Friday, August 22, 2014
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New Hope for India

CAMBRIDGE – India’s recent general election could be the most important positive economic event of 2014. Indian voters decisively rejected the Congress party, which had governed India virtually without interruption since it gained independence from Britain in 1947. They are likely to be happy they did.

Sonia Gandhi, the head of Congress and the widow of former Prime Minister Rajiv Gandhi, has been the power behind the throne since 1998, turning Prime Minister Manmohan Singh into little more than a figurehead. Under her leadership, Congress has pursued a populist agenda that increased transfer payments and reduced India’s annual economic-growth rate to less than 4% in 2013. GDP per capita is still only about $4,000, less than half the level in China.

The newly elected prime minister, Narendra Modi, campaigned on a platform that promises to deliver to India as a whole the rapid growth in employment and income that the state of Gujarat achieved when he was its chief minister. Under Modi’s leadership, Gujarat became a business-friendly state that expanded economic activity, and attracted business investment from both Indian and overseas companies.

A remarkable feature of the recent election is that Modi’s Bharatiya Janata Party (BJP) received an absolute majority in the national parliament, an almost unprecedented achievement in India. As a result, Modi will not have to compromise with the other national or regional parties to pursue his legislative agenda.

Two key officials will help Modi manage his economic program. The new finance minister, Arun Jaitley, is an experienced political leader who served in ministerial positions in previous BJP governments. Jaitley is also known as a strategic thinker who is sympathetic to business interests. The head of the Reserve Bank of India (the central bank) will continue to be Raghuram Rajan, a distinguished economist who has already shown his desire to reduce India’s near-double-digit annual inflation rate, and to reform some of the inherited counterproductive restrictions on the country’s financial sector.

The measures needed to stimulate economic growth will take time to implement and to produce results. But anyone who wants to see whether the new government is acting to achieve faster long-term growth should examine whether progress is being made in the following ten policy areas.

Education. Although India has excellent institutions of higher education and technology, only a small share of the population can take advantage of the opportunities they offer, because primary and secondary education is so inadequate. Only 60% of the adult population can read and write at an elementary level. Teachers themselves are poorly educated, and many are so unmotivated that they do not even show up at the schools where they are supposed to work.

Infrastructure. India needs better roads and ports to enable efficient transport of products domestically and to the rest of the world. The recent expansion of private airlines and airports shows what private firms in this sector can accomplish.

Fiscal consolidation. Large budget deficits are absorbing the national savings that should be used to expand business investment, and are increasing the national debt that will have to be financed by future taxes.

Privatization. The enterprises owned by the Indian government in manufacturing and other sectors operate inefficiently and often produce losses that absorb national saving. Selling off these enterprises would contribute directly to accelerating the pace of economic growth.

Removal of subsidies. Subsidized electricity and fuel leads to wasteful overconsumption and contributes to the fiscal deficit. Though these subsidies are politically difficult to eliminate, they should be replaced by cash transfers, which can now be done efficiently in India, owing to a remarkable new system of fingerprint-based cash transfers.

Agricultural reform. In the current system, the government buys, warehouses, and distributes agricultural products. As a result, an enormous amount of goods are spoiled in storage, while production incentives are misdirected. Agricultural markets should be privatized.

Property rights and zoning. Anyone who visits Mumbai or other major Indian cities sees how zoning restrictions cause misuse of urban land and limit modernization. Ambiguous property rights, especially to agricultural land, prevent industrialization in rural areas.

Relaxing limits on foreign investment. Foreign firms are now barred from majority ownership of banks and insurance companies. Relaxing such restrictions would strengthen the financial sector and play an important role in economic growth.

Tax reform. India’s complex system of national and state sales taxes distorts domestic trade. Replacing these taxes with a national value-added tax and using revenue-sharing to the states has been long debated and should now be enacted.

Corruption. Major cases of high-level corruption have undermined economic confidence and impeded official decision-making. India is also handicapped by small-scale corruption, with bribery a common feature of all forms of business and personal transactions. The government should crack down on instances of high-level graft and use the new system of cash transfers to limit the scope of petty corruption.

The Indian stock market is up about 20% this year in anticipation of stronger growth and rising profits. Now it is up to Modi and the BJP to show that they can deliver on their campaign promises.

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  1. CommentedRamesh Kumar Nanjundaiya

    US and Obama urgently need India on its side

    Having just returned from a trip to Hong Kong and Macau and having an opportunity to speak to various (English speaking) Chinese tourists and also a couple of financial experts, I could gather that the general mindset of the Chinese today is to find new markets globally. They say they see latent potential in Latin America as the N. American economy is on a definite decline. They add that they need to protect their hard earned investment lying in the USA. The best way therefore is to expand in that region (which needs cash) and find interesting avenues for investment., which also means defense deals. This brought in a new perspective and thinking. What should Obama do to contain this expansion. Yes he might have just found a good bait. "Today US need India for economic/strategic and political reasons and this need to be done early. The timing has been just perfect – Barack Obama inviting Modi in September. Because come November, US will be heading to midterm elections. Obama knows well that Republicans will certainly retain control of the House of Representatives. But he also knows that the result of election will be important for him. If on the 36 seats in the senate, Republicans get an upper hand then this could weaken Obama. What he wants to do is the meeting with Modi in September. He and Republicans know well that today India will be a plus point for the US globally. If Obama can clinch the meeting then it means that he can ride well the next 24 months of his term. India needs energy, Obama can pitch in. Get buy in from India to support Obama on a climate change global agenda in 2015 as India is not going to be led by China in the climate change discussions. Modi being pro business, he is going to allow private sector participation in defense. This is the best time for Obama to pitch in or some juicy deals. This will certainly up his ratings, etc. On the security issue in the Indian subcontinent, Obama will do well to keep Modi on his side. This will give him brownie points. So message for Obama is, come September don’t screw up on the meeting with India. "

    Chinese financial/economic influence today on the US:
    It is well known today that the United States’ debt load has risen substantially in the last 10 years raising concerns about the country’s long-term financial health. A nation’s debt is, after all, the total of bonds that the country has issued. Given the size of the U.S. debt – $17.35 trillion as of year-end 2013 - it should come as no surprise that the largest investors in U.S. Treasuries are other governments and central banks. China, which owned an estimated $1.227 trillion in U.S. Treasuries, is the number-one investor among foreign governments, according to the December 2013 figures released by the U.S. Treasury. This amounts to over 22% of the U.S. debt held overseas and about 7.4% of the United States’ total debt load. Why is China buying Treasuries, this i to help depress the value of its currency (the yuan). A cheaper yuan makes the country's exports less expensive for foreign buyers, thereby keeping the country’s export-based economy chugging along and now with the focus on Latin America this is much needed. . Consequently, the Chinese economy would suffer as much, if not more than, that of the United States if China were to suddenly stop buying U.S. debt. It’s also important to keep in mind that since China holds such a large position in U.S. debt, the nation has a vested interest in maintaining the health of the Treasury market. Naturally, this provides ample motivation for China to avoid any action that would cause Treasury prices to plunge.
    India Situation (New BJP Government) : As a smooth transition of power took place recently in New Delhi, the political doyens of diplomatic world started contemplating regarding the fate of relationship between the US and India. Today the India-US relations that have caught the imagination of everyone, precisely because the new Prime Minister of India Narendra Modi in the past has been ostracized by the US government after the Gujarat riots of 2002. In the wake of his tremendous victory, it becomes exceedingly important to analyze and interpret the future discourse of this relationship.
    The Obama Administration has moved swiftly to restore some semblance of normalcy in its dealings with Mr. Modi post his euphoric win in India. Modi is a Gujarati businessman and he is unlikely to let past issues affect his policy decisions. The visa issue will now automatically become a non-issue because as Indian prime minister the US will have no option but to engage with him. The US has taken an important first step: President Barack Obama’s invitation to Modi to visit Washington should not be underestimated. This indicates that the US is ready to work with Modi and that it would not let the visa issue cloud bilateral relations. However, the bilateral relationship does not rely on the visa issue alone. There are many areas that can help set things on the right path. Considering the prior BJP administration had very close ties to the United States. In fact, Vajpyaee’s tenure ranks as one of the warmest times in the two nations’ history. Therefore it is more likely that, Modi, recognizing the importance of U.S. trade, security cooperation, and support for a larger Indian role on the international stage, will pick up where Vajpayee left off rather than letting his pride get in the way.
    The pro-business policies of Modi could bring about more U.S. investment in India. The priorities projected by Mode in his speeches suggest helpful movement on matters that have troubled U.S.-India economic ties in the past several years. Modi has talked about ending “tax terrorism.” The party platform promises to rationalize India’s complicated tax regimes and support the introduction of a Goods and Services Tax (GST), which would bring greater predictability to India’s business climate. Moreover, major American companies look to India as a potentially lucrative market and vice versa. Granting private firms to work out their own business and investment relationships will result in benefits for both the countries. U.S. and India should place greater importance on the areas of relationship that have made impressive progress such as Military cooperation, including joint defense exercises, and counter-terrorism efforts.
    Washington will do well for themselves if they reach out to Modi and assure him that while the past cannot be swept under, the future of U.S.-India relations can be bright if managed productively. A Narendra Modi-led government would offer business opportunities for United States-India relations in a big way. India will go ahead and maintain cordial relations with U.S. since Washington does not seek territorial gain from India unlike China and Pakistan. Also, by allying with the US, India stands to gain from a coalition that includes Japan and Australia. For the US as well, India represents a massive market (the Indian Middle Class) for its goods and services. Its middle class is more likely to buy its products than inferior quality, mass-produced Chinese goods. While these market forces will probably force the US to pay more attention to India, a Modi Government, will undoubtedly be seek to develop and enhance its ties with Washington. Most importantly the US India relationship is important not only because it is a relationship that advances the interest of the United States or India, but it is an important relationship because when the world’s largest democracies partner together, the ability to advance and bring global benefit increases by leaps and bounds. Obama cannot stop China from going full speed into Latin America, what he need urgently is a bait (to tell the Republicans) and India fits the bill very well only if he plays his cards well. Ramesh Kumar Nanjundaiya

  2. CommentedProcyon Mukherjee

    Growth for India, as Raghuram said, is a no-brainer; it is so obvious but so much more made difficult to achieve by the instruments of government action and inaction. This is going to change under Modi surely.

    The points highlighted by Martin are all great things as a ready reckoner, but what really counts is delivery, which has to move through a maze of known and unknown obstacles, which needs the patience and the grit, both are perhaps the forte of Modi.

  3. CommentedVirat Divyakirti

    You have highlighted a number of factors that are stalling India's growth. I am not sure if the order in which you have listed was intentional but the order in which they have appeared in the article has a meaning in itself. Education is indeed a basic asset that a society possesses.

    There is much talk about demographic dividend but are we going to redeem that dividend on the shoulders of semi-literate population? An article in Economist May 2013 (India's demographic challenge: wasting time) shows that Indian might have already missed the opportunity.

    Hari Naidu brings up the issue of linguistic diversity. There is a debate going on in India these days on the language issue. There is no speed available to a country that continues to drag her feet in linguistic infrastructure that was created by her colonial masters. Education is important - resolving language issue is fundamental. Further discussion at: http://bit.ly/1qGRwKO

  4. Commentedhari naidu

    Marty I couldn't agree more with you because India is a subcontinent with 1.3B population, it's really difficult to manage and implement policy across such a wide spectrum of linguistic and other diverse cultural forms of identity.

    External inputs, me thinks, are going to be central to growth and development; defense outlays have hitherto taken a huge chunk of federal budget at expense of rural development and poverty eradication; therefore the subcontinent demands a peaceful neighborhood which means Sino-Indian relations have to be put on sound footing with mutual respect for frontiers in Himalayas - to be decided - and FDI from mainland China.

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