India still dawdles dangerously on reform

By John Chalmers

NEW DELHI (Reuters): In the bad old days, workers at India's biggest bakery had to get 13 signatures if they wanted to go on leave. Today, the red tape has been slashed by its new owner, the subsidiary of a foreign multinational.

A sign of the times?

Hardly. In the 10 years since India ditched four decades of socialist economic orthodoxy for the free market, the government has ceded control of only Modern Foods Ltd and Bharat Aluminum Co to the private sector.

India has come a long way since a balance-of-payments crisis forced it to liberalize the economy in the summer of 1991.

But now politicians, bureaucrats and labor unions are digging their heels in as the most painful reforms loom, and the process has almost ground to a halt.

"We need reforms because the government has no business making cement, computers and condoms -- and the government is doing all three of them," says Surjit Bhalla of Oxus Fund Management.

"Why is it not going at a faster pace? It's the people who lose from reforms, the bureaucrats and the politicians, these are the two groups which have the most at stake."

India's economy responded quickly to the shock treatment of 1991, which included a massive devaluation of the rupee, an assault on subsidies and sweeping deregulation of both the highly protected trade regime and domestic private industry.

Between fiscal 1993/1994 and 1996/1997 gross domestic product (GDP) growth averaged 6.5 percent, making India one of the fastest-growing economies in the world. Exports raced ahead with double-digit growth and inflation fell to a single-digit clip.

Pockets of wealth -- even conspicuous consumption -- emerged within a burgeoning middle class as private enterprise blossomed, and a glittering software industry sprang up from almost nothing.

All this fueled a heady perception that India was at last painting tiger stripes onto its elephantine economy.

But the scorecard is far from healthy.

According to the National Council of Applied Economic Research, almost 40 percent of India's one billion people live below the official poverty line, and even more have no power supply to their homes.

Regional economic and social disparities have widened dramatically over the past decade, with reform-minded states in the west and south of the country forging ahead of the impoverished Hindi heartland states of the north.

Random statistical comparisons with China underline the distance that India still has to go.

While India accounts for around 0.6 percent of world exports, its neighbor China has a commanding 3.5 percent, and its foreign direct investment inflows of some US$2.2 billion a year are dwarfed by China's $40 billion.

Economists say that with the population growing at two percent a year, India needs to sustain gross domestic product growth of close to 10 percent to make inroads into poverty, improve infrastructure and turn social indicators around -- and that will require a renewed push for reform.

However, the liberalization drive had slowed by the mid-1990s and pathbreaking legislation was held up as the revolving door of politics started spinning in 1996, bringing a succession of wobbly coalition governments.

Growth has stagnated at around 6.0 percent, industrial output slipped to a modest 4.9 in 2000/2001 and the fiscal deficit -- even without the huge deficits of state governments and public enterprise losses -- stood at a crippling 5.2 percent of GDP.

The infrastructure sector is, for the most part, still in ruins and the bureaucracy is still mired in bloated inefficiency.

The collection of customs and excise, the source for 70 percent of government revenues, is in such bad shape that even the head of the department was arrested this year on charges of graft and criminal conspiracy.

Finance Minister Yashwant Sinha has promised a "second generation of reform" to quicken growth since 1998.

But his ambitions have been bedeviled by vested interests. Even his greatest achievement, the opening up of the insurance sector, took years to push through parliament.

These interest groups include organized labor, which is balking at plans to make it easier for companies to lay off workers, and both politicians and bureaucrats who can win votes and make money while they still control subsidies and industry.

"Political battles ... have not been fought on economic reform," says Shankar Acharya, who until recently served as chief economic adviser in the Finance Ministry.

"It has not become the daily currency of political competition because there are lots of people who gain from a lack of economic reform."

Even Congress, the very party which weaned India off Soviet- style economic planning, snipes at reform plans from the opposition benches in parliament and there are influential Hindu nationalist groups allied to Sinha's party which have proved fierce defenders of economic "self-reliance".

The rise of regional and caste-based parties which now wield power in the federal government has also made policy-makers susceptible to their expensive spending demands.

The same parties have made a nonsense of decentralization in their home states, racking up huge debts with populist policies.

Old socialists are a dying breed in India and there has been a sea change in thinking on the role of the state and the role of markets in its economy. But there are still voices of dissent.

Arundhati Roy, the prominent Booker Prize novelist, penned a vitriolic essay last November which branded privatization "barbaric dispossession" and said the call to cut subsidies had almost become a blood sport.

"India's politicians have virtually mortgaged their country to the World Bank," she spat in her piece, which also slammed the mushrooming of call centers in India as an example of "how easily an ancient civilization can be made to abase itself completely".

It's a philosophy that still has its supporters in a country where, even after 10 years, market liberalization has not become a popular revolution.