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India Briefing: The state of the Subcontinent

Published by PranayGupte.com on 2004-12-10

The central issue in India today is that of good governance and how it will affect the country's economic prospects.

Those prospects would appear to be promising, on the surface at least. With a population of 1.2 billion people, including a growing middle class of 300 million mostly urban residents, India is rapidly becoming the world's fourth biggest consumer market -- after the United States, the European Union, and China. The annual economic growth rate is expected to be around 5 to 6 percent for the rest of this decade. This isn't a spectacular figure by any means, and India would need to accelerate the growth rate by at least two or three percentage points in order to meet the rising expectations of its mostly impoverished population.

For that to happen, India's leaders at the federal and state levels desperately need to tackle five pressing problems, all related to good governance:

1. Poverty alleviation. The cohort of those living in extreme poverty is growing. That means some 600 million Indians earn less than the equivalent of US$2 a day. The technology revolution and the development of robust securities markets have not helped this cohort one bit. Manufacturing jobs are still concentrated in and around the major urban centers of Bombay, Chennai, Delhi, Hyderabad, Bangalore, Kolkata and Ahmedabad. That's partly because these cities offer educated workers who are willing to toil for relatively low wages. Even among the educated, there's an estimated 200 million population of unemployed. There is little coordination between federal and state governments on the question of poverty alleviation, let alone something as useful as a national job-creation scheme.
2. Infrastructure development. Vast areas of India's hinterland have no paved roads, fitful electricity, and little access to potable water. Little wonder that entrepreneurs are unwilling to set up production facilities away from the urban centers. India's national leaders have been only occasionally successful in persuading foreign investors to channels funds into infrastructure strengthening. The current foreign direct investment figure (FDI) is less than US$3 billion annually -- compared to US$53 billion for neighboring China. There needs to be a stepped-up focus on wooing funds for hydroelectric projects, road-building, and telecommunications.
3. Irrigation and water supply. Some 57 years after independence from the British, India still depends heavily on good monsoons to generate adequate agricultural yields. There is no national grid of irrigation canals that could feed areas whose soil is hospital to year-round crops. Here again, unresolved disputes between states over the sharing of river waters need to be dealt with forthrightly by state and national leaders.
4. Primary education and health care. While India's much-publicized technical institutions -- such as the seven Indian Institutes of Technology -- turn out stellar graduates who then promptly head for lucrative overseas jobs, primary-school education in much of the country is sadly under funded. There simply aren't enough teachers in rural areas especially, and not enough schools. Because education is a state responsibility, India's 29 states need to have their local leaders pay more attention to the issue.
5. Corruption. This is the biggest issue of all, as far as governance is concerned. The Indian polity is deeply infected with corruption. It starts at the top of the political pyramid, with federal and state cabinet officials widely reputed for demanding -- through their proxies -- payments for approving projects. Government bureaucrats have been known to make their own demands, particularly of industrialists who wish to expand their facilities or to start new factories. While the old "license Raj" is being slowly dismantled, it's being replaced by the "inspector Raj" -- where five or six inspectors from various ministries can arbitrarily shut down production at plants. Often, there's very little that plant managers can do other than cough up cash. The political parties -- without exception -- demand, and receive, funding for campaigns from India's dozen or so big industrial houses. Even the Indian judiciary, supposedly independent, is gradually being tainted by credible accusations of corruptions. In states such as Uttar Pradesh -- India's biggest, with a population of 180 million -- and Bihar, it's not uncommon for court decisions to be bought. Transparency International, the Berlin-based watchdog, has just named India has being one of the world's five countries with the most corrupt political parties.

Will India's leaders take bold steps to address the above problems? It's unlikely in the foreseeable future.

That's because, at the federal level, the administration is run by a government that's a coalition of 14 parties. It's led by the Indian National Congress, whose president is Sonia Gandhi, the Italian-born widow of the late Prime Minister Rajiv Gandhi and the daughter-in-law of the late Prime Minister Indira Gandhi. Both Indira and Rajiv were assassinated, and Sonia Gandhi is determined that the Nehru-Gandhi dynasty should continue. (The founder of the political dynasty was Jawaharlal Nehru, India's first prime minister, and Indira Gandhi's father.) Sonia's 34-year-old son, Rahul Gandhi, has been designated as the heir-apparent. Like his mother, he sits in the Lok Sabha, the 450-member Lower House of Parliament. He has been entrusted with regaining Uttar Pradesh state for the Congress Party from a quasi-socialist party that currently controls that state's legislature.

It is Sonia Gandhi who is India's real ruler. Prime Minister Manmohan Singh, an economist and technocrat who was among those responsible for initiating economic liberalization programs when he was finance minister in an earlier government (that of Prime Minister P. V. Narasimha Rao in the early 1990s), governs but doesn't rule. No Cabinet decisions are taken unless Sonia approves them.

Dr. Singh is a mild-mannered man who takes his marching orders almost daily from Sonia Gandhi. Members of the 29-person cabinet often go directly to Sonia Gandhi for directions and directives.

Moreover, although the ruling coalition is led by the Congress Party, its survival depends on the support of the 70 or so Communists in Parliament. They constitute the biggest obstacle to further economic liberalization. For example, the Leftists have consistently opposed involvement of foreign investors in telecommunications, modernizing India's antiquated airports, and privatizing the moribund state-owned carriers, Air India and Indian Airlines. They have also opposed reforming labor laws -- which means that the bloated bureaucracy, estimated at more than 10 million nationally -- cannot be trimmed meaningfully. Nor can workers at government industrial behemoths such as loss-making steel plants, be laid off.

In other words, the Singh Administration cannot take bold measures to open up India's economy to foreign capital or even to dramatically eliminate the statist system of controls and inspections. It will take a majority government at the federal level for this to happen.

That is why many analysts predict that Sonia Gandhi will call for early elections in late 2005 or early 2006. Her efforts to revive the Congress Party at the long-neglected grassroots have intensified in recent months. Her purpose is clear: to ensure that in the next national elections, the Congress will emerge as the majority party.

If that happens, India can be expected to move more speedily along the path of economic reforms. It can be expected to be in a stronger position to persuade foreign investors to channel more money into manufacturing and infrastructure projects; these investors are sitting on the sidelines because of continuing uncertainties over the direction and implementation of market-oriented policies.

Meanwhile, several state governments where majority parties are in power --such as the industrial state of Maharashtra, where the Congress recently won handsomely in local elections -- are conducting their own campaigns to win the confidence -- and cash -- of foreign investors. States such as Andhra Pradesh, Tamil Nadu, even West Bengal (where a Marxist government has long been in power) frequently dispatch trade missions overseas, particularly to Europe, the United States, and Southeast Asia. They have met with significant success. Cities like Hyderabad in Andhra Pradesh, and Bangalore in Karnataka, have emerged as formidable techno-hubs, with investments by global giants such as Microsoft.

Some of these investors, including Temasek of Singapore, have recognized the economic potential of India. Malaysian companies have won bids to develop roads and mini-dams in the resource-rich but economically backward eastern states of India. The Singh Administration wants to develop closer economic and political relations with Asean, and with China and Japan in the hope that pacts such as the Comprehensive Economic Cooperation Agreement with Singapore, and the Foreign Trade Agreement with Thailand, will generate not just more trade but also fetch investments for strengthening India's languishing infrastructure.

Still, what continues to worry foreign investors is the cost of doing business in India. Translation: corruption needs to be factored into practically every business transaction.

That's where the question of good governance and transparency in policy-making comes into play. It's a scarcely encouraging signal to potential investors that practically every file on practically every economic project is run past Sonia Gandhi by the relevant minister. In this scenario, Prime Minister Manmohan Singh seems almost a caricature, a courteous but cartoon-like figure who means well but who must take orders from a foreign-born naturalized citizen whose driving ambition is to gain political hegemony for her party and have her son become India's next prime minister.

That ambition may well provide India with the political stability it needs at the federal level in the long run. In the short run, however, it stymies prospects for faster economic growth because Sonia Gandhi's focus is almost entirely on the political calculus. And faster economic growth -- through the mobilization of domestic and foreign funds -- is what India needs now. After all, India's population continues to increase by 18 million each year: a new Australia is being added annually. That's 18 million more mouths to feed and house and clothe and educate beyond the tens of millions already mired in degrading poverty.

It would be nice to think that India's elected leaders -- most of whom hail from rural areas because of the skewed demography -- recognize this challenge. It would also be nice to think that India is developing a new generation of political leaders in a land where 75 percent of the population is below 35 years of age.

But the educated young don't want to go into politics; it's considered too dirty a game. It is, however, still the fastest way to make a quick rupee in India.

So where's the good governance going to come from?

Prognosis: India will muddle along economically, at times in spurts. But it will not be able to catch up with China for at least another generation or two. Its leaders may talk as much as they want about becoming an economic superpower within a decade. That would require increasing India's GDP from the current US$675 billion to at least US$3 trillion. It's hard to see that happening.

Pranay Gupte,
Senior Writer and Global-Affairs Columnist


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