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The government takes a long, winding path towards reform
Jun 25th 2016 | MUMBAI | From the print edition
LAST November, two days after India s ruling party suffered a drubbing at local
polls in the state of Bihar, the government unexpectedly opened a dozen new
industries to foreign direct investment (FDI). A gushing official called it
the biggest path-breaking and the most radical changes in the FDI regime ever
undertaken .
On June 20th, two days after Raghuram Rajan, the respected governor of India s
central bank, abruptly announced that he would soon step down, the government
covered its embarrassment with another impromptu salute to FDI. The slim
package of enticements, amounting to a slight lowering of barriers in some of
the same industries, has made India the most open economy in the world for
FDI, said the office of Narendra Modi, the prime minister.
Hyperbole is not unexpected from a government keen to burnish its liberalising
credentials. But it has not lived up to its cheery slogans ( Startup India ,
We Unobstacle , Minimum Government, Maximum Governance ). Two years after
clinching a sweeping electoral mandate, and with the opposition in disarray, Mr
Modi s reform agenda should be in full swing. Instead, as with previous
governments, his ill-focused initiatives have run up against India s statist
bureaucracy.
To be fair, much of what has been done is useful. Corruption has been stemmed,
at least at ministerial level. A vital bankruptcy law has been approved. Yet
for all the evidence that Mr Modi s team is doing a better job running the
existing economic machinery, it has shown limited appetite for overhauling it.
Pessimists see Mr Rajan s departure as evidence of a further wilting of
ambition. After all, as a former chief economist of the IMF, he is an
enthusiastic advocate of structural reform. Then again, at the central bank he
has focused chiefly on bringing down inflation. Optimists hope he is being
eased out because of his habit of speaking his mind, thereby occasionally
contradicting the government line, rather than to pave the way for retrograde
policies.
Thanks to a mix of lower oil prices and prudent fiscal policies (and perhaps
also flawed statistics) the economy grew by 7.9% in the first quarter, compared
with the same period the year before, the fastest pace among big economies.
Ministers think further acceleration is possible.
That may prove difficult. India s public-sector banks, which hold 70% of the
industry s assets, are stuffed with bad loans; the central bank reckons that
some 17.7% are stressed . That Mr Rajan forced them to disclose this fact will
not have endeared him to politically connected tycoons now being badgered to
repay the banks. Bank shares rose after he said he was leaving, presumably in
the hope that his successor will go easy on them. Rating agencies fret that
they will still need recapitalising, blowing a hole in the government s
finances. In the meantime, credit to industry has all but ground to a halt.
India s overweening bureaucracy is another drag on growth. Copious red-tape and
poor infrastructure put India 130th out of 189 countries in the World Bank s
Ease of doing business rankings. Getting permits to build a warehouse in
Mumbai involves 40 steps and costs more than 25% of its value, compared with
less than 2% in rich countries. It takes 1,420 days, on average, to enforce a
contract.
A slew of liberalising reforms in 1991, when India was in far worse shape than
now, were left unfinished as the economy gradually recovered. Whereas product
markets were freed from the licence Raj , which no longer dictates how much of
what each factory can produce, inputs such as land, labour and capital are
still heavily regulated. Having once sought to prise those open, the Modi
government now encourages state governments to take the lead with their own
reforms.
One result is that there is no proper market for land: businesses that want to
set up shop are best off wooing state governments to provide some. Chief
ministers with a presidential approach (a model Mr Modi espoused in his
previous job running Gujarat) scurry around scouting for plots on behalf of the
private sector in a manner that would have seemed familiar to the central
planners of yore.
That India is pro-business but not necessarily pro-market is a frequent
refrain. The government wants to create jobs, not the environment in which
job-creation flourishes, says one investor. Special economic zones are set up
as sops, sometimes to entice single companies. Even big foreign investors are
essentially told what to do: Walmart can only open cash-and-carry stores closed
to the general public, Amazon must sell mostly other merchants goods rather
than its own, and so on.
If businesses cannot get things done themselves, even the most energetic
politician will struggle to set up enough factories to generate jobs for the
1.1m Indians joining the labour market every month. Most will end up in the
informal sector, where nearly nine in ten Indians now work. The problems
snowball from there: informal wages are just a tenth of those in the formal
sector, and tax-dodging is rampant. India has just 49m income-tax payers out of
a population of 1.2 billion.
Evidence of the mistrust of markets is abundant. Indian farmers need more
fertiliser, but imports are taboo and price controls discourage investment in
new factories. No matter: the government has leaned on Coal India and a power
utility, of all companies, to try their hand at it. If venture capitalists are
wary of funding Indian startups, the state will do it in their stead, badly. A
government fund launched five months ago for this purpose has so far made just
one investment (each requires the approval of several ministers).
Hopes that privatisation might return the commanding heights of India s
economy, nationalised in the 1960s, to private hands have dimmed. Aside from
dominating banking and insurance the government also owns an airline, hotels,
utilities, a maker of photographic film and, until last month, several
watch-making factories. Ministers run industries rather than regulate them.
This month your correspondent witnessed an audience-member at a public event
ask the telecoms minister why his (state-supplied) broadband connection was so
slow. The minister promised to look into it. It would have been better, surely,
to pass the buck to the private sector.