Economia De India

India’s economy

Losing its magic

Politics is preventing India from fulfilling its vast economic potential

Mar 24th 2012 | from the print edition

INDIA is a land of large numbers: a place of over a billion people, a million mutinies and a thousand different tongues. But it is not too much of a stretch to say that since independence in 1947 there have only been two kinds of Indian economy.

The first produced slothful growth, mind-bending red tape and suffocating bureaucracy. The second revved up gradually after liberalisation in the 1990s, so that by the mid-2000s India was a land of surging optimism—open and full of entrepreneurs who overcame a retreating but still cranky public sector. The country seemed destined to enjoy a long spurt of turbocharged growth, thanks to its favourable demography, fired-up firms, gradual reforms and willingness to save and invest.

But lately, like a Bollywood villain who just refuses to die, the old India has made a terrifying reappearance (see article). The main reason is the country’s desperate politics.

Back to the rickshaw rate of growth

India’s acceleration in trend growth, from an average of about 6% in the late 1980s to as much as 10% (and, some hoped, beyond), may sound modest. But extrapolated over several decades it promised to transform the country and Asia. Hundreds of millions of Indians would escape poverty faster. Firms the world over licked their chops at the prospect of a vast new middle class. Strategists in the Pentagon began to see India as a superpower-in-waiting and a democratic counterweight to China.

No one doubts that India’s economy will keep getting bigger. But the angle of its economic trajectory has dropped. Growth slowed to 6.1% in the past quarter. Even if, as the government hopes, it bounces back, plenty of people worry that trend growth is now unlikely to be much above 7%.

Three recent episodes illustrate the muddle at the top. First, the government announced that it was at last opening its inefficient retail industry to foreign firms—only to change its mind within days. This month, to protect industry at home, it banned the export of cotton, upsetting India’s farmers and trading partners; within days, it backtracked. And last week the government moved to overrule the Supreme Court and change the tax code to tax foreign takeovers retroactively, not least Vodafone’s purchase of its Indian arm. Some worry that the rule of law, one of India’s great strengths, is being eroded.

No wonder business is in a sulk and investment is falling. Red tape and corruption, always present, seem to have got worse—in recent state elections so many banknotes were doled out that they help explain a liquidity problem in the banking system. Longstanding bottlenecks have not been tackled. Partly as a result, inflation is high and stubborn.

Every one of these problems involves the state, still huge and crazy after all these years. Few ever thought it could be reformed easily. But the hope was that a wily private sector would allow India to sprint to prosperity regardless. That view now looks romantic. It is not just a matter of a lack of the public services, from roads to power, that any economy needs, particularly

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