India’s economic opportunity

The rest of the world is still struggling to escape recession but India is on a roll.  With 2015 GDP growth approaching 7.3 percent in the final quarter of 2015 over the previous year, the Indian economy was the world’s fastest growing. This is the highest in five years. In China, where there is always a nagging doubt over the figures, Beijing’s report of 6.9 percent growth last year despite a rapid slowdown is being taken with a pinch of salt. However, it may just be that domestic consumer spending is making up for a precipitate fall in exports. But for India, it seems all good news. A big boost has come from the oil price drop, because India imports significant quantities of oil to bolster the still sluggish growth in its domestic production.  But as with so much economic analysis, there are downsides. India’s exports have been slowing. Its service industries are undergoing challenges, particularly in the outsourcing sector where 20 years ago the country established such a commanding global presence. Now Indian outsources are being challenged by lower cost rivals in the developing world. More worrying perhaps is evidence of a pushback by major international corporations, who are reconsidering passing so much of their back offices to outsourcing contractors. Then there is the pace of structural reform. Narendra Modi won power in 2014 very much on his reputation as the successful entrepreneurial chief minister of Gujarat state. He pledged himself to reform and modernize Indian infrastructure and slash stifling bureaucracy. He also promised to encourage foreign investment. With the internationally-respected economist Raghuram Rajan as governor of the Reserve Bank of India, the central bank, there also seemed a good chance of long-overdue reforms to the banking sector and tighter control of the country’s finances. Much was expected of Modi after he took power. But the best that can be said of his reforms is that they are still very much a work in progress. One of his aides predicted shortly after Modi’s victory that breaking the bureaucratic hold on some of the most basic procedures, such as permission for industrial investments, would be as difficult as pushing water uphill. And so, unfortunately, it has often proved.  India has long been addicted to rules and regulations, which have multiplied and become ever more complex, purely it appears, for their own sake. The regulatory and governmental systems that need reform are also protected by the feeling that affairs have always been conducted in such and such a manner, and it would be risky to change the time-honored procedures. It is significant that very few senior officials, in, for instance, the state-controlled part of the oil and gas sector are prepared to make any public pronouncements suggesting ways in which the performance of their enterprises could be improved. Lack of official initiative and reluctance to embrace change remain huge obstacles in the way of Modi’s reform program. And while the government’s economic figures look good, surveys of business confidence are markedly less enthusiastic. Stultifying bureaucracy has not only scared off foreign investors with billion dollar industrial plans, it has also caused Indian entrepreneurs to look abroad to make their biggest investments. India’s potential remains immense. But unless Modi can imbue the country’s civil service with his modernization vision, the clear danger is that the immense potential for growth will remain just that - potential.