Running Low on Momentum

Why can't India's economy take off? Despite seven years of reforms and Indians' impressive savings rate, the local business sector is gloomy and foreign investment has slowed to a trickle. Analysts predict growth in the region of 4.5% this year, which is not bad in Asia these days. But reform has stalled, infrastructure needs go unmet and consumers aren't spending. To explore how India might turn things around, TIME convened a panel of South Asian experts last week during the India Economic Summit organized by the World Economic Forum and the Confederation of Indian Industry in New Delhi. Excerpts from the two-hour discussion:Palaniappan Chidambaram, member of parliament and former Finance Minister: The current slowdown is due to a lack of confidence, compounded by political instability. The savings rate is rising, but no one is spending. Someone like Roosevelt should go on the air and say, Spend! Meanwhile, foreign investment flows are at a trickle; export growth is negative. For the ruling BJP [Bharatiya Janata Party] it's like hitting a golf ball into the woods. They have to find a way to come back to the fairway. I can't see how they're going to fight their way out of the problem.Percy Barnevik, chairman of the Swedish industrial holding company Investor AB: You're right about the negative sentiment here. But longer-term, I think people are assured that India will follow a reform path. Look at Poland. They had seven prime ministers in eight years, but they all moved roughly in the right direction and they've pulled it off now. In India, no one wants to return to the old protected, monopolistic, socialist, centralized society.Adi Godrej, managing director of Godrej Soaps: We say we are permitting foreign direct investment in certain key infrastructure sectors, but we actively discourage it--by regulations, lack of decision-making, even in the courts.Barnevik: I think India is really a much better investment destination than its reputation suggests. The companies that I supervise have 80 factories here. They're into exporting now. In India you can produce high-quality goods 20% cheaper than you can in Europe.Harinder Kohli, former World Bank senior adviser: A lot of investors are looking at China and India as they shy away from Southeast Asia. India has had a good opportunity to exploit that. It's a shame that some of the momentum we had has been lost and that investors are not coming into India in the degree they could.Barnevik: It's partly a perception problem. There's a long history in India of antagonism. We all remember Coca-Cola and IBM pulling out years ago. But many investors are not aware that India has changed dramatically. I ask American businessmen who spend billions of dollars in China, where there is uncertainty and a lack of transparency, why they don't come to India. I don't think China is as safe, stable and reliable as India. You have millions of educated, English-speaking people here, you have a British judicial system. I think India's pitiful $2 billion in foreign direct investment could be $20 billion.Aroon Purie, editor-in-chief of India Today: The problem is transaction costs. India does not have clear policies for entry in a lot of these sectors. They say roads are open for private investment, but nobody says how tolls are to be collected, who will collect them, and so on. Investors are not sure what their returns will be. India must determine how to award investment contracts in a transparent way and give foreigners assurances that they will make money on their investments. For years, we've talked about opening infrastructure and everybody has repeated the mantra, We're open. Come! But nobody comes. People can't see how their money will come back in a clear, certain manner.Barnevik: It's such a politicized country. If some of that passion could be geared toward the business sector, you could unlock energy and brains to develop the country. The civil servants are a gigantic army slowing India down. These are the same people I met 10, 20, 30 years ago. Ministers come and go, and yet they're still around. That world will be threatened as the market economy comes. To deregulate India, you need fewer regulators.PAGE 1||Kohli: The fundamental issue is how to lift efficiency and productivity. This economy is very much capable of growing 7% to 9% a year, not just the current 5%. But the biggest problem is the fiscal deficit, which is partly related to subsidies for power, water and other things. Unless users are asked to pay for the services they're getting, you cannot make infrastructure companies commercially viable. You cannot get the private sector coming in.Chidambaram: The government should find ways to boost production. The effort should start with short- and medium-term, well-focused measures to revive four central industries: cement, automobiles, steel and textiles. These have always been the leading segments of India's economy. If they show an uptrend, then the domestic economy picks up. Also, in the first years of reform, India had a series of new sectors coming onstream--automobiles, telecoms. But in the last few years we've had nothing, except perhaps information technology. We need to push new sectors--roads, ports, mining, petroleum.Barnevik: Can market prices for, say, kilowatt hours of electricity or telephone calls be introduced to stimulate inflows of private capital to infrastructure?Chidambaram: No offense, but that's a very Delhi-based overview of what appeals to Indian people. The real growth story in India lies in addressing issues that concern the rural and domestic economy. Unless, of course, you are willing to privatize the state electricity boards.Barnevik: Why not? If you could get political forces to rally behind the privatization of the electric network, you would free up private capital to invest. You'd get increased electricity supply and a narrower budget deficit.Chidambaram: Yes, but it's difficult to implement. Which party has the political courage and strength to do it? To the farmer, free power today is a bird in the hand. Reforms, efficiency, an eventual price drop--that's all pie in the sky to the farmer. That road can be taken only by determined leadership willing to bring reform to the people and take flak for it.Barnevik: If you cut subsidies to loss-making state industries and create a market economy in key services, then you really open up opportunities for growth. We've seen it in Thailand, even in Indonesia and China.Chidambaram: Inflation control must also be high on the government's agenda. A government that sends out a signal that it is not concerned about prices has egg on its face sooner than later.Kohli: There are interesting economic experiments happening in some states. What's going on in Andhra Pradesh is a good test. You have a chief minister, Chandrababu Naidu, who is openly saying he will deliver better services. It will be interesting to see what happens in the next election there. If he wins, it may be a signal that the public will reward you if you deliver on services and efficiency.Godrej: Naidu is the first politician who has very clearly focused on delivering economic results. It's the first time a grassroots politician has believed that good economics is good politics. There can be several Chandrababu Naidus thrown up by the Indian system, provided the system rewards such initiative.Chidambaram: It's true. Some states already are well ahead in privatizing public services. These are important islands of change. For the most part, water, electricity and public transportation are still subsidized. But if the states get their acts together and begin to recover user charges, they will benefit greatly. These reforms are better than anything coming from the center.Kohli: It is quite important to develop these islands of success and then expand. China started with a few special economic zones in the coastal areas. As they took off, as they proved their success, as foreign investment came in, China expanded the reforms to the whole economy. You don't have to do everything from the top down.|2|Kohli: Don't overlook recent progress. India had been mired for years in an annual growth rate of 3%, the so-called Hindu growth rate. But India has broken through that. Now the debate is whether 5% is good enough. That's a dramatic change. The real question is why India can't accelerate to a 7% growth rate. There's a huge difference between 5% growth and 7%.Godrej: India's new national housing policy could have tremendous economic force. In India people haven't realized the multiplier effect of housing. There's hardly any foreign-exchange component, and it's very labor-intensive. If you could get one major thing going, like housing, it could be the trigger.Kohli: I'm quite confident about the Indian economy in the next 10 to 15 years. India and China will account for a lot of the coming growth in the world economy. The foreign sector will look to both countries, for their domestic markets and as sources of exports.Godrej: There's been some progress lately. Earlier it was just a standoff between business and government. Now there's better cooperation, though we need much more.Purie: The problem is the government. Unless government and bureaucracy are cut down to size, nothing is going to work. There's an unholy conspiracy between politicians and the bureaucrats to maintain this huge superstructure that keeps things as they are. Unless somebody comes in and breaks it, nothing will change.Godrej: Our potential is tremendous. But we don't have a vision in this country of where we want to be in 20 years' time. If we get things right, by 2020 India, in purchasing-power-parity terms, can be the third-largest economy in the world, up from No. 5 today. And poverty can be totally eliminated. That should be the vision.||3