Are the Dark Forces Returning to India?
April 10, 2012
I have long believed that every graduate economics student, and indeed every economist, should be required to spend at least some time thinking about India. The development path of this large, complex, and increasingly important emerging market has challenged even the best minds in economics. Joan Robinson, the great Cambridge economist and disciple of John Maynard Keynes, once joked that “Whatever you can rightly say about India, the opposite is also true.”
Through the ups and downs of recent decades, almost all observers have acknowledged India’s great potential. A vast democracy in the rapidly growing Asian region should have a promising future. With a median age of about 25 and a total fertility rate well above the population replacement rate, it certainly has growth-friendly demographics. And, while the data are not well established to gauge business formation, many have nonetheless noted a strong entrepreneurial culture.
The challenges, however, are equally apparent. While poverty and illiteracy rates have supposedly fallen, both remain elevated. Health problems are widespread and serious. The food supply chain is essentially dysfunctional, contributing to one of the highest inflation rates in the developing world. While the country has begun to attack the much-noted infrastructure challenge, there is a long road ahead to build modern transportation and communications systems.
After the Indian financial crisis of 1991, which forced this proud nation to twice go hat in hand to the International Monetary Fund, the government accelerated the business-friendly reforms that slowly began during the 1980s. Engagement in global markets, while still weaker than most developing countries, grew dramatically. The results surpassed all expectations. Indian GDP growth rose to above 8 percent during 2003 and 2004 and was above 9 percent between 2005 and 2007. A strong dose of infrastructure investment helped India to quickly recover from the global recession of 2008 and 2009.
But the world is once again worrying about India. Economic growth has slowed sharply as of late and there are concerns about direction and about the future. A recent article in the Economist summarizes what could be a difficult turning point, attributing growing problems to “desperate politics.” Signs of incompetent governance have been in abundance. Recently, the government announced that it was opening its inefficient retail industry to foreign firms, a good move for a country that badly needs low-skilled jobs. A few days later it changed its mind. To protect industry at home, the Indian leadership banned the export of cotton, relying on an antiquated and largely discredited development theory. Within days, the government once again backtracked. The growing fiscal deficit is perhaps the most salient and consequential evidence of a leadership that has lost its way in terms of economic and development policy. Small wonder that gross fixed investment, partially driven by confidence, has been contracting.
To paraphrase John Maynard Keynes, India needs not just investment but “skilled investment” to “defeat the dark forces of time and ignorance which envelop <its> future.” If it doesn’t get the strong leadership that it desperately needs at this critical moment and is allowed to slip back to the bleak years of the 1970s and 1980s, Asian and global growth will suffer.
India is an important country. By 2025 United Nations demographers expect that it will surpass China to become the world’s most populated. For everyone’s sake it needs another dose of fundamental reform that will put it back on the path to a bright future.