The Indian Economy Blog

October 28, 2005

The Economist on Indian Economic Reforms

Filed under: Basic Questions,Infrastructure,Politics — Reuben Abraham @ 2:01 am

Taking note of the 8.1% growth recorded by the Indian economy, The Economist is carrying a couple of stories on the constraints on the Indian economy. The magazine has a leader on India and China, followed by a special report on India called Democracy’s Drawbacks. The report addresses all the usual issues, including the Left’s protection of its narrow political base, namely organised labour, which means it doesn’t really have to care about workers at large. Another issue that is raised is the shocking 14%-15% of GDP spent on subsidies, to which we can add another 1% of GDP courtesy of the REGS. After detailing all of the problems, the obvious question is posed: how can the economy be doing so well, if everything is as messed up as it seems?

There are a number of reasons. The biggest is that the Indian economy is so strong, structurally and cyclically, that it can ride out a period of wobbly policy. India’s young population gives it a fast-growing workforce and a declining proportion of dependants. Over the next few decades, that will be good for savings and investment. Industry, meanwhile, has recovered from a splurge of over-investment in the mid-1990s. It has improved efficiency and is now both reaping the benefits and investing again in new capacity.

Almost every budget since 1991, including this year’s, has cut import tariffs and freed more industries from “reservation” for small firms, a big hindrance to competitiveness in businesses that might benefit from economies of scale. This year, moreover, saw the introduction of one long-planned reform, a standardised value-added tax imposed at state level. Typically, politics meant that not all states fell into line, and implementation has been patchy. Yet the tax may eventually not only bring new fiscal stability, but also reduce the burden of cascading excise and sales taxes that is one of the biggest handicaps facing manufacturers. Modest, piecemeal reform, in other words, is not quite dead.

The government’s priorities—investment in infrastructure, agriculture, basic education and primary health care—are also right, given that the big macroeconomic stuff was mostly done in the 1990s. But they all need money, and that requires fixing the budget. India’s fiscal deficit is now 8% or so of GDP if both state and central governments are counted—an improvement after six years of double-digit deficits, but still too high.

The deficit, which goes largely on interest payments (40% of recurrent spending), defence, subsidies and civil-service wages and pensions, leaves little room for big capital investments.

What about the Left Front? Will they eventually realise the damage they are doing to the economy and the country?

Jairam Ramesh, a Congress member of parliament who played a big role in writing the “common minimum programme” that defines relations between the UPA and the Left Front, floats the interesting theory that, now that Congress has enacted the Employment Guarantee Act that the Left was so keen on, the Left may prove a little keener on asset sales. They would, after all, be a way of paying for all those jobs. From the Left Front come faint signs of accommodation. Prakash Karat, the general secretary of the CPI (M), the most important party within the group, is, like Mr Ramesh, adamant that full-scale privatisation of profitable public enterprises is not on the agenda. But he says the party is “ready for a discussion” on how to raise resources for spending on the poor.

Ironically, the most telling statements about the nature of power without responsibility, an artform mastered by the Left ideologues in Delhi, came from veteran communist leader, Buddhadeb Bhattacharjee.

On September 30th, the day after Communist-affiliated trade unions had brought his capital, Kolkata to a halt, he could scarcely conceal his exasperation. He told The Economist that the trade unions—and many of his party comrades—had become “one-dimensional”, representing only the interests of the 30m or so workers in India’s “organised” sector. Mr Bhattarcharjee concedes that some of his colleagues in Delhi do not seem to grasp that economic reform could benefit a much bigger number of workers than those who belong to unions. If they do, they perhaps see political benefits in ignoring it. But “Here, we are running a government. We have to fulfil the aspirations of the people.”

Exactly, Mr. Bhattacharjee. Now, if only you could convince your Stephanian brethren of exactly this!!


  1. Unfortunately it is not just the Left that has “power without responsibility” in India. Several senior members of the Congress government, including the prime minister, home minister, human development minister, and the foreign minister also have some degree of power without responsibility. They were not elected to parliament and have no voters to hold them to account. They were appointed by Sonia Gandhi and are accountable only to her. They can behave responsibly (as the prime minister does) or irresponsibly (as most of the rest do) since their fate does not depend on results but on pleasing a vain and corrupt woman who is afraid of serious challengers to her son’s accession to the throne. India suffers from this problem inside the Congress just as it does from the leftists.

    Comment by Blue Sky — October 28, 2005 @ 5:03 pm

  2. [...]
    First it was the Wall Street Journal. Then it was Yale Global , followed by the Economist. And now, it’s Fortune’s turn to tell us tha [...]

    Pingback by The Indian Economy Blog » Blog Archive » The Long And Winding Road — November 1, 2005 @ 3:45 pm

  3. Exactly, Mr. Bhattacharjee. Now, if only you could convince your Stephanian brethren of exactly this!!

    Which Stephanian friends are we talking about here? Is Buddha a Stephanian? Are you a Stephanian?

    Comment by Stephania — November 6, 2005 @ 8:00 pm

  4. The best known of the Stephanian idealogues are Sitaram Yechury and Prakash Karat. Noone exemplifies the power without resposibility thing better than this duo.

    Comment by Reuben — November 11, 2005 @ 9:14 pm

  5. [...] 17;s Drawbacks?
    November 11th, 2005 by Reuben Abraham

    Some time back I had linked to an Economist special report, Democracy’s Drawbacks, [...]

    Pingback by The Indian Economy Blog » Blog Archive » Democracy’s Drawbacks? — November 11, 2005 @ 9:17 pm

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