By Jim Yardley And Vikas Bajaj
Manish Swarup/Associated Press
A powerhouse seems less powerful: Prime Minister
Manmohan Singh of and Sonia Gandhi, president of the Congress Party, face numerous challenges |
While short-term growth has slowed but not ground to a
halt, India ’s problems have dampened hopes that it, along with China and other non-Western economies, might help revive the
global economy, as happened after the 2008 financial crisis. Instead, India is
now facing a political reckoning, as the country’s elected leaders must address
difficult, politically unpopular decisions — or risk even deeper problems.
“When India was being run comparatively well in 2008, they seemed to
cope with these external shocks, at least from a financial perspective,” said
Glenn Levine, a senior economist at Moody’s Analytics in Sydney , Australia . “I think people are starting to question the long-term
Indian story. That is the difference now.”
Today, India ’s economy is still expanding, with growth projected
between 6 percent and 7 percent this year. And analysts say India ’s long-term strengths remain significant. It has one of
the world’s youngest populations, and polls consistently show they are
overwhelmingly optimistic about their future. Meanwhile, India ’s businesses are competing more aggressively on the global
stage.
But the slowdown has punctured the once bubbly mood in the
business and political classes and brought sharp criticism of the government.
Indian business leaders, foreign investors and analysts say India’s strengths
are being undermined by growing political dysfunction: the populist tendencies
of Indian politicians, a lack of action by top leaders and allegations of
corruption that have undermined the authority of policy makers.
“A quiet crisis of confidence is building up,” said Pratap
Bhanu Mehta, president of the Center for Policy Research in New Delhi . “There is no certainty over the regulatory regime. There
is no certainty over the tax regime.”
Indians have long thrived amid adversity, often by
creatively — at times, illegally — subverting onerous regulations with a
workaround ethos that has spurred economic activity. Even today, industries
like pharmaceuticals, information technology and consumer goods, which do not
need many licenses and official approvals, are prospering. But those sectors
tied to the government, including mining, construction and manufacturing, are
struggling.
“We have consciously kept away from businesses where we
would have needed lots of permissions,” said Ajay Piramal, who heads a Mumbai-based
conglomerate focused on pharmaceuticals.
At the core of the political uncertainties is the weakened
status of the Indian National Congress Party, which leads the coalition
government, known as the United Progressive Alliance. Since 2004, the government
has operated under an unorthodox partnership between Sonia Gandhi, president of
the Congress Party and the governing coalition, and Manmohan Singh, her
handpicked prime minister.
The division of duties worked during the government’s first
term. Mrs. Gandhi managed the coalition partners, rode herd on the Congress
Party, championed safety net programs for the poor and oversaw election
strategy; Mr. Singh, a quiet economist considered a father of India ’s reform era, moved India closer to the United States and oversaw a booming economy where growth topped 9
percent.
In 2009, voters returned the U.P.A. to power amid
expectations that India ,
having shrugged off the 2008 global recession, was on an
inevitably upward growth track. But analysts say the contradictions in the Singh-Gandhi
partnership have since been exposed. Mr. Singh holds the most politically
powerful job in the country, yet is seemingly reluctant to wield power and
often must seek approval on policy questions from Mrs. Gandhi. She oversees an
advisory panel largely consisting of social activists that her critics regard
as a shadow government.
The result has been a lack of a clear political agenda
emanating from the top, analysts and business leaders say, allowing the
bureaucracy to fall back into its traditional resistance to making decisions.
When officials do act, they often change course after encountering political
opposition.
“The last year was wasted,” said Sanjaya Baru, a former
spokesman for the prime minister who is now at a research institute. “We’ve had
a crisis of leadership on the economic side.”
Moreover, the government has been on the defensive since a
series of corruption scandals, dormant for several years, exploded into public
view. Attempts by technocrats to push through a so-called “second generation”
of deeper economic changes were undermined by the inability of the Congress
Party to corral its coalition partners.
In December, Mr. Singh’s cabinet announced that foreign
retailers like Walmart would be allowed for the first time to open stores in
the country with local partners. But Mr. Singh was forced to reverse course
after an ally, Mamata Banerjee, the chief minister of the state of West Bengal ,
balked and threatened to bring down the government.
Then in March, facing pressures to raise revenues and stem
the rising fiscal deficit, Pranab Mukherjee, the finance minister, released a
budget that proposed new taxes on foreign entities in India, including levies
on past deals that the Indian Supreme Court had ruled were not taxable in the
country. Foreign investors were stunned, and analysts say the outflow of
capital is one reason the rupee has tumbled 13 percent since the end of
February.
“We are fed up and our investors are not keen to even talk
about India ,” said a senior executive at an American bank in Mumbai,
asking not to be identified so he could speak bluntly. “They are sick and
tired.”
Kaushik Basu, the government’s chief economic adviser,
acknowledged that the government had made mistakes and had missed opportunities
to better position India as the global economic landscape shifts. Yet he said that
the rising pessimism was unwarranted and that India was still growing, still had high investment and savings
rates, and should take advantage of the depreciation of the rupee to push
exports. He said India ’s problems were no worse than those in other emerging
economies.
“It is a difficult stage,” Mr. Basu said in an interview.
“But I do remain very, very optimistic. Six months and we will pull up.”
In the meantime, the immediate challenges are piling up.
This month, in a move to raise revenues, the government raised gasoline prices,
drawing public fury. Now the question, analysts say, is whether the
administration can muster the political courage to trim the bigger subsidies
affecting diesel fuel and cooking gas.
Mr. Singh warned last week that the government would have
to make some unpopular decisions. Many experts, however, say they expect more
stalemate.
“It has always been tough,” said Mr. Levine, the Moody’s
economist, “but there is a sense, at the moment, that it’s too difficult. For
the time being people are just giving up on it.”