How the technocrat economist Prime Minister Manmohan Singh left India's economy in tatters.
- By Sadanand Dhume<p> Sadanand Dhume is a resident fellow at the American Enterprise Institute. </p>
As news flashes go, Manmohan Singh’s Jan. 3 announcement that he intends to "hand over the baton to a new prime minister" was hardly earth shattering. Given his unpopularity after nearly a decade in office — Singh’s favorability rating hovers at about 5 percent — the 81-year-old already looked as likely to snag a third term as to win India a medal for skiing at the Sochi Olympics.
Nonetheless, his formal announcement — at only his third press conference since he took office in 2004 — sets the stage for an epic election showdown, most likely in April and May. Later this month, the ruling Congress Party is likely to name 43-year-old Rahul Gandhi, the fifth generation Nehru-Gandhi dynasty scion, as its candidate to replace Singh as prime minister. Gandhi’s main rival, 63-year-old Gujarat Chief Minister Narendra Modi, has been crisscrossing the nation since the opposition Bharatiya Janata Party (BJP) anointed him their candidate in September. Polls show Gandhi trailing the pro-business Hindu nationalist; in December, the BJP pulverized Congress in four important state elections. And some pundits also expect a strong showing by the year-old Aam Aadmi (Common Man) Party led by anticorruption activist Arvind Kejriwal.
Amid the battle to elect a new prime minister — who will almost certainly be more charismatic and effective than the incumbent — it sometimes seems as though Singh has already faded into retirement. But his lackluster record will frame the upcoming election.
On Jan. 3, Singh tried to put his best foot forward. He spoke of his government achieving the country’s highest growth "for any nine-year period," delivering "a New Deal for rural India" by raising incomes, and pulling 138 million people out of poverty. He touted new legislation to check corruption, and older efforts to boost government transparency. For good measure, he warned that electing Modi — on whose watch in 2002 Gujarat witnessed anti-Muslim riots that killed more than 1,000 people — would prove "disastrous" for India. (Modi denies wrongdoing, and in December a lower court upheld a Supreme Court-ordered investigation that cleared him of complicity in the riots.)
Unfortunately for Singh, many people view his legacy in less charitable terms. The Oxford-educated economist inherited a nation filled with hope and leaves it filled with doubt and despair. He entered the prime minister’s office as a widely-respected former finance minister, known for probity and quiet dignity, and will exit it as a byword for weakness and ineffectual governance.
The International Monetary Fund (IMF) estimates India’s economy grew at 3.8 percent in 2013, about a third of its all-time high of 10.6 percent in 2010. Despite his best efforts, Singh failed to produce a breakthrough in relations with neighboring Pakistan or consolidate ties with the United States. And the staggering scale of corruption under Singh will likely linger in memory longer than his reputation for personal honesty.
The scandals that stained Singh’s once spotless reputation underscore the futility of expecting a prime minister’s personal integrity to curb graft. In the 2G scam, the government lost the country as much as $40 billion by selling mobile licenses at throwaway prices to favored companies. Reports of padded contracts — $80 toilet rolls and $19,500 treadmills, and a budget bloated many times over the original estimate — tainted the 2010 Commonwealth Games in Delhi. Of what use is a leader who keeps his own hand out of the cookie jar, ask critics, if he can’t stop others from emptying it before his eyes?
Singh’s inability to assert himself highlights the importance of electing a prime minister by popular vote. In hindsight, Singh — a technocrat with no mass following, whom Italian-born Congress President Sonia Gandhi propped up to sidestep controversy over her foreign origins — always lacked the authority to lead effectively. To make matters worse, the media-shy Singh refused to seize the bully pulpit his office offered. In the age of 24/7 television news and social media, nobody can hope to run India as a recluse. As in most major democracies, a degree of accessibility to the public and the press needs to become part of the prime minister’s job description. (Both Modi and Kejriwal deliver powerful speeches and possess an instinctive understanding of television.)
For the United States, the end of the Singh era also offers an opportunity for reflection. Before India’s economy turned south sharply in 2012, conventional wisdom in Washington was to take for granted India’s rise as a peaceful, democratic, counterbalance to China. During his November 2010 visit, President Barack Obama declared, "India is not just a rising power, it has already risen." Now it appears that those words may have been spoken prematurely, especially in relation to the economy.
Indeed, an assessment of India’s first economist prime minister must focus on the economy. As the finance minister who implemented important reforms in 1991, Singh abolished industrial licensing, slashed import duties and ended government monopolies in much of the economy. As prime minister, however, instead of deepening reform Singh presided over a government that lurched to the left by plumping for redistribution over growth.
Among Singh’s first acts in office in 2004 was to scrap the Ministry of Disinvestment that had begun privatizing loss-making state-owned companies. (Taxpayers continue to subsidize staggeringly inefficient firms like Air India and Scooters India.) The flagship economic initiative of Singh’s first term — an unwieldy "employment guarantee" scheme promising 100 days of work for the rural poor — distorted labor markets, boosted corruption and helped inflate the fiscal deficit.
The technocratic Singh also showed that he could pander to voters just as nakedly as any old-fashioned populist. In 2008, a $15 billion loan waiver forgiving the debts of small farmers placed the Congress Party’s reelection above fiscal responsibility and fostering a responsible culture of credit. Along with lending by state-owned banks to politically well-connected firms, the waiver weakened the banking system. In 2013, Morgan Stanley estimated problem loans accounted for 9 percent of India’s total compared to less than 5 percent five years ago.
Less tangible, but arguably no less damaging, was the Congress Party’s popularization of the term "inclusive growth," which implies that somehow growth is not a good thing in itself. As commentator Clive Crook points out, Chinese policymakers would see this ambivalence "as a form of derangement." In India, it portended a slide back toward the old socialist habit of viewing private enterprise with mistrust.
Besides a burst of trade liberalization, India achieved precious little from Singh’s first term (2004-2009). Nonetheless, growth received a boost from a strong global economy awash with surplus cash, and the effect of a flurry of reforms in taxation, telecom, infrastructure, and aviation that Singh’s predecessor Atal Bihari Vajpayee had initiated. Meanwhile, government spending helped India emerge from the global financial crisis relatively unscathed on the surface. But the stage for the country’s dramatic slowdown had already been set.
Only after Singh’s comfortable reelection in 2009 did investors begin to lose confidence in India. They expected the prime minister, no longer dependent on support from Communist parties as in his first term, to unleash long-delayed reform in banking, insurance, and retail. Instead, India began to backslide. The Environment Ministry quickly turned into an immovable roadblock for large steel, aluminum, and real estate projects. In 2012, then Finance Minister Pranab Mukherjee amended the law to introduce retroactive taxation after the government lost a $2.2 billion tax dispute with telecom firm Vodafone. Needing to increase revenue collection to pay for expansive welfare programs, tax authorities began aggressively targeting private firms, including foreign ones such as Nokia, Cadbury, and Royal Dutch Shell. Meanwhile, heavy-handed regulations requiring a greater proportion of technology products sold domestically to be made in India angered firms such as IBM.
Unsurprisingly, GDP growth plummeted. In the first six years of Singh’s tenure, it averaged a robust 8.6 percent; in the final four, 4.6 percent, according to IMF estimates. That’s below par for a country at India’s stage of development, and not nearly fast enough to create the 15 million new jobs the country needs annually to employ a youthful population. And yet India remains one of the world’s toughest large markets in which to do business. It slipped three places to number 134 on the World Bank’s Ease of Doing Business rankings in 2014, behind such icons of market friendliness as Ukraine, Paraguay, and Ethiopia. As for corruption, which Singh claims his government has worked hard to combat, Transparency International ranks India 94 out of 177 countries worldwide, marginally worse than the 88th place it held in 2005. Nor has India’s economic slowdown forced a serious rethink. In 2013, Singh’s government passed a law promising subsidized food grains to 800 million people, and a land acquisition law that businessmen say will halt industrialization by making it exceedingly difficult to buy land for factories.
Businesses have got the message: In the first seven months of the fiscal year ending March 31, 2014, foreign direct investment declined 13 percent to $18.9 billion compared to the same period the previous year. Morgan Stanley economist Ruchir Sharma blames Singh for India’s swift metamorphosis "from breakout to breakdown nation." Singh epitomized the complacency and hubris of India, Sharma said, which mistook a buoyant global economy for evidence that it could continue to grow rapidly while focusing on redistribution rather than reform.
Singh could easily be criticized for more than just corruption scandals and mishandling the economy. In terms of foreign policy, the prime minister’s most cherished achievement, the landmark 2008 civil nuclear agreement with the United States, has stalled: Not a single new reactor has been built in India under its auspices after a tough liability law passed by India’s parliament in 2010 made projects commercially unviable. And the recent drama over the arrest and de facto expulsion of Indian diplomat Devyani Khobragade — over charges of visa fraud and making false statements about a domestic employee — was preceded by a longer period of drift between the two nations.
In judging the prime minister’s legacy, though, these are mere asides. Singh first built his global reputation as an economic reformer, and it is that record that will be scrutinized most carefully. In hindsight, Singh was not an economic visionary, but a technocrat who managed to scurry up the greasy pole of power by keeping his head down and his voice low. When he served the reformist Prime Minister P. V. Narasimha Rao (1991-96), Singh delivered reform. When he served the populist Sonia Gandhi, he pursued "inclusive" growth.
Either way, it’s not much of a legacy. Whoever is sworn in as prime minister later this year will struggle to return India to the path of high growth and rising global stature that so many Indians had begun to take for granted. And they will remain aware that the man who once kindled hope that India would be the next Asian tiger left behind the plodding elephant of old.