Why fix it?

India's economy

Aug 25th 2005 DELHI
From The Economist print edition

Just don't say it's shining

ECONOMIC growth, for the third year running, of more than 6%; a stockmarket that, until this week at least, was testing new highs and had risen by more than 50% in a year; buoyant exports, a credit boom and bulging reserves of foreign exchange. India is, once again, enjoying a burst of economic optimism. Sadly, it is also suffering a stalling of the economic reforms that laid the foundations for recent successes. Oddly enough, they were launched in 1991 under Manmohan Singh, now prime minister, as minister of finance.

The summer monsoon can still make or break India's economic forecasts. Agriculture accounts for less than a quarter of GDP. But more than 70% of Indians live in the countryside. This year's rains have so far been patchy, but overall about 5% heavier than the long-term average. This has encouraged most economists to nudge their predictions upwards, to an annual GDP growth rate of about 7%.

Already, the economic data looked rosy. In June, industrial production climbed at its fastest rate in nine years: by 11.7% compared with the same month in 2004, including an increase in manufacturing of 12.5%. The same month, exports were up by 19% on the previous year, and imports by 30%. Businesses have rarely been so confident. A survey of smaller enterprises published this week by the Confederation of Indian Industry found that 93% expected to invest more in capital expenditure in the coming year than in the one just past.

This is the sort of cyclical upturn that led India's previous government to boast “India is shining”, call an early election, and lose it. Now, as then, there are some worrying numbers, too. An “infrastructure index” produced by the government showed hardly any growth in July. Production of coal, crude oil and electricity actually declined. Shortages of electricity and bottlenecks in transport will be big constraints on India's future rate of growth.

Also alarming some economists is the government's inability to pursue any additional liberalising economic reforms. The ruling coalition, led by the Congress party, relies for its parliamentary majority on support from a group of Communist parties that oppose many reforms. This month they forced the government formally to abandon plans to sell stakes in 13 state-owned companies to strategic investors. It even had to drop its attempt to sell on the stockmarket a 10% stake in Bharat Heavy Electricals, a government-owned power-equipment maker.

Besides any other benefits privatisation may bring, the government will miss the lost revenue as it struggles to restrain its budget deficit. Budgetary concerns led many economists to decry a reform the government has pushed through—with support from across the political spectrum. This week, parliament passed a law that guarantees 100 days a year of employment on public-works projects to a member of every household in 200 of India's 600 districts, a scheme that is to be extended to all of the other districts within five years.

For its promoters, such as Sonia Gandhi, leader of the Congress party, the employment guarantee is nothing less than a visionary scheme that will drastically reduce poverty, help fix rural India's rotten infrastructure and change age-old social structures by giving power and rights to the very poor. For its critics, the scheme is yet another way of pouring unmeasured pots of good money after bad, into a bottomless pit where ghost workers dig and corrupt officials thrive. But critics and champions alike can agree that it is a vote-winner.

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