kong) had a great sense of national consensus on how they would like to project the country’s image in the global markets. One attribute that is common among all of them was their consensus to dominate global exports markets through manufacturing. When we think about India it is neither a services nor manufacturing powerhouse. It is very essential that we build a national consensus and channelize investments accordingly. Major focus on manufacturing is essential to engineer an exodus from agriculture to industrial jobs. This will support income levels and speed up urbanization. Qualitative developments like these would help us in breaking through the middle income trap. However, our industrial output has been quite inconsistent despite of such great promise and incessant potential to achieve global domination.
Already Indian companies in automobile, steel, auto components, and pharma have earned great reputation in the overseas markets. On the other hand, the rise of technological advancements means greater impetus should be offered to the technology companies. India, at present is one of the key destinations for R&D and IT operations for numerous global IT companies. Undoubtedly, it was the IT sector that brought India onto the global map during the early 1990s. However, absence of reforms in educational sector and diluting quality of Indian education means that a vast swathe of population fails to benefit from education either due to affordability or subpar quality of syllabus lacking practical exposure.
So far only five Asian countries have managed to break the “Middle-Income Trap”. Middle Income Trap refers to that part of the growth process that occurs when a country’s per-capita income gets into the range of $5,000 to $10,000(xii). In Asia only Japan, Taiwan, South Korea, Singapore and Hong Kong have succeeded in breaking the middle income trap through continuous structural economic changes firmly centered on national consensus. India’s per capita income is at roughly $1,700 in comparison to China’s $4,000.
In order to make the strenuous climb up from a low-middle country to a middle-income one and then from a middle-income country to a high-income one it is imperative to build national consensus on how India is going to achieve this goal. Are we going to achieve this by boosting investments in knowledge-based service sectors thus stepping up investments in education and accelerating educational reforms to make it practical and affordable? Or are we aiming at deepening our industrial aspirations by channelizing investments in manufacturing and supporting exports? If we look at the growth trajectory of the emerging Indian provinces which have outpaced the technology boom of the Southern Indian provinces, then we would find that the Western and North-Eastern provinces have achieved growth and prosperity through industrialization and manufacturing. Or are we going to have a mix of manufacturing and knowledge-based services sector? If India chooses manufacturing and greater industrialization of the country then the development would warrant complete overhaul of our foreign policy apparatus. For industrialized countries foreign policy holds the key as their interaction with the other countries, which would be the potential markets for their exports would determine the acceptability of their goods. China, for instance, has adopted an extrovert foreign policy, where in the country leaders places greater emphasis on deepening economic and political relations with countries perceived as potential export markets. This pretty much explains China’s much deeper political engagement with Africa, Latin America, Central and Eastern Europe, Central Asia and MENA region than India’s.
Voting for growth and not subsidies
The local Indian business media has been vocal about that merit of Goods and Services Tax, which would possibly play a critical role in shoring up government finances. On the other hand, action on land and labor reforms would instill investor confidence and hence corporate investments. Ironically, major action is pending from the confused Indian voters. For decades now their support for regional provincial parties has been to garner greater subsidies so as to protect them from rising inflationary pressures. The recent series of fuel price hikes by the ruling UPA government attracted harsh response from the middle-class and lower middle-class segment. Now it is increasingly visible owing to deteriorating fiscal deficit and current account position that the ruling government cannot extend generous subsidies and handouts to the middle-class and the lower middle-class segments.
It is time the voters in India broaden their outlook and arrest the ability of narrow-visional and growth-sapping provincial parties to topple major investment decisions and developmental projects. This country needs leaders of Narendra Modi and Nitesh Kumar’s pedigree and certainly not Mamta Banerjee. Life without subsidies would be hard in the initial phase but the substantial investments in infrastructure, businesses and education would unleash an era of irreversible achievements, prosperity and uninterrupted growth. The trajectory chosen by the voter segment henceforth in terms of using their voting power purposefully would determine largely whether India is likely to break the middle-income trap or not. It has been a long while since India had a large-scale revolution of sweeping changes. Perhaps the present turbulence has been a great apostle accentuating on the need to assign power to a political group with the acumen of building nation-wide consensus and achieving consensus-driven growth. A lot can be learned from China, in terms of oneness of policy mandate that is pro-stability and pro-growth.
Notes:
(i) Trading Economics http://www.tradingeconomics.com/india/gdp
(ii) Big Banks turn their backs on India story, Economic Times - May 26 2012 edition
(iii) Sharp increase in projects shelved – Center for Monitoring Indian Economy http://www.cmie.com/kommon/bin/sr.php kall=wclrdhtm.php&cmienvdt=20120514170016706&pc=099000000000&type=COMMENTS
(iv) Ibid
(v) Vibrant Gujarat investor presentation slides – Why Gujarat pdf (Slide 5)
(vi) Ibid
(vii) Vibrant Gujarat http://www.vibrantgujarat.com/index.htm
(viii) Vibrant Gujarat Summit 2011 - http://www.vibrantgujarat.com/vibrant-gujarat-summit.htm
(ix) Narendra Modi on Time’s cover - http://www.vibrantgujarat.com/DisplayNews.htm?NewsId=13
(x) Ibid
(xi) Ibid
(xii) The Next Convergence – Michael Spence, page 100