WHILE developed economies are grappling with demand-side problems, India is facing supply-side constraints that are holding back its growth potential.
The economic crisis in the western world, which has led to abysmally low growth rates, has been caused largely because of lack of demand for housing units, consumer loans, consumer goods and other products and services that can generate economic growth.
In India, a massive supply-side crunch — in terms of liquidity, natural resources, housing, industrial and agricultural products and infrastructure including roads, ports, airports, power plants and railway corridors — is preventing the nation from growing at a healthy eight to 10 per cent annually, a rate that can slash poverty levels and raise the standard of living of millions of its citizens.
The United Progressive Alliance (UPA) government, which was first voted to power in 2004 and won re-elections five years later, has in recent years been fighting shy of deepening economic reforms to accelerate growth. The UPA appeared to be a house divided, with allies bickering over portfolios and even ministers jockeying for power. Internecine fights between various key ministries saw both domestic and international investors shying away from investing in projects.
The result: though India has not directly been impacted or exposed to the global economic crisis — its banking industry is sound, despite recent fears of a growing bad loans portfolio — its GDP growth rate has plummeted from 9.5 per cent at the time of the 2008 economic crisis to just about 6.5 per cent at present.
And even as the UPA government faced a crescendo of corruption charges in recent months, its leading ministers appeared to have withdrawn into a shell. Fears of an over-ambitious Comptroller and Auditor General (CAG) hauling ministries for alleged wrong-doing and the likelihood of corruption charges flying thick and fast saw many ministries virtually close shop, refusing to take any decisions.
But in the last leg of its second five-year tenure, the UPA government seems to have realised the folly of meekly succumbing to unpredictable allies, extra-constitutional and over-zealous officials and bodies and civil society activists.
Last week, for the first time in its eight-year-long tenure, the top guns of the UPA regime came out forcefully in defence of economic reforms by addressing a massive rally in the national capital. Prime minister Manmohan Singh, the hapless leader of the government — who has been virtually bullied by allies and even members of his own Congress — finally got the backing of party chief Sonia Gandhi and her son, the heir-apparent to the Congress throne, Rahul, in pursuing economic reforms.
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WITH barely 18 months left before general elections are held in the country, Singh is now working overtime to push ahead with reforms, held back over the past few years. A few weeks ago, his government announced bold decisions, opening up multi-brand retailing to foreign investors, slashing subsidies on cooking gas and hiking the price of diesel, a fuel that powers luxury cars and SUVs that are owned by the rich and powerful.
The government also announced an ambitious plan to establish a National Investment Board (NIB) that would provide single-window clearance for mega infrastructure projects entailing a minimum investment of Rs10 billion. While India’s infrastructure sector needs massive investments — Singh himself has estimated that the country needs to invest about $1 trillion over the next five years in the infrastructure sector — most of the major announcements have failed to materialise, thanks to bickering ministries, interest groups and lobbies who set up environmental NGOs, or instigate farmers, tribal people and the local populace to oppose projects.
Some of the ministries that oppose these projects have also become personal fiefs of over-ambitious junior ministers. Thanks to a weak leadership, both at the government and party level, such ministers have succeeded in thwarting crucial infrastructure projects by virtually holding the economy to ransom.
Sadly, instead of reducing bureaucracy and simplifying procedures, many of the ministries opposing major projects have raised a complex structure of rules and regulations — all in the name of a clean and green environment, or to protect tribal culture — which frustrate investors. Of course, the well-connected and politically savvy investors manage to get the necessary clearances, thanks to their well-greased network of friends in power.
Not surprisingly, Singh’s proposal to set up the all-powerful NIB, which will have over-arching powers over other ministries and will ensure fast-track clearance for projects worth over Rs10 billion, has faced a volley of opposition from some of the ministers who fear that their power to sit in judgement over such proposals will disappear.
Last week, however, Arvind Mayaram, the economic affairs secretary, revealed that the government is hopeful of taking a final decision on setting up the NIB, after consulting with the various ministries. “For any decision to take place, which has implications for a very large number of ministries, you need to have inter-ministerial discussions and create a consensus, and that process is on,” said Mayaram. “We hope that in another two to three weeks we will have a decision on that.”
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OF course, the government will have a tough time in proceeding ahead with the NIB. Already, several environmental groups have started lobbying against the setting up of the board. About two-dozen environmental, civil society and community-based organisations attacked the government for floating the proposal for setting up the NIB.
The activists have predictably lashed out at the ‘growth fetish’ that has been prevalent in India since 1991, the year when Singh — as finance minister — started dismantling a virtual command economy. International organisation Greenpeace has also launched a campaign to prevent the NIB from becoming operational.
The Centre for Science and Environment (CSE), a much-respected NGO, has also criticised the move for such an entity.
According to the CSE, “industry, government and regulatory agencies have been persistently talking about how environmental regulations have throttled the country’s growth and how the system of forest and environment clearances has forced India’s credit ratings to its nadir. And they have bitterly complained about how environmentalists were holding the country and its people to ransom.”
Rejecting the claims by many in government that green clearances lead to inordinate delays in infrastructure projects, the CSE feels that the NIB will dismantle the regulatory system for such clearances.
Indeed, the UPA government will find it a formidable challenge to set up the new body in the face of such stiff opposition from both within government and from outside. While the weak UPA government succeeded in dilly-dallying much-needed reforms for a substantial part of its second tenure, it now appears to be in a big hurry to bring about cosmetic changes, which hopefully should trigger off economic growth, lead to a bull-run on the stock markets and restore the ‘feel good factor’ missing for the past few years.
The prime minister and his close circle of economic confidants — including finance minister P. Chidambaram and Planning Commission chief Montek Singh Ahluwalia — appear convinced that the only way to tackle the numerous challenges facing the country is by following China’s economic model of rapid, 10-plus per cent economic growth.
With millions of young educated Indians graduating out of schools, colleges and universities every year, there is need to generate an equally large number of jobs; this can be done only when mega investments are made in sectors including infrastructure that need to grow rapidly. However, unlike in China, it is difficult to steer through such ambitious and lofty proposals without hammering out a consensus among various stakeholders.