India: The mess of democracy
By Swati Lodh

NEW DELHI - People in general and Indians in particular will celebrate the passing of 2011, a year that claimed the lives of way too many people - people who shaped our world, our thoughts, our outlook. The latest stalwart to leave us poorer in our lives is Mario de Miranda, the cartoonist par excellence. With utter ease Mario was able to bring a smile to our faces whenever we had an opportunity to bump into his caricatures.

As things stand now, the world needs many more Marios to give us momentary relief from the charades played out by politicians masquerading as policymakers. While this is a global phenomenon as countries and regions are being held to ransom by self-centered politicians, we Indians have been reminded of the perils of democracy, no less.

With the ruling government mired in controversy and several

 
cases of corruption hanging against them, the opposition is baying for blood, sensing that the government is on the back foot. With some important state assembly elections scheduled for next year, every decision is being weighed with the potential political fallout. As a result, parliament has become dysfunctional.

India is into the third decade since economic liberalization was ushered in during the early 1990s, when the country faced a crisis. It has benefited from the advantages provided by several low-hanging fruits of liberalization that were available then.


Cartoon by Mario de Miranda (The Illustrated Weekly of India)

The rate of growth became a forgotten chapter as India's average growth rate was upped from 4% to 6% and even more. The Indian economy, for some years, grew at even 9% plus and threatened to touch the double-digit mark. In fact, India was thought of as having tremendous growth potential and some even went to the extent of declaring that the new century would belong to India. Such comments might not have been out of place, but in the case of India, they forgot the biggest stumbling block - politicians of all hues.

Consider India's agriculture sector. While this now barely makes a double-digit contribution to gross domestic product (GDP), officially about 60% of the population (in reality about 70%) depends on this sector for their livelihood. Years of neglect meant that investment in this sector is falling, as are yields.

Lack of inadequate infrastructure leads to nearly 50 million tonnes of foodgrain being wasted every year. Loss of perishable products is often estimated at around 35% of the produce. Food inflation is spiraling out of control. Yet, the real beneficiaries of the rising food prices are not the poor farmers. Apart from a few farmers who are rich and well-connected, the real beneficiaries are the middlemen with a vice-like grip on the people who till the soil, sow the seed and depend on getting the produce to market.

Yet the plan to introduce FDI into India's retail sector has been scuppered, as suddenly everybody fears that foreign competition will make mom-and-pop retailers go out of business.

However, in the Indian context, we already have a few well-established domestic retail giants. The question is - what more harm would a foreign retailer do that has not been done by Indian retailers? If anything, it would have taken the leech-like middlemen out of the system.

A political party that was a proponent of this policy in its heyday is now opposing this tooth and nail. A political leader was heard saying that investment in Indian agriculture infrastructure is not rocket science and hence foreign investment is not required. But what precisely has India done over the past 64 years of freedom that inspires confidence that this basic requirement will be taken care off now?

One would do well to remember, the initial process of liberalization was punctuated with several doomsday theories that were aimed at derailing the process. The wave of computerization in India also brought to the fore several such theorists. All to be proven false. Now the alarmists are at work again, aiming to destabilize the growth process.

On the same day that they decided to prevent retail FDI becoming a reality, a parliamentary standing committee struck down a suggestion to increase the cap of FDI in insurance from 26% to 51%. Interestingly, the committee was headed by a former finance minister who himself was a proponent of opening up of the insurance sector.

The committee cited recent issues in the world economy, particularly in the insurance sector, to oppose the government's suggestion. Clearly, India is getting a reputation as a country fond of endless debates and discussion but generally refusing to take action, of having a mentality of kicking the can down the road - something that has now become all pervasive.

Even more glaring is the apparent decision of the same parliamentary standing committee to withdraw the National Identification Authority of India Bill 2010. While the reasons are not clearly spelled out, I for one am not surprised. This project has faced several roadblocks and, I am sure, there will continue to be efforts to scuttle this because it has the potential to change the way the government's delivery mechanism works.

India's various social sector expenditures are fraught with mindboggling levels of corruption. Given the amount of leakage and the fact that the beneficiaries of such practices cut across party lines, it is not a surprise the UID (Unique Identification) scheme will face roadblocks from the high and mighty of Indian politics.

So, where does that leave India? In a mess, I am afraid. The sentiment of foreign investors is clearly going to be adversely impacted. The inability of the government to carry out reforms brings to question the stability of India's policy.

With foreign institutional investors deserting India, the country is in dire need to attract as much FDI as possible to finance the high and rising current account deficit. The situation is even more dire, as India's fiscal deficit is likely to overshoot the target of 4.6% (set during the recent budget) by at least a percentage point, if not more. The problem is further exacerbated by the substantial deterioration of the rupee.

NEER - nominal effective exchange rate

Source: RBI

With India's growth slowing down sharply (see graph below), RBI will not be in a position to raise interest rates to attract foreign exchange. Neither can it intervene in the market to alter the direction of the currency movement. The only option to stem the flow was to have been able to attract FDI.


Source: RBI

Ergo, with the growth rate falling off, inflation remaining stubbornly high (though expected to come off soon, mostly due to base effect), the fiscal deficit moving north with gusto, and with a depreciated currency (expected to depreciate even further), the year 2012 will turn out to be very challenging for India.

Swati Lodh is an economist and freelance writer.

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