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2016-06-29 08:58:10
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.