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Has India Peaked? (Part 3)

18/08/2015


Has India Peaked? (Part 3)

Has India peaked? This may seem like a strange question given the strong economic growth the country has experienced since it liberalized its economy in 1991. Together with China, India is widely regarded as the greatest global economic success story of the past quarter century, with growth rates typically ranging between 5 and 10 percent.1 Although its growth rate has declined recently to less than 5 percent due in part to the global economic downturn, the landslide victory of the strongly pro-business BJP (for Bharatiya Janata Party, or Indian People’s Party) in the spring 2014 elections has convinced many that it will begin trending up again in the near future.


Now, thanks to the 2014 Lok Sabha elections, all this has changed. The BJP emerged from the election with an absolute majority, capturing 282 out of the 543 seats on offer. The defeated Congress party, on the other hand, only managed to win 44 seats, by far its lowest total ever. Although the BJP had been expected to win, no one foresaw the magnitude of the victory, which at least for now appears to have reversed the long-running fragmentation of Indian politics. There is also no sugar-coating the fact that 2014 represented a decisive rejection of Congress by Indian voters. During its most recent five-year term in office, it had suffered through one embarrassing political corruption scandal after another, while its tenure coincided with the recent downturn in the Indian economy. The party increasingly emerged in popular imagination as a rudderless ship totally lacking in dynamism. This was mirrored by the performance of Rahul Gandhi, the heir to the Nehru–Gandhi political dynasty, who spearheaded the Congress election campaign while demonstrating little appetite, and even less aptitude, for the political arena.

The BJP, meanwhile, was led by the controversial but charismatic Narendra Modi, whose personal dynamism and “can do” political optimism contrasted sharply with that of his feckless younger rival. Well aware that he was regarded as an extremist in a party whose own Hindu nationalist ancestors borrowed heavily from Italian fascism, he tacked vigorously toward the political center during the election campaign and promised to represent the interests of all Indians, Hindu and Muslim alike. He also confined himself to economic generalities, promising to foster job growth by investing in badly needed infrastructure improvements and encouraging foreign investment.

In one of its few concrete commitments, however, the party manifesto reaffirmed the BJP pledge to roll back or at least modify a decision taken by the defeated Congress government to permit foreign multi-brand retailers such as Walmart to penetrate the Indian market.24 This commitment was aimed at protecting the small-scale “mom and pop” shopkeepers who currently dominate the retail market in India and who are a mainstay of the village India romanticized by so many of the upper-caste Hindus, who constitute the hard core of BJP support.

 

Has India Peaked?

So to return to the question: has India peaked? The answer is that it all depends. Over the next five years, it depends more specifically on what the new BJP government will decide to do. Although India is currently suffering from the effects of the global economic recession, a World Bank report from last year asserted that “given favorable demographics, rising educational attainments, and high rates of capital accumulation” Indian growth could once again exceed 8 percent a year.25 But the key question here is whether any future growth in the Indian economy will provide jobs and promote increased living standards for the one billion Indians who are still living on less than $4 a day.

An Economist piece that came out about the same time as the World Bank report indicated that 2005 to 2010 saw no net increase in jobs in India.26 Yet this was during a period when the economy was growing at an annual rate of 9 percent. Once the global recession has run its course, the IT sector may well lead the country through another upsurge in economic growth. But what good will it be if it only serves to make the “haves” of Indian society that much richer, while leaving more than two-thirds of the Indian people living on under $2 a day? And even here there are reasons for concern. With domestic IT wages rising and increasing competition from countries such as the Philippines, the Indian IT sector has already lost 10 percent of its global market share during the past 5 years.27

Unable or unwilling to pursue labor law reform, the defeated Congress government tried to lessen the burden of poverty by establishing the National Rural Employment Guarantee Act (NREGA). First passed in 2005, this is a program involving make-work activities which guarantees 100 hours of paid employment a year to rural families who volunteer for the program. But it has not caught on in states such as Uttar Pradesh where it could do the most good, and has been highly susceptible to corruption, as local administrators have proven highly adapt at skimming money off the top.28 Last year, the government followed up with the National Food Security Bill, aimed at providing subsidized food grains to two-thirds of the Indian population,29 a percentage which coincides with the percentage of the population living under $2 a day. This program is also highly susceptible to corruption, and like the NREGA constitutes a substantial drain on the public exchequer. Both programs represented a tacit admission by the Congress government that the Indian economic miracle had not improved the lives of the great mass of rural and urban poor. They were attempts to ameliorate the impact of poverty, not lift people out of it.

It is an open question how much longer this situation can persist. Much of eastern India, extending from Bihar in the north to Andhra Pradesh in the south, has already fallen victim to an ongoing Maoist insurgency known as the Naxalite rebellion, whose cadres, recruited from the disaffected rural poor, are estimated to involve up to 20,000 armed fighters and an additional 50,000 supporters.30 It is more of a nuisance now than an imminent threat to the state, although Manmohan Singh once referred to it as the “biggest internal security challenge” India has ever faced.31 There are no signs yet that the Naxalite movement may be evolving into something much larger and more threatening, but the possibility cannot be excluded if the rich continue to get richer without the benefits of economic growth filtering down to the people who really need it.

It is against this backdrop that the new BJP government has taken office. Given its absolute majority in the Lok Sabha, it is in an unprecedented position to enact fundamental change. More specifically, it is the first government since the economy was liberalized in 1991 in a realistic position to pursue serious labor law reform. This is not to say there would not be opposition. The trades unions will strike and the Left Front and lower-caste parties will howl, but for the first time in a quarter century, these forces lack the strength in the Lok Sabha to prevent it from happening.

Even though the new government has signaled that it intends to honor its election manifesto pledge to begin discussing labor law reform with Indian stakeholders,32 it is of course possible, and some would say likely, that Narendra Modi will decide not to go down this road. Even though he has the votes, he and his senior BJP colleagues may decide labor reform would generate too much opposition within the body politic. Whatever the Congress party might think about the merits of the issue, it would be almost certain to jump on the opposition bandwagon in an effort to get back in the political game. Resistance may also exist within the BJP itself due to the perceived impact that labor law reform would have on traditional village India. As a result, the BJP may decide to stick to the much more modest framework laid out in its election manifesto, investing in infrastructure, further easing restrictions on foreign investment (except in the multi-brand retail sector), and promoting tourism. This is the line he appeared to take in his meeting with prominent business CEO’s in New York on September 30 during his official visit to the United States.33While this may help stimulate the economy in the short run and may even create new jobs for some, it is hard to see how it could make a significant dent in the proportion of Indians living on less than $4 a day, much less the many hundreds of millions who continue to eke out a living on far less.

Since the massive BJP victory in the 2014 elections may well prove to be an aberration in the long-term fragmentation of Indian politics, the current government could represent the last best chance that India will ever have to enact labor law reform and pursue labor-intensive growth. If it fails to seize the moment, then India very well could have already peaked. It could perhaps even lose ground over time, if its share of the global IT sector continues to decline. India would be left a two-tier economic state, consisting of a relatively small privileged English-educated elite, presiding over a great mass of rural and urban poor.

On the other hand, if India does succeed in doing away with its restrictive labor laws while taking appropriate steps to upgrade its energy and transportation infrastructure, then the sky is probably the limit. Given its reservoir of hundreds of millions of untapped or underproductive workers, whose labor can be purchased for what in global terms is next to nothing, it should be able to supplant China as the most dynamic late developing economy in the world, with growth rates to match.

Are you listening, Prime Minister Modi?

by John R. Schmidt

Notes

1. See “GDP per capita growth (annual %),” World Bank, http://data.worldbank.org/ indicator/NY.GDP.PCAP.KD.ZG. Although there were occasional dips in the growth rate the overall trend has been upward until recently.

2. For a discussion of reforms during the 1980s, see Arvind Panagariya, “India in the 1980s and 1990s: A Triumph of Reforms,” IMF Working Paper, March 1, 2004, http:// www.imf.org/external/pubs/cat/longres.aspx?sk=17129.0.

3. For an example of reporting at the time, see Bernard Weinraub, “Economic Crisis Forcing Once Self-Reliant India to Seek Aid,The New York Times, June 29, 1991. Available online at http://www.nytimes.com/1991/06/29/world/economic-crisis-forcing-once-self-reliant-india-to-seek-aid.html [JS: Done website address?]

4. Kaushik Basu, “Why India’s Labour Laws are a Problem,” BBC News, May 18, 2006. Available online athttp://news.bbc.co.uk/2/hi/south_asia/4984256.stm. See also Edward Luce, In Spite of the Gods: The Rise of Modern India (New York: Anchor Books, 2008), p. 48.

5. “The Next China,” The Economist, July 29, 2010, http://www.economist.com/node/ 16693397.

6. Luce, op. cit., p. 31.

7. Thomas Friedman, The World is Flat: A Brief History of the Twenty-First Century (New York: Farrar, Straus and Giroux, 2006), pp. 104–105.

8. Luce, Op. cit., p. 48.

9. Sambuddha Mitra Mustafi, “India’s Middle Class: Growth Engine or Loose Wheel?” The New York Times, May 13, 2013,http://india.blogs.nytimes.com/2013/05/13/indias- middle-class-growth-engine-or-loose-wheel/.

10. “GDP per capita (current US$),” World Bank, http://data.worldbank.org/indicator/NY. GDP.PCAP.CD.

11. Jagdish Bhagwati and Arvind Panagariya, Why Growth Matters: How Economic Growth in India Reduced Poverty and the Lessons for Other Developing Countries (New York: Public Affairs, 2013), pp. 114–115. See also Mehul Srivastava, “Why India is Rethinking Its Labor Laws,” Bloomberg Businessweek, January 13, 2013, http://www. businessweek.com/magazine/content/11_04/b4212013616117.htm; and Saritha Rai, “Labor Rigidity Keeps India’s Firms on Edge,” The New York Times, February 9, 2006, http://www.nytimes.com/2006/02/09/business/worldbusiness/09iht-toyota.html?_r=0.

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