Why the country will pay the price for its wildly overrated prime minister.
- By Sadanand Dhume<p> Sadanand Dhume is a resident fellow at the American Enterprise Institute. </p>
Is India’s economic juggernaut in danger of turning into a train wreck? Not so long ago, it seemed that the country’s rise couldn’t be stopped: the economy was expanding at nearly double-digit rates, and everyone from global shampoo manufacturers to Western think tanks was racing to put an India strategy in place.
But by the first three months of 2012, GDP growth had slowed to a nine-year low of 5.3 percent, its eighth straight quarterly decline. Now, scarcely a week passes without news of the rupee nose-diving to a new historic low against the dollar. In a report last month, credit rating agency Standard and Poor’s warned that India risks losing its investment grade rating and becoming the first "fallen angel" among the four BRIC economies. This comes on the heels of a slew of warnings by pundits that India can no longer take economic success for granted. And it’s not simply a question of riding out the current global slowdown. Flawed government priorities, poor fiscal management, and rampant corruption all threaten the inevitability of India’s rise.
It may be too early to fundamentally reassess India’s prospects. A young population, relatively high savings rate, and the lowest per capita income among the BRICs give the country the potential to return to the nearly double-digit growth rates it enjoyed until 2010. But if India’s economic future remains uncertain, one thing is clear: along with the fate of 1.2 billion Indians, one man’s reputation hangs in the balance. Will 79-year-old Prime Minister Manmohan Singh go down in history as the bold economic reformer who lifted India out of poverty? Or will he instead be remembered as a pithless technocrat whose government was, to borrow the assessment of historian Ramachandra Guha, "inept and incompetent beyond words."
For now, it looks like history will not judge Singh kindly. Over the course of his prime ministership, he has gone from being admired for being self-effacing and honest to being derided for his lack of courage and leadership skills. But now he’s got a chance to prove what he’s made of: On June 27, a day after taking direct charge of the economy following the finance minister’s resignation to run for India’s largely ceremonial presidency, Singh’s office tweeted his intention to "revive the animal spirit in the country’s economy." He has his work cut out for him, to put it mildly.
When the soft-spoken economist was sworn in as prime minister eight years ago, the outlook couldn’t have been more different. Middle class Indians and foreign investors alike spoke of the new prime minister with admiration and affection. Outside India, Singh was best known as the finance minister responsible for India’s 1991 economic reforms. By scrapping industrial licensing and slashing tariffs, he earned much of the credit for setting an autarkic backwater on the path toward becoming a major global economy. Not surprisingly, when Singh became prime minister in 2004, many observers expected him to deepen the reforms he had pioneered more than a decade earlier. That Singh, and not populist Congress Party President Sonia Gandhi, who had led the party to an upset victory over the right-of-center National Democratic Alliance government, was in charge signaled that India’s commitment to reforms was irrevocable.
For the Indian middle class, Singh’s symbolic appeal extended beyond his reformist turn as finance minister. How many children born in 1932 in a village in today’s Pakistan with neither electricity nor running water ended up with a Ph.D. in economics from Oxford? In a nation of political princelings, whose constituencies are handed down like family heirlooms, the prime minister stood out as an advertisement for effort and intelligence. In a land of rabble rousers, where caste and religion remain the surest tickets to political power, the respected economist embodied quiet technocratic efficiency. And Singh’s Sikh faith — shared by only 2 percent of his compatriots — showcased India’s storied pluralism.
Burnishing the inspirational arc of Singh’s life story was a reputation for personal probity acquired over a lifetime. The prime minister was seen by many as the sort of person who wouldn’t offer an old friend a ride in his official car lest he waste government petrol. His family, the Achilles heel of many a Third World leader, maintained a similar sense of decorum. Instead of careening around town in bullet-proof SUVs, gun-toting guards in tow, or riding dodgy business deals to overnight millions, Singh’s three daughters stayed out of the public eye. One of them is a history professor in Delhi; another is a little-known writer married to a civil servant; the third works for the American Civil Liberties Union in New York.
Eight years into Singh’s term, however, the script has gone horribly awry. The vaunted economist’s government has taken the sheen off the economy and India’s Mr. Clean sits atop a mountain of dirt that has sparked the largest nationwide anti-corruption protests in a generation.
First, the economic slowdown. For the first four years of Singh’s tenure, growth averaged 8.7 percent, enough to transform talk of India eventually catching up with China from a cruel joke into a distinct possibility. Between 2005 and 2010, India pulled 40 million people out of poverty. According to India’s Planning Commission, the poverty rate declined from 37.2 percent to 29.8 percent over the same period. But, as the University of Chicago’s Raghuram Rajan points out, the Singh government deserves little credit for this high growth or the poverty alleviation that accompanied it. For the most part, India simply rode a combination of the momentum created by previous reforms and a buoyant global economy.
To his critics, Singh’s flagship economic program — which promises 100 days of government-provided work a year for any villager who wants it — has become a byword for populist profligacy. Predictably enough, for a country ranked 95th out of 183 on Transparency International’s Corruption Perceptions Index — below authoritarian China and luckless Zambia — the program is known to be riddled with graft. It has also distorted labor markets while producing few physical assets of lasting value. Brown University political scientist Ashutosh Varshney estimates that the employment guarantee’s price tag of $6-7 billion per year costs India about as much as the home ministry — which is responsible for internal security for the entire country. Along with unsustainable fuel and fertilizer subsidies, it has pushed the federal government’s fiscal deficit to 5.6 percent this year instead of the budgeted 4.6 percent.
And Singh’s jobs program is not the only indication that India is resurrecting its statist past. Human Resource Development Minister Kapil Sibal is best known for a clumsy effort to muzzle the Internet in the name of social harmony, and a quixotic quest to build a cheap Indian tablet computer that nobody wants to buy. Jairam Ramesh, a leading pro-reform voice in the 1990s, used his stint as Singh’s environment minister (2009-2011) to stall development projects, including a proposed steel plant by the Korean firm POSCO, and a bauxite mine owned by London-based Vedanta Resources.
Meanwhile, the business newspaper Mint dubbed Pranab Mukherjee, Singh’s finance minister until his recent elevation as frontrunner for the presidency, "the worst finance minister India’s had." The popular news website First Post called Mukherjee "a relic of that long-ago time, when we had peak income tax rates of 97 percent." On his watch, prompted by howls of protest by a mercurial coalition ally, New Delhi reversed a long-awaited decision to allow foreign companies such as Wal-Mart to own a majority stake in so-called multi-brand retail stores.
Mukherjee also bludgeoned India’s reputation for rule of law by legislating a retroactive tax aimed at British telecom multinational Vodafone that effectively overturns a landmark Supreme Court decision earlier this year that went in favor of the company. (The government is trying to collect $2.2 billion in taxes it says it is owed from Vodafone’s 2007 purchase of Hutchison Whampoa’s Indian assets from a Cayman Islands subsidiary.) Regardless of one’s view of the Supreme Court verdict — seen as unfair by those who frown upon companies structuring deals in offshore tax havens — the government’s end run around the court creates an unsettling precedent for future investors. Who can be certain that the rules in India won’t suddenly be changed midstream? Last week, Singh hinted that he may review the unpopular decision.
As for corruption, though Singh’s personal decency remains largely above reproach, nobody can say the same for his government. On Singh’s watch a new "resource raj" has risen from the ashes of the license-permit raj, in which the government, not private business, decided everything from the location of a factory to how many widgets it could produce. Today, businesses dependent upon government discretion — particularly in mining, telecom, infrastructure, and real estate — have become bywords for staggering corruption. Government auditors estimate that the country may have lost as much as $40 billion in the so-called 2G scam, which involved selling telecom spectrum to favored bidders at throwaway prices. More recently, attention has shifted to government coal reserves allegedly sold to private companies for a song.
All this has led commentators to reevaluate Singh’s place in India’s history. With the benefit of hindsight, credit for India’s first burst of reforms belongs less to Singh and more to the prime minister who hired him, the dour and largely forgotten P. V. Narasimha Rao, who held the country’s top office for five years in the early 1990s. Arvind Panagariya, who wrote the definitive history of the Indian economy, calls Rao the "architect of the new India." In a nutshell, Rao believed that only reforms could lead India to prosperity. As long as he provided political cover, Singh delivered. Under Gandhi, advised by a kitchen cabinet of activists and do-gooders, once again Singh has fallen into line. For the past eight years, his government has chosen to privilege redistribution over growth.
This pattern also resolves another paradox of Singh’s public life: If he was such a great reformer, then why did he serve the stifling license-permit raj with such distinction for decades? Prior to 1991, he served as chief economic advisor, finance secretary, head of the planning commission and governor of the central bank. In the late 1980s, he did a stint as the secretary general of the South Commission, a kind of global Third World think tank founded by Tanzania’s Julius Nyerere. In short, Singh’s poor economic record as prime minister is exactly what you would expect if you had looked at his entire career rather than merely his role as finance minister at the dawn of liberalization.
For India, Singh’s hopeful tweets notwithstanding, it’s time to draw lessons from the failures of the past eight years. In terms of politics, it makes no sense to divide political and administrative power, as between Gandhi and Singh. As in other parliamentary democracies, and for most of India’s history as an independent country, the top job should go to the country’s most powerful politician. Had the populist Gandhi — reportedly unsure of her policy smarts and wishing to tamp down controversy over her Italian birth — not handed Singh the reins of government, most people wouldn’t have made the mistake of expecting reforms to begin with. They will remain implausible as long as Gandhi remains wedded to the idea that India needs welfare programs more than it needs jobs.
The moral of the story: both Indians and international investors need to become more skeptical of promises not backed by actions. Singh may have presented a reform-friendly image to the outside world based on one small slice of his past. But his government’s domestic priorities on the ground, even when freed of the compulsion of seeking communist support after re-election in 2009, remained solidly redistributionist. Of course, for Singh himself these lessons likely won’t matter. With less than two years to go in what is almost certainly his last term in office, it may be simply too late to pick up the pieces of his halo.