India’s Economic Miracle Loses Its Shine


India’s top officials are increasingly self-congratulatory about the country’s growth trajectory. Last month the Finance Ministry issued a report stating that India could overtake China to become the world’s fastest growing economy within four years. Minister Pranab Mukherjee foresees double-digit growth “in the very near future.” But amid all the triumphalism, no one in New Delhi seems to be focusing on just how sustainable-or not-that growth will prove.

That’s probably because, like the rest of Asia, India experienced rapid expansion for years on the back of the Federal Reserve’s easy money policies, which inflated the global economy and saw capital pour into the Asia-Pacific region. The 2002-08 boom in India had little to do with fresh action from New Delhi, which used the upswing to run up notable deficits and spread the wealth around with generous cash payouts to the poor.

Pranab Mukherjee

But with booms come busts. The Federal Reserve is still running easy money policies, but the U.S. economy is sluggish, as is Europe. Without those engines of growth-and no discernible economic reforms of its own-it will be hard for India to repeat the previous decade’s performance.

There are already signs of a slowdown. By the government’s own tally, real GDP growth slipped to 6.0% for the October to December quarter, versus 6.2% the previous year. The failure to move back toward the pre-financial crisis pace has been dismissed as due to a weak monsoon and other transient factors, with a return to 9% growth portrayed as around the corner. It is at least as likely that 9% growth will prove transient.

New Delhi is struggling to meet its commitments. In its February budget presentation, the Congress Party-led government pledged to cut its deficit to a still hefty 5.5% of GDP. This is supposed to be accomplished on the back of revenue gains from a faster economy. But the government promised the exact same thing last year, and the deficit reached 6.9% of GDP.

Persistent budget deficits cloud the prospects of a generation of rapid growth, as interest burdens rise and the government has to raise taxes or debt to fund it. There is also harm in the here and now: The Reserve Bank has been forced by record government borrowing to maintain exceptionally loose monetary conditions, or risk choking off private credit. This has allowed inflation to move into the 9% range in barely a year. Last week’s rate hike by the Reserve Bank is welcome but tightening probably started too late. Monetary authorities have little leeway given the Congress Party’s demands for both high growth and cheap deficit financing.

Congress isn’t helping by sticking to a program of populist handouts, despite the fiscal constraints. Scheduled tax overhauls have been delayed and diluted, with the government again reduced to cries of “next year.” Food imports have soared despite hideously expensive fertilizer subsidies.

Congress claims growth will motor ahead on a surge of public infrastructure spending. Technically, that might be true: Government spending on infrastructure automatically adds to current GDP. But the future returns are likely to be dismal. Public infrastructure programs almost always exceed both schedules and budgets, and many are never completed. Further, foreign companies have voted with their feet on commercial value. Wholly-owned foreign infrastructure projects are permitted, and incentives have been offered. But the foreign share of much-touted public-private infrastructure partnerships is negligible.

It was not infrastructure spending that moved India beyond the “Hindu rate of growth.” The way to achieve durable expansion is to repeat the 1991 big-bang reforms: liberalize, liberalize, liberalize. But for now, the Congress-led government is headed in the wrong direction, and slowly taking the shine off of India’s economic miracle.


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