Global Perspective: The Hindu rate of self-deprecation

The Hindu rate of self-deprecation
Economist, 20-Apr-11

Listen to the critics and India’s economic miracle seems, well, miraculous

FOR all its success in recent years, India’s economy has disappointed its boosters in at least one way: growth has remained slower than China’s. In terms of national income per head, China overtook India only two decades ago. The gap has widened relentlessly since. Yet last year, according to the IMF’s World Economic Outlook, India’s economy grew by 10.4%, outpacing China’s, albeit by six-hundredths of a percentage point (see article). That number may not be wholly reliable. India’s government, which measures GDP in a different way, puts growth at 8.6%. But even that is spectacular compared with the lumbering “Hindu rate of growth” of not long ago, and most economists now accept the possibility that in a few years’ time India might supplant China as the world’s fastest-growing big economy.

So foreign and local businesses alike should be oozing confidence. Yet last year foreign direct investment into India fell by almost a third. This January, the year-on-year decline was 48%. And, to judge from two recent conferences, when Indian businessmen or experts get together, they do so not to praise the country’s business environment but to bury it in withering criticism.

Their observation is borne out by surveys. In the World Bank’s “Ease of Doing Business” index, India ranks 134th out of 183 countries, scoring particularly badly on ease of starting a business (165th) and, above all, enforcing contracts (182nd, behind Angola but pipped by Timor-Leste for the bottom slot). Another index, on “Entrepreneurship and Opportunity”, produced by the Legatum Institute, a think-tank, puts India 93rd out of 110 countries.

That low rank is in large measure a consequence of the expense of starting a business. And there are plenty of other obstacles in the way of both local and foreign entrepreneurs. India is still tangled up in red tape. It takes time and trouble merely to discover what permits a business needs. Rules differ across the country. In Mumbai there are, according to the World Bank, 37 procedural hoops to jump through to gain approval to build a warehouse. It takes 200 days to secure them and costs 2,718% of national income per head. In Kolkata a mere 2,549% of income and 27 permits are needed, but they take 258 days to procure.

Then there are India’s infrastructural shortcomings. For all the improvements of recent years, the road network remains dreadful, the railways overloaded, seaports clogged, airports struggling to cope with the huge increase in flights and electricity and water supplies in many places shockingly unreliable. Faced with unflattering comparisons with China, Indians used to cheer themselves up by boasting of their superior “soft infrastructure”, of accountable institutions and the rule of law. But the backlog of cases in the legal system is estimated at more than 30m.

Business as a whole is disappointed by the timidity of the government of Manmohan Singh. A Legatum Institute survey of entrepreneurs in India and China found that only 11% of Indians thought their government was doing “a very good job”, compared with 30% in China. The grand liberalisation of the Indian economy Mr Singh ushered in 20 years ago as finance minister has been replaced by creeping, incremental reform. Nobody now expects his government to tackle one big, unreformed obstacle to business: employment-destroying labour laws.

None of this, however, entirely accounts for the strange disconnect between high growth and low index rankings. After all, that Legatum Institute survey found that 83% of Indian business owners also thought the country “a good place for entrepreneurs to succeed”. Nearly half expected India to be the world’s biggest economic power in 20 years’ time, which would be a real miracle. All the gripes about the business climate seem like muttering about the weather. Everyone complains about it but no one does anything about it. And it does not seem enough to detract from India’s underlying strengths—the long-lasting benefits of the liberalisation of the 1990s; its favourable demographic profile; its successful diaspora now returning home in large numbers to invest; and its thriving businesses in those areas such as information technology where the government has got out of the way.

Two grouses, however, do seem fundamental. Businesses of all kinds complain about the difficulty of finding and retaining qualified staff. Garment-makers cannot find enough workers with even the basic literacy they need. Hotels and shops see English-speaking staff lured away by call centres. The big IT and outsourcing firms have to invest more and more in teaching graduates what they should have learnt in college. Over the next decade the Indian workforce will increase by at least 80m. That is the “demographic dividend” underpinning much economic optimism. But agriculture is fully staffed. Poor basic education and restrictive labour laws will make it hard for many to find jobs in manufacturing, and there is a limit to how many can work in services. The dividend may prove hard to cash.

Angry at last

The second grumble is corruption. Endemic for decades, it has at last become the subject of genuine rage throughout society and business (even though business, is, of course, complicit). “It’s like living in a pile of vomit,” snarls one Mumbai entrepreneur. This, however, is a little odd. Information technology may actually be reducing some forms of corruption. There are fewer meetings across tables under which envelopes can be passed. Moreover, bribes in India used to be of dubious value, since the recipient would often prove unable or unwilling to fulfil his side of the bargain. Now, the evidence of the growth figures is that corruption has become less inefficient. The mobile-telephone network, for example, despite huge scandals, has expanded tremendously. It is tempting to ask whether India has tired of corruption just as it was beginning to show some results.