Economy: Unfinished journey

Stalled reforms, slower growth, and a crop of aged, dithering politicians all bode ill for India's fortunes.

The Indians travelling on board, who are well- off enough for a long-distance train fare but  not rich enough to fly, are full of hope. They cheerfully point to signs of rising fortunes in the passing landscape: concrete houses in remote corners of West Bengal have new iron roofs and trail electricity wires; mobile-phone towers sprout near the rail track and give uninterrupted coverage; every other home seems to sport a dazzlingly garish mural that advertises lessons in English or computer use to legions of the aspirational.
On board, too, there is plenty of evidence of a rising middle class: college students who crowd around laptops to watch screechy Bollywood films; invalids paying to ride from northern Assam for treatment at a good hospital far south in Tamil Nadu; a soldier on leave texting eager messages home to Kerala on a new phone; an entrepreneur from Manipur who predicts his business running the train's kitchen will flourish, and India with it.
Long may their hopes be met. For many Indians, a decade-long boom has brought obvious gains. Some are physical: a study in the National Medical Journal of India last year, looking at children among India's wealthier population, found that at the age of 18 boys are 4.5cm taller and 4kg heavier than they were in 1992, when economic reforms had just got going. That seems to be down to better food and less disease.
The good that's been done: Poorer Indians are apparently doing better too. An official study published on March 19th assesses the desperately needy, defined as rural-dwellers who earn a pitifully low 22 rupees ($0.44) or less each day (29 rupees for those in cities). Their number fell by 52m over five years, from 407m in 2004 to 355m in 2009; that's a number lifted out of poverty equivalent to the entire population of South Africa (though still a fraction of China's achievement). Critics are right to say that for almost a third of the population to remain in such penury is a terrible thing, and to note that if the measure of poverty is raised to $1.25 day, the total swells by tens of millions. But on that measure, too, there have been gains.
Figures just released from last year's census give further cause for hope. The country's 247m households, two-thirds of them rural, have seen literacy rates rise to 74% from 65% in 2001; 63% now have phones, up from just 9%; nearly 60% have a bank account; 93% of those in towns and cities have at least some access to electricity, two-thirds cook on gas, and so on.
But for such progress to continue, and for India to achieve its ambition to become a great power, two things are necessary: a government that keeps its finances in order and consistently fast economic growth. Worryingly, both of these are now in serious doubt.
The ruling Congress party recently suffered in state elections. Its fortunes were mixed in four smaller states, losing in Goa and Punjab, but winning in Manipur and Uttarakhand. But in the most important of all, Uttar Pradesh (UP), which has a population of 200m, the size of Brazil, Congress came an ignominious fourth. Its haul of only 28 seats, out of 403 contested, was a particular defeat for Rahul Gandhi, the Congress scion who had campaigned hard there. Long touted as Congress's next leader, he risks becoming India's answer to Britain's Prince Charles: stuck in a dynastic holding pattern behind his powerful mother, Sonia.
The result in UP leaves Congress worried about its prospects in the national elections due in 2014—and many of its leaders desperate to buy popularity. It is supplementing an existing “right to work” scheme concentrated on rural areas with a new “right to food” scheme aimed especially at helping the two-fifths of infants still stunted by hunger.
The good that is left undone: Next may come the roll-out of direct cash transfers into the bank accounts of welfare recipients. This will be made a lot easier by a “unique identity” biometric scheme which aims to enroll 200m Indians by the end of the year. It looks like a more efficient way to get benefits to the needy, bypassing crooked officials; that is welcome. But giving politicians an easy way to funnel cash to voters could also be an invitation for the welfare bill to surge.
Welfare is not the only area where spending is climbing beyond the country's means. The military budget rose by more than 10% last year and is budgeted for a rise of 17% this year (see article). There is a $1 trillion plan for new infrastructure in the next five years, and much more besides.
But the growth to pay for all this is faltering. Over the five years to 2008, the economy raced forward by an average of 9% a year. By contrast the year just ending looks likely to notch up between 6% and 7%. Global difficulties, especially high oil prices, play a part. But the main causes are disappointing industrial investment, high inflation and interest rates, excessive public borrowing that crowds out the private sector and investors who have lost their faith that India's politicians can bring about economic reform. The fall in investment is especially stark (see chart).
Growth above 6% may not sound bad, but for big, poor India losing momentum is costly. Less investment now reduces the capacity to grow later. A lower growth trajectory means many millions stuck in poverty for years longer than otherwise. Though the census figures showed much progress, they also revealed how far India still has to go. Half of all Indians have no choice but to defecate in the open. Two-thirds still cook on open fires.
And even when it was at its raciest, India's economy struggled to create jobs. Low-paying casual jobs are all that are available for four-fifths of urban workers—a level hardly changed in years. A slowdown could easily reverse the gains that have been made.
Slower growth could be grim in the short term, too: if Indian farmers suffer a bad monsoon this year, expansion may dip under 6%. At that level the heavily indebted Indian government will struggle to pay its way, hard put to draw enough foreign funds to cover the 3.6% current-account deficit.
India's rulers predict that growth should recover to 7.5% or so next year. But some at least appear to understand the brooding risks that will persist even if that figure is met. In his budget on March 16th the finance minister, Pranab Mukherjee, offered a decent diagnosis of what is wrong. He fretted over wasteful and costly government spending (earlier he had said that soaring subsidies for fuel and fertilisers keep him awake at night), weaker industry and the lack of private, notably foreign, investment in recent years.
Speaking in his office on March 20th, he was more explicit. As he talks up the “resilience” of domestic demand he is preoccupied with getting the central fiscal deficit down to 5.1% of GDP. The government currently puts the deficit at 5.9%; include state deficits and off-balance-sheet items and you get a yet more daunting 8.5%, according to Chetan Ahya of Morgan Stanley (see chart 2).
The key to reducing the deficit is slashing a subsidy bill that gobbles 2.4% of GDP. Mr Mukherjee rules out any cuts in food subsidies as morally (not to mention politically) impossible, “but in other areas, including the oil sector, we have to reduce.”
Yet that, too, looks unlikely. The clearest way to save funds would be to end a subsidy on diesel fuel used for both transport and generators. In 2010 Congress said it wanted to do this. According to Morgan Stanley, overall fuel subsidies cost 0.8% of India's GDP over the past financial year. But Mr Mukherjee's budget failed to give any details on how cuts would be applied. In any case, the government struggled to impose its will. On March 20th it barely defeated a budget amendment that would in effect have been a no-confidence vote.
Mr Mukherjee's inability to cut spending undermines his hopes of persuading sceptics that India can “come back to the path of fiscal consolidation”. It reinforces the fears of many—including, it seems, the country's central bank— that India's period of fast growth is over. In the years running up to the economic crisis in the West, India had comparatively tight public finances, high and rising investment and a steady drip of reforms. Today the central bank all but admits that none of those conditions applies. Inflation has risen and remains high; the bank is loth to cut interest rates sharply until the government borrows less. So high interest rates will continue to squeeze industry, and growth will continue to be slow.
Mr Mukherjee talks bravely, but not convincingly, of fostering a cross-party consensus: “if a mandate is fractured you must carry other parties with you”. They must be persuaded of the benefits of reform, he warns, because otherwise slower growth and rotten public finances could provoke “long-term suffering…like what is happening in the euro zone and many countries.”
Leaders needed: Mr Mukherjee is not alone in feeling this way. The prime minister, Manmohan Singh, told parliament on March 19th that India could still get back to happy days of 9% growth, but only if “we can agree on a number of difficult decisions”. By that he means rolling out a goods and services tax, cutting subsidies, easing conditions for investors and more.
Yet the appetite for such reforms is meagre at best. India's politicians are keen on sharing out the benefits of growth, but scared of putting in place policies that would allow that growth to continue. Getting any economic reform or legislation passed has been beyond the wit of Congress since its re-election in 2009, when it managed to increase its number of seats but still fell short of getting a majority. Instead, in the years since, corruption scandals such as the one that blew up this week over coal allocations and a nastily divisive political climate have distracted everyone.
Deferential Mr Singh, who might once have been expected to spearhead any reform efforts, turns 80 this year. His authority, already limited, is waning further. He is so soft-spoken that a common joke at meetings is to ask for mobile phones to be put on “Manmohan Singh mode”—which is to say, rendered inaudible. Populist rivals increasingly push him around.
On March 18th his reformist minister for railways, Dinesh Trivedi, was forced to resign by a junior coalition ally. The minister's sin: raising passenger fares on India's vast railways for the first time in nine years. For a passenger riding 2nd class on the Vivek Express for the length of the country the rise would have added 212 rupees ($4) to the current fare of 673 rupees. Even the unions agreed to this, and Mr Singh praised the fare rise as “forward looking”. But he feebly acquiesced as Mr Trivedi was hounded out.
Nor does the 76-year-old Mr Mukherjee, though sprightly, make a convincing leader. India's stockmarkets slid in the days after his budget speech. Investors who were supposed to be cheered by talk of getting private capital back to India were instead puzzled by a plan for retrospectively levying tax on big firms. That seems aimed at Vodafone, a telecoms company. The Supreme Court recently rejected a tax case against the company.
But at least the finance minister talks of balancing books and reforms. Few others among India's increasingly gerontocratic political class bother even to try. Congress is divided. The cabinet surprisingly agreed, late in 2011, to let foreigners like Walmart and Tesco invest in Indian retailing—an opening-up that carried a lot of symbolic freight. Yet 71-year-old A.K. Antony (a leading Congress figure who sits in the cabinet as defence minister) let it be known he had in fact opposed it, and Sonia Gandhi, Congress's chief, gave only tepid, tardy support; her son Rahul was yet more timid. The decision has now been put on hold.
That was a victory for Congress's main coalition ally, the Trinamool Congress. The party's tough and ambitious leader, Mamata Banerjee, braved beatings and attempted murder by political rivals in West Bengal during her rise to political power. She has been chief minister of that state for nearly a year, and makes a sport of blocking any reforms she considers bad for the poor. “She is very clear, she does not want to tax the people,” says Mr Mukherjee.
In December she had Mr Singh “freeze” the decision on foreign investment in retail. Earlier she threatened to quit over rising petrol prices (though she backed down). It was she who elbowed Mr Trivedi—a member of her own party—out of the railways ministry. In the past few months alone she has also blocked a water-sharing deal with Bangladesh; Delhi's efforts to oversee anti-terrorism work; and a government anti-corruption bill.
If not now, when?: With Ms Banerjee as an ally, Congress looks stymied. Known familiarly as Didi, she is clearly campaigning for the next poll, when she may decide to dump Congress. The main opposition Bharatiya Janata Party (BJP) occasionally stirs things up by suggesting that national polls could somehow be triggered early.
Whether or not that happens, important elections are looming. They always are, in India. Coming next, in late March, is a partial election for the upper house of parliament, the Rajya Sabha, where Congress is weak. After that, probably in July, is a vote among state and national assemblymen to elect a new president. Congress is anxious to get another compliant figure into the head of state's post. The haggling expected in these elections is likely to prove as contentious—and distracting—as any popular, public poll.
While the politicians are in election mode there is almost no chance of any consensus for reform. Nor would elections that turfed Congress out necessarily change things for the better. If the BJP were a more compelling alternative to the current government, more voters (and politicians) might be inclined to welcome an early election. But the BJP, too, is divided, and would be hard put to return to a liberal, coherent set of policies directed at growth. Once a liberalising champion, the party has taken against letting foreigners into Indian retailing, reversing a 2004 manifesto pledge in order to court urban traders afraid of Walmart. A leading BJP figure explained late last year that as a “nation first” party, “we don't succumb to the pressures of the West” in such matters.
BJP leaders of some individual states, such as Narendra Modi in Gujarat could make a credible pitch as business-minded economic reformers. Relatively young, with decent economic records in their states, they could stand as “pro-development” candidates if India's economy slows more. An opinion poll in January suggested Mr Modi, with 24%, is the country's most popular candidate to be prime minister. But he is also divisive, even within the BJP, and risks putting off Muslim and moderate Hindu voters furious over his handling of anti-Muslim pogroms in Gujarat ten years ago, when police failed to stop the murder of over 1,000 people. Divisions on both sides leave little chance for Mr Mukherjee to build cross-party agreement. And what chance there may be is dwindling; if politicians are unlikely to back reforms now, they will become ever more so as a general election comes closer. For reform to happen, someone needs to persuade the hope-filled voters on the Vivek Express that surging economic growth is not something India enjoys by right. It is something which depends on policies that encourage investment. Getting such a message across requires energetic, active leaders, plus politicians who are ready to compromise. Given the state of the parties, and elections that always seem to be looming, that seems too much to hope for.