Dreams died first, now reality is hitting hard. A colossal mismanagement of the Indian economy--the second-fastest growing member the world’s trillion-dollar GDP club--is now showing unmistakable evidence of being derailed. India’s economic growth will fall to 5% for the financial year that ends in March 2013, the lowest in 10 years, government projections said last week. This is below all expectations, including IMF’s. The comparable numbers stood at 9.3% in 2010-11 and 6.2% the next year. The fall, in other words, has been precipitous.
Is it time to give up on India? Well, maybe in the short run, but certainly not in the long term. Here’s why:
Politics will support recovery. The Congress-led United Progressive Alliance (UPA), the governing coalition, has just brought in a new face as its leader. Sonia Gandhi’s 42-year-old son Rahul was predictably made vice-president last month, and that could changes things—for Rahul and the country. This is the first time that the heir to India’s most famous political name has been given direct responsibility for the success of his party; previously he had been surrounded by apparatchiks who could take the fall for failures. In other words, if the economy tanks further and voters take it out on the UPA, it’s on Rahul’s head. Result: Expect huge political energy will go behind bringing the economy back.
Demographics will demand it. Rahul is focused on the young people of India, as well he should be: The country has 500 million people below the age of 25. This “young and impatient” demographic, as Rahul puts it, needs jobs and those with jobs need raises. Both are conspicuous by their absence, which is a problem for the new leader of an incumbent coalition. The only way out: creating a policy atmosphere that encourages entrepreneurs to take risk, set up businesses, and hire.
However, starting a business remains hard… At the end of the day, it is not economic figures that will attract entrepreneurs; rather, what matters is the ease with which they are able to enter India, set up businesses and profit from them. On that count, India continues to score badly--it ranks 132 out of 185 countries in ease of doing business. This won’t be fixed immediately and will remain a barrier in the near term. But if the first few steps are taken in the right direction, it would send the right signals.
…And capital is scarce. The Indian central bank is keeping interest rates high because of runaway inflation, and the government remains in an acute ‘policy freeze’ that won’t be unfamiliar to Americans facing policy gridlock in Washington. The two forces have combined to limit private investment. Public sector investment will be limited as the government has to control its fiscal deficit, which finance minister P Chidambaram hopes to bring down to 5.3% of GDP this year. Signals from New Delhi suggest that leaders recognize the need to encourage investment. What they will do about it, though, remains unclear.
Still, 5% growth is nothing to sneeze at…While India bemoans a growth rate of 5%, most advanced economies would be thrilled by it. World output will grow by 3.5% in 2013--the US will likely grow by 2.0%, Japan by 1.2%, and the Euro area will contract by 0.2%. There are only two growth economies with scale, and one of them is India. (China is the other, of course, with a projected 8.2% growth rate.)
And the potential of India’s growing middle class is still awesome. Despite all the problems, India’s consumer spending is expected to close 2013 at 59.7% of GDP. That adds up to a $1.2 trillion market. Given that India’s per capita income stands at less than $1,300, compared to $48,000 for the US or $8,400 for China, there is a lot of upside. Granted, the next couple of years may be fairly gloomy measured against India’s long-range potential. But that potential is there. Best advice: Keep your eyes focused on the next 10 years.