New York Times (May 7, 2012)
THE economic slowdown in India is one of the world’s biggest economic
stories, but it is commanding only a modicum of attention in the United
States.
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It may not even look like a slowdown because by developed standards,
India’s growth — estimated by the International Monetary Fund at 6.9
percent for 2012 — is still strong. But a slowdown it is: the economy
has decelerated from projected rates of more than 8 percent, and
negative momentum may bring a further decline. The government reported
year-over-year growth in the October-through-December quarter of only
6.1 percent.
What is disturbing is that much of the decline in the growth rate is
distributed unevenly, with the greatest burden falling on the poor. If
the slower rate continues or worsens, many millions of Indians, for
another generation, will fail to rise above extreme penury and want.
The problems of the euro zone are a pittance by comparison.
China commands more attention, but Scott B. Sumner, the Bentley College
economist, has pointed out it is India that is likely to end up as the
world’s largest economy by the next century. China’s population is
likely to peak relatively soon while India’s will continue to grow, so
under even modestly optimistic projections the Indian economy will be
No. 1 in terms of total size.
India also is a potential force for energizing the economies of
Bangladesh, Nepal and, perhaps someday, Pakistan and Myanmar. The
losses from a poorer India go far beyond the country’s borders;
furthermore, the wealthier India becomes, the stronger the allure of
democracy in the region.
Why is India’s economic growth slowing? The causes are varied. They
include a less than optimal attitude toward foreign business and
investment: recall the Indian government’s reversal of its previous
willingness to let Wal-Mart enter the retailing sector. The government
also has been assessing retroactive taxation on foreign businesses
years after incomes are earned and reported. Another problem is the
country’s energy infrastructure, which has not geared up to meet
industrial demand. Coal mining is dominated by an inefficient
state-owned company and there are various price controls on both coal
and natural gas. Over all, the country does not seem headed toward
further liberalization and market-oriented reforms.
These problems can be solved. More troubling are the causes that have
no easy fix.
Agriculture employs about half of India’s work force, for example, yet
the agricultural revolution that flourished in the 1970s has slowed.
Crop yields remain stubbornly low, transport and water infrastructure
is poor, and the legal system is hostile to foreign investment in basic
agriculture and to modern agribusiness. Note that the earlier general
growth bursts of Japan, South Korea and Taiwan were all preceded by
significant gains in agricultural productivity.
For all of India’s economic progress, it is hard to find comparable
stirrings in Indian agriculture today. It is estimated that half of all
Indian children under the age of 5 suffer from malnutrition.
Another worry is that India’s services-based growth spurt may have run
much of its course. Call centers, for example, have succeeded by
building their own infrastructure and they often function as
self-contained, walled minicities. It’s impressive that those
achievements have been possible, but these economically segregated
islands of higher productivity suggest that success is achieved by
separating oneself from the broader Indian economy, not by integrating
with it.
India also has one of the world’s most unwieldy legal systems, and one
that seems particularly hard to reform. On the World Bank’s Doing
Business Index, the country ranks 132 out of 183 listed countries and
regions, behind Honduras and the West Bank and Gaza, and just ahead of
Nigeria and Syria. One undercurrent of talk is that the days of “the
license Raj” have returned, referring to the country’s earlier subpar
economic performance under a regime of heavy government regulation.
ON the positive side of the ledger, the country retains a population
with remarkable talent, energy and entrepreneurship. It has worldwide
networks of trade and migration, and world-class achievements in
entertainment and design, among numerous other strengths. Nonetheless,
the previous pace of progress no longer seems guaranteed.
India may not be alone in this slowdown. There is a more general worry
that the grouping of disparate giants known as the BRIC nations —
Brazil, Russia, India and China — has, for some reason, lost much of
its previous momentum. Last year Brazil grew at only a 2.7 percent
rate, down from 7.5 percent, and Chinese and Russian G.D.P. growth are
slowing too, to an unknown extent and duration. In the past, many
countries engaged in catch-up growth have suddenly slowed and hit
plateaus, although economists do not have firmly established theories
as to when and why this happened. In any case it remains a real danger.
In the short run, we often focus on headlines, elections and fights
between personalities and political parties. But the world is shaped by
deeper structural forces, such as resources, technologies, demographics
and economic growth rates. We ignore India’s troubling trends at our
peril.
Tyler Cowen is a professor of economics at George Mason University.
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