The news that China has overtaken Japan to be number 2 in the GDP ranks elicited the usual responses. People began calculating how soon China would overtake the US. But that sort of exercise is done on a calculator assuming current tends would continue forever. Twice in the last 60 years, we have had the US being threatened by someone taking it over. First was (and you?d better believe this) the USSR. Khruschev boasted in 1960 that the USSR will overtake the US in 25 years. ?We will bury you in an avalanche of commodities? was the threat. Well we know what happened to the USSR.
Next was Japan and there were forecasts during the 1980s that Japan will be the largest economy by the end of the 20th century. Japan had MITI (Ministry of International Trade and Industry), which directed its industrial policy while the US had no official policy at all. So Japan, with an active government, a tightly knit business elite and an industrial strategy, was going to win. That forecast bit the dust in the 1990s.
China is the next and we shall see what will happen. We also have had predictions that thanks to the demographic dividend, India will overtake China by 2030. My own take on this is that there is no reason to assume that India?s growth performance is guaranteed. Indeed, the last quarter of 2010 and two months of 2011 warn us not to take anything for granted. There are several strands that warn us that India is in a fragile position as far as the growth performance is concerned. Let me enumerate these.
First, the latest advance estimates for 2010-11. It came out as 8.6% but this was artificially boosted by the 5.6% growth in the agricultural sector. This was high due to growth from a low base of a drought ridden 2009-10. The underlying trend, if you adjust for that, would be roughly half the recorded growth and the GDP growth rate would come down below 8%.
Second, the persistence of inflation. Every time a high number comes up for inflation, we have the policy makers telling us it will come down in six month?s time. We have had 18 months of this prediction. There seems to be no policy on the supply side and RBI raising interest rates will only strangle growth.
Look at the index of industrial production over the last six months. It has been very volatile. There seems to be no plausible explanations to why it is so. But in absence of any positive shock, the index is likely to bump along and we cannot rely on it for a boost to growth in 2011-12.
But more than any of these things it is the environment in the economy since last November which is worrisome. We know India is a corrupt country. But what has now happened is that partly due to the global context (as in the CWG scam being first spotted by the UK tax authorities), partly due to the sheer size and inter-related nature of successive scandals?2G, CVC, Radia tapes, Isro, CWG and even, in its own way, the IPL, Brand India is losing its shine abroad. Now I no longer meet breathless admirers of India in London but people asking if India is a safe place to invest, given its governance problems.
It is not enough to blame the NDA for the UPA?s troubles nor does it help to be told by the PM, no less, at his press conference that the battle between the two parties is due to some criminal case in Gujarat being pursued or not. The sheer failure of governance at the Centre has eaten through the system. The Radia tapes have dented the reputation of business houses. How such taping could be sanctioned for such a length of time has to be investigated for its implications for human rights of all involved. But given the politicisation of CBI and other regulatory bodies, we shall never find out. In the meantime, the business houses will suffer. This will have repercussions abroad for them when they go out to do business. The OECD code of conduct on corruption is very strict as is the most recent Bribery Act that the UK has passed. The Radia tapes expose Indian businesses to prosecution by governments or shareholders abroad. Foreign investors have been getting around their domestic legislation and finding local Indian agents to do the bribery bit. But if they are going to be exposed by telephone tapping initiated by the government and then leaked arbitrarily, they may become wary of coming to India.
The same goes for the arbitrary ways in which 2G contracts are being called in for cancellation or repricing. The Isro-Devas deal may be cancelled for no reason other than saving the PMO?s collective face. This is not the way a country based on the Rule of Law is supposed to function.
It will take a long time before Brand India is restored to its previous shine.
The author is a prominent economist and Labour peer