/ 27 September 2012

Deep economic reform is needed

Despite India's economy growing by 9% a year
Despite India's economy growing by 9% a year

Mr Luthra, the shopkeeper at my local market who sells me once-scarce Western delicacies has views on many subjects.

Oddly, the new measure brought in by the Indian government last week to allow foreign supermarket chains to sell directly to customers, rather than through retailers, is not among them. Though he is one of the millions of small businessmen who critics of the measure say are likely to lose out, Mr Luthra is unconcerned, even when told Walmart has said it hopes to open a store in India within a year to 18 months.

"I have been here 30 years. I know everybody. How can some American compete with that?" he asks.

Fly into Delhi and you'll arrive at the international airport's new terminal building, opened in 2010. It is a concrete ­­manifestation of what 20 years of sustained economic growth can produce. Since a package of reforms designed by Manmohan Singh – then India's finance minister – was implemented in the early Nineties, India has enjoyed up to 9% growth each year.

But leave the airport and within minutes you really enter India. The roads are chaotic, clogged and pitted. The new Metro link to the airport is broken. All the gaps in India's growth story are glaringly obvious. The most recent batch of Indian reforms, introduced by the same Manmohan Singh, now prime minister, is inspired by the fear that these holes will swallow the progress made if drastic action is not taken.

Close aides explain that Singh's sudden courage stems from victory in a battle within his ruling Congress party, which has long been split between those favouring economic policies that owe much to socialist-style central planning and those looking to boost private-sector growth and foreign investment and cut back state spending. But first came a change in finance minister, and then party president Sonia Gandhi was convinced by Singh that unless some money was generated, the various dole schemes she believes are essential to improving the lot of India's poor (and her party's electoral chances) could not be funded.

"It is understood now that without money there is no welfare," an aide to the prime minister says. "There are many more [reforms] to come."

This is a huge shift, but the most recent reforms, though impressive in the context, are less so in the grand scheme of things. They may bring investment and reassure the markets, but they will not tackle the fundamental bottlenecks stifling growth – runaway public expenditure and soaring inflation. For this, new legislation is needed. And even Singh's loyal aide admits this is impossible.

The result is that India, at least until the 2014 election and almost certainly beyond, will not see the deep reform needed to return to high growth. It will putter on at 6% at best – just about enough to meet the current needs of the growing population, economists here say.

Outside Singh's office, the sun is slanting across the vista towards the Gate of India. Children play, labourers sleep under trees, coup-les stroll and snacks sellers do brisk business. Like Mr Luthra, no one seems very worried about the imminent arrival of Walmart. – © Guardian News & Media 2012