A year ago, I offered an optimistic and hopeful view of India?s possibilities in 2011. As it turned out, things were much less rosy than I had guessed they might be. I had gone with the then-popular growth forecast of 9%. Growth has been much lower. Part of the problem was the ongoing European crisis, and the US?s slow recovery. Much of the difference came from what has been happening within India.
A year ago, I remarked that the private sector in India has done well despite poor governance. This has remained true, but not to the extent that I had hoped. The general poor quality of governance was compounded in 2011 by uncertain handling of corruption, which surfaced as a major issue for India?s citizens. My view is that India?s ruling coterie is currently weak in its leadership and its vision. Too many of those who rule are focused on short-term personal advantage, rather than leading the country well. Will this improve in 2012? It is hard to say what will happen at the national level. However, one can hope for more progress in governance quality in some of the states.
A year ago, I noted the problem of inflation and the challenges of macroeconomic management. There was much talk in 2011, but nothing was done to address structural problems and microeconomic policy mistakes that have made inflation worse. RBI raised interest rates, but did it slowly, seeming to be behind the curve, while saying it was not sure its policies would be effective. It would have been better to raise rates quickly, speak confidently about it, and talk down inflation expectations, rather than sounding helpless. RBI has also continued to allow a backward-looking inflation measure to dominate the headlines, rather than giving the public a clearer sense of what is happening in the present, with a month-on-month, seasonally-adjusted inflation measure.
A year ago, we were worried about rupee appreciation. Instead, the currency has depreciated dramatically. First, appreciation was supposed to be a problem. Now, depreciation is supposed to be a problem. If we want foreign capital for investment, and foreign portfolio flows are volatile and lead to currency fluctuations, maybe that is a price we should be willing to pay. One can build institutions that allow firms which are exposed to international trade to do some hedging, direct or indirect. Progress on this front has been slow, but the welfare gains from this more microeconomic approach, rather than trying to control exchange rate fluctuations, are likely to be high.
Perhaps the biggest disappointment of 2011 was India?s seeming retreat from its potential position as a global role model: a pluralistic democracy with burgeoning creativity and innovation, addressing the needs of a diverse population with attention and care. Instead, the country has seemed rudderless, preoccupied with reacting to problem after problem, instead of foreseeing them and dealing with them proactively. Will 2012 be different? How the top leadership of the country, both on the ruling side and those in opposition, responds to the current situation will be crucial. It is hard to predict what will happen.
So no predictions, but here instead is a short wish list for 2012.
First, I hope that the government makes public accountability a national issue, and works with all political parties to put in place some institutions to reduce corruption and increase the quality of governance more broadly. India?s citizens deserve this. No arrangement will be perfect, but there is clearly room for improvement, and those who ostensibly serve India?s citizens have to accept that they have fallen short.
Second, I hope that the government will realise that development comes from the ideas and energy of those same citizens. Instead of struggling to maintain controls, introduce new ones, or keep on doing things that the government should not be doing (running airlines and hotels, for example), there should be a vision of maximising the capabilities of India?s people, and a focus on just a few things that would do the most to help that goal. Freeing up much of the education and health sectors, while focusing solely on the needs of those who will not be adequately served by private enterprise, would lead to a huge improvement. Similarly, giving more Indians an environment in which they can pursue enterprising activities, rather than just giving them handouts (even if still necessary for many), would do more for inclusive growth than anything the government has done so far.
Third, I hope that India?s ?middle class? continues to grow and shape the country?s trajectory in positive ways. It has had a role in bringing government to account for corruption. It now appears to be moving away from the worst manifestation of its bias against girls and women, according to the latest figures on gender ratios. There is much more it can do. Ultimately, India?s own people bear the responsibility for their destiny.
The author is professor of economics, University of California, Santa Cruz