Bloomberg News

India Shunning ‘Big Bang’ Economic Change Risks Singh Legacy

August 01, 2011

(Updates with parliament opening in second paragraph.)

Aug. 1 (Bloomberg) -- Prime Minister Manmohan Singh’s push to deepen India’s welfare system may divert focus from the investment and regulatory changes needed to sustain an economic transformation that he unleashed two decades ago.

The government is expanding education and rural jobs plans whose costs could swell by almost 2 percentage points of gross domestic product, International Monetary Fund estimates show. Singh also aims to submit a bill in the parliamentary session that started today securing low-cost food for more than 800 million people, more than the combined U.S. and euro-area population.

While embracing such populist measures may help shore up support for a government roiled by corruption charges, it means proposals to boost investment and overhaul tax and land-use laws risk languishing, analysts said. By contrast, Singh as finance minister 20 years ago attacked regulatory burdens that held back private companies, helping propel a 247 percent surge in GDP.

“While the government has succeeded in building a safety net for the poor which is probably the most extensive for any nation at India’s per-capita income level, it has come at the cost of enhancing the investment environment,” said Jahangir Aziz, an economist at JPMorgan Chase & Co. who used to work at the finance ministry and the IMF.

India is losing about 2.5 percentage points in growth a year from regulations and approval requirements that deter investment in roads, ports and power generation, and labor laws that hinder firing, Credit Suisse Group AG estimates.

To-Do List

The Federation of Indian Chambers of Commerce and Industry, one of the nation’s two largest business lobbies, wants priorities set on agriculture investment -- to prevent 40 percent of India’s food from going to waste, an attack on corruption and overhaul of labor laws, said Harsh Mariwala, president of the New Delhi-based group.

“We are not big-bang reformers,” Montek Singh Ahluwalia, the prime minister’s top economic aide, said in an interview July 19. “A lot of what needs to be done is in the works.”

Two decades ago, the attitude was different. As Singh stood to address parliament on July 24, 1991, as finance minister, India was on the brink of defaulting on some of its $84 billion in overseas debt. Paraphrasing French novelist Victor Hugo, he said “no power on earth can stop an idea whose time has come,” as he outlined plans to pare back the system of business permits and quotas dubbed the “License Raj.”

Historic Barriers

Sunil Munjal, whose family runs Hero Group, India’s biggest motorcycle company, remembers how 26 government officials who used to visit each month in search of signs production quotas were being exceeded disappeared after the changes.

“We had officials crawling around ranging from labor to excise inspectors,” Munjal said in an interview last month. “It was a sheer waste of time.”

In his first two months as finance minister, Singh devalued the rupee, swept away government monopolies, cut import tariffs and tax rates, and let foreign companies take 51 percent stakes in sectors including automobiles and pharmaceuticals.

Coca-Cola Co. and International Business Machines Corp. returned after leaving in the 1970s. The main stock index has risen twelve-fold since 1991, poverty has halved and swelling wealth has lured luxury firms, with Fiat SpA’s Ferrari and Aston Martin opening their first India dealerships this year.

Shifting Tack

Singh, 78, has shifted his focus in his terms as prime minister since 2004 toward direct support for the nation’s poor, in a nation where more than three-quarters of the people live on less than $2 a day.

He enacted a jobs plan in 2006 that gives 100 days’ work to any rural household that requests it, and this year indexed the pay rates to the pace of inflation. Expanding it to states where penetration so far has been limited would cost about 0.8 percent of GDP, the IMF said in a February report. Widening an effort to boost literacy would entail 0.9 percent of GDP, it said.

Singh’s emphasis is appropriate to help build public support for continuing the economic transformation, according to Amartya Sen, India’s first Nobel laureate in economics.

“He has to do more to make Indian economic growth more inclusive,” Sen, a Harvard University economics professor, said in an interview in Edinburgh last month. “An illiterate laborer with very indifferent health isn’t in a great position to seize the opportunities that globalized economic relations provide today.”

Growth Warning

Even so, India’s central bank last week was the latest to warn that the government’s priorities risk crowding out investment critical to sustaining current expansion rates, let alone securing an acceleration. Growth averaged 8.6 percent in the past six years, compared with the near 10 percent rate officials say is needed over two decades to lift the third of the world’s poor who live in the country out of extreme poverty.

The rural jobs program has sparked a “wage-price spiral,” the bank said in a July 25 report. Aziz at JPMorgan said that higher rural incomes have set a nationwide benchmark for sectors from the construction industry to services jobs including maids and car drivers, embedding inflation.

Central bank Governor Duvvuri Subbarao, whose term ends next month, said in a statement July 26 that a lack of steps to remove supply bottlenecks raises questions about the economy’s ability to sustain current growth rates. The bank has increased its benchmark interest rate 11 times since early 2010 to quell inflation, putting pressure on capital investment.

Investment Drops

Planned corporate investment fell 43 percent in the six months to March, the Reserve Bank of India said July 25. Foreign direct investment dropped 22 percent in 2010, according to data compiled by Bloomberg. India is the most bureaucratic place to do business, a January survey of 1,370 U.S. executives by Hong Kong-based Political and Economic Risk Consultancy showed.

The government has made moves to address investment, with a panel advising July 22 that retailers such as Wal-Mart Stores Inc. and Carrefour SA be allowed 51 percent stakes in multi- brand supermarkets. Officials on July 29 published the latest draft of a bill to end years of disputes with farmers over compensation for land needed for roads or factories.

“It will join the long list of bills that just sit there and don’t get passed,” predicted Laveesh Bhandari, a director of Indicus Analytics, an economics research firm based in New Delhi. “It is not lack of intentions, it is lack of credibility to push some of these bills through.”

Corruption charges that led to the jailing of a minister have made the government less bold in pushing reforms, said Leif Eskesen, Singapore-based chief economist for Southeast Asia and India at HSBC Holdings Plc.

“India needs to rediscover that reforming zeal otherwise the growth we are enjoying today may not last,” said Rahul Bajaj, chairman of Pune-based Bajaj Auto Ltd., India’s No. 2 motorcycle maker, who wants action on corruption, infrastructure, a proposed tax overhaul and fiscal-deficit reduction. “There’s still an enormous amount of work to be done.”

--With assistance from Kartik Goyal in New Delhi, Siddharth Philip in Mumbai and Peter Woodifield in Edinburgh. Editors: Mark Williams, Chris Anstey

To contact the reporter on this story: Andrew MacAskill in New Delhi at amacaskill@bloomberg.net; Unni Krishnan in New Delhi at ukrishnan2@bloomberg.net

To contact the editor responsible for this story: Peter Hirschberg at phirschberg@bloomberg.net; Stephanie Phang at sphang@bloomberg.net;


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