By Fareed Zakaria
Are things looking gloomy for India? The country’s annual economic growth rate slipped to 5.3 percent in the first quarter of this year, the slowest in a decade, and a poll out last week shows analysts slashing their growth forecasts for this year.
Yet India remains an incredibly promising economy.
First, India overall is still very poor, and so there’s a lot of room to move up. Its per capita GDP is still only about a third that of China’s, and it still has huge advantages in terms of low cost of labor; it has a long way to go before it even becomes a middle income country.
There’s also enormous entrepreneurial energy in India, and you can see that in the success of Indian companies, which is continuing even in these rough times – many firms continue to grow dramatically. And the domestic economy, outside exports, remains very vibrant and growing.
The problem India has is that there are some crucial areas where it needs government policy to move forward, and yet you have a broken political system with a very weak central government and a coalition that has been completely unable to move forward.
But I have some hope that India now has a chance to meet its potential with the prime minister having taken on the finance minister’s portfolio. This is significant because the prime minister is Manmohan Singh, the architect of India’s reforms and a man who understands India’s problems very, very clearly. Indeed, he has articulated these issues often.
The problem, it appears to me, is that the government doesn’t feel it has the political capacity to get its way. It has been trying on a number of fronts and keeps getting blocked. It needs to be bold, articulate the reforms that the government is going to pursue, try to get as much through parliament as possible, and push the rest through his own executive power. There are lots of things that could be done in India just by changing sentiment.
India still has plenty of room for maneuver – remember India has among the highest interest rates in the world, so if its central bank were just to lower its interest rates by 1 percent or 1.5 percent, that could unlock business activity. But of course, this could only happen after a set of agriculture reforms to ensure that food prices don’t go up too fast.
There is a path to high growth again, and it’s a path that you have to hope that Singh – perhaps the most incorruptible figure in Indian politics – moves onto.
Singh wants to go down in history as India’s great reformer, and he did unlock the economy in the early 1990s. But he needs to complete the process with a second wave of reforms. Singh is 80 years-old. The next two years will be his last two years in public life. The question is, does he want to go out with a bang?