Guy de Jonquières wrote an op-ed yesterday in the Financial Times in which he points to one of the most frequently debated issues on this blog, namely how long can economic growth continue at a fast clip while the reforms process stagnates. He lays out the case that the driver of economic growth thus far has been the private sector, while the best thing that can be said about the government is that it hasn’t turned the clock backwards. Nonetheless, there are serious problems lurking right around the corner…..
There are signs that the economy is overheating and that recent growth has been stoked up by a consumption boom fuelled by lax fiscal and monetary policies. The result is a widening current account deficit, much of it financed by intrinsically volatile short-term portfolio inflows. Foreign exchange reserves are ample to prevent a crisis. But higher interest rates look inevitable. The central bank seems anxious to act but the government is resisting. That is hardly surprising. Not only is it keen to keep growth up; as a big borrower, largely to fund current expenditure, it wants to keep debt service costs down. Despite Delhi’s efforts to restrain the states’ spending, the consolidated budget deficit remains stubbornly above 8 per cent of gross domestic product.
More seriously, fiscal indiscipline limits public investment, above all to renew crumbling infrastructure. Investment, though rising, is still only 6 per cent of GDP – a quarter of the level in China. Lack of modern airports, electricity supply, highways and ports not only throttles India’s relatively small manufacturing sector and exports; it cramps services, notably tourism, potentially a big job creator. Incredibly, fewer tourists visit India each year than Singapore [Ed: Something to keep in mind while reading those feel-good stories about increasing tourist arrivals].
Education cries out for investment. India’s colleges are straining to meet exploding demand for top-flight graduates. Still more important, the country’s literacy rate of just 64 per cent – compared with more than 90 per cent in China – underlines the scale of the effort needed to make the large numbers of rural poor employable outside agriculture. Finally, a sustained attack is needed on rampant official corruption and chronic public mismanagement, whose malign consequences Indians often blame on “democracy”. That is a pathetic cop-out. Democracy has not prevented sound policymaking and clean and efficient government elsewhere. Nor need it do so in India.