India's once booming economy is sliding into a deep slump. The country grew just 4.4 per cent this summer, a far cry from the 7.7 per cent average for the past decade. Its currency, the rupee, has tumbled 16 per cent against the dollar in the last three months. And analysts expect things to get even worse in the coming months.
Like Indonesia, Brazil and other developing countries, India has been hurt as investors have moved money to the United States to take advantage of the prospect of higher interest rates. But most of India's biggest problems - like its high inflation, which was nearly 5.8 per cent in July and has been rising partly because of the falling rupee - have domestic causes. Until the coalition government led by Prime Minister Manmohan Singh reforms the country's economy, India will fall far short of its potential.
During the global financial boom of the mid-2000s, investors indiscriminately dumped cash into fast-growing countries and India's shortcomings were easily overlooked. The financial crisis forced investors to pay more attention to fundamental problems in emerging markets. Analysts and business executives say the country has become even less hospitable in recent years. In the nine years that the coalition government has been in power, several ministers have resigned in corruption scandals; large infrastructure projects have been delayed by mismanagement; the government's budget deficit has ballooned, thanks to wasteful spending like subsidies for diesel fuel; and politics have thwarted reforms in labor and education.
Singh has been an ineffectual leader without much authority. The real power is held by his political patron, Sonia Gandhi, who leads the Indian National Congress Party, which has expressed little concern for the country's ailing economy.
Sadly, most analysts expect Gandhi and Singh to make no politically difficult changes - like privatizing bloated state-owned enterprises or easing counterproductive regulations and delays on public infrastructure projects - until after national elections next year.
As the economy slows, India's poor suffer most. Many have lost jobs in hard-hit sectors like construction and manufacturing. They are also seeing their meager incomes eroded by rising food costs. One change that would help is for government to provide welfare payments directly to families instead of funneling subsidized food grains, fuel and other commodities through corrupt officials who siphon off up to 60 per cent of the benefits. In Brazil and Mexico, direct transfers to the poor have helped reduce poverty and cut down on corruption and waste.
The new governor of India's central bank, Raghuram Rajan, a respected economist, can also help by pushing through delayed reforms to make the country's financial industry more competitive by, for instance, granting licenses to new banks. But unlike the Federal Reserve, the Reserve Bank of India is subject to significant political meddling, which could limit how far he can go.
In 1991, when the country was facing a financial crisis and had to pledge its gold reserves for an emergency loan, the Indian government pushed through landmark economic reforms like freeing businesses to produce as much as they wanted without seeking government approval. The situation is not as dire today, but the country needs solutions that are just as far-reaching.
New York Times News Service