What will it take for India to raise its per capita income (PCI) of just over $1,100 in 2009 to the global average and become a developed global power in the 21st century? Global PCI was about $10,000 in 2009. In nominal dollars, it will probably be about $20,000 in 2035 when India reaches that average. At that point, the PCI of developed countries will be over $55,000.

Before one can say what it will take for India?s PCI to reach the global average, leave alone that of a developed country, one has to ask why it has taken 60 years for India to get going at all.

Independent India did not just underperform in its first 45 years; it was an economic failure. Its relentless, relative diminution was stark when compared with the export-driven successes of East Asia and the endogenously driven (if overleveraged) ascent of Latin America from 1950-80. Africa performed better than India until 1980. For most of the 20th century when the world thought of poverty, despair, chaos, ignorance, illiteracy, and misgovernance, it visualised India. Many around the world still do. Africa did not displace India as the world?s basket case until the mid-1980s when similar policy choices, and even greater failure on the part of independent governments, took Africa to depths that India had not plumbed.

From 1947 to 1992, India?s PCI grew at an average 0.5% per year. In round numbers, it took 45 years for PCI to climb from $300 to $500 but only 15 more to reach $1,000. From the same starting point over the same period of 60 years, China?s PCI increased to about $4,000 and Singapore?s (a small island with no natural resources other than people) to over $50,000. These disparities are due to differences in the institutions, policies and governance of these nations.

Yet, while India?s economic performance was poor from 1947-92, its democracy was impressive. It is interesting but impractical to wonder whether India?s status as a giant democracy was related to its being an economic pygmy. Was India?s failed experiment with home-grown socialism essential to nation building? That is often suggested to justify the sins of the past. Analysed rigourously?especially in a comparative context with East Asia?the notion is a feint at self-delusion.

And, although widely seen as a ?success?, India?s democracy in the eyes of the world was (and is) tarnished by poor governance, bureaucracy, and corruption. Its relative economic stagnation until 1992, its weak governance, and its obviously characteristic inefficiency, have resulted in India not having the influence on the world stage that its throw-weight demands. Today, India is much less significant than China, whose influence almost equals that of the US and exceeds that of the EU or Japan. India?s influence does not match that of Germany, France or the UK but approximates that of Italy, Spain or Russia.

Early 90s reforms

After two decades it is overlooked that India became an economic success only after the reforms of 1991-93. Since then, its PCI has increased 10 times faster than pre-1990s. Those reforms aimed at liberalising the real economy. Oddly, they left its financial system illiberal. That is analogous to building up India?s body with a malfunctioning cardio-vascular system. Action was taken on the first Narasimham Report of 1992. But action on the second Narasimham Report of 1998 and a series of other reports on the financial system since then has been indefinitely deferred.

The success of the 1991-93 (Manmohan Singh) reforms?which India has been living off for the last two decades?indicates that the key to India?s future lies in coming to closure by completing the process of India?s break with its unhappy past. A number of committee reports commissioned by the Government of India (GoI) have emphasised that further liberalisation is needed in financial markets and other services (education, health, infrastructure, etc). They need to be acted on. The rollback of state control over the real economy that began in 1991-92 needs to be accelerated rather than reversed. Instead, the opposite has transpired; an unstable disequilibrium now persists, defining the status quo. It has resulted from earlier reforms being partial and not being followed through; in fact, there has been much side-stepping and, in some instances, backsliding.

For India to secure its future, it must now overperform politically and economically at a rapid, sustained pace. Though it was not as clear in the 1990s as it is now, India?s corporate sector has proved beyond argument that it can deliver world class output in goods and services. Even in financial services, India now has significant private institutional capability though state-owned banks remain backward. Despite its natural competitive advantage, India has yet to make its long-delayed entry into the world market for financial services. That is because the Reserve Bank of India (RBI) prefers to keep the Indian financial system primitive and repressed, ostensibly on the grounds that liberalisation would induce financial instability. The real issue seems to be more one of RBI being concerned about losing its role of absolute command-control over the financial system?which would be good for India but bad for RBI.

India?s competitiveness in services is now firmly established. In manufacturing, it still lags China. But there is no reason why it cannot catch up by clearing blockages caused by its infrastructure deficit, financial backwardness, precarious public finances and dysfunctional labour markets.

India?s labour laws are outdated and outmoded. They protect, asymmetrically, the rights and permanence of organised labour but at the cost of employment generation, leaving employees in the informal sector woefully vulnerable. Such laws, along with the unions and leftist opposition that support their continuance, conspire to turn what should be a significant labour cost advantage into a competitive disadvantage by making the effective productivity adjusted cost (and inflexibility of deployment) of labour in India higher. By doing so, they distort the growth process by forcing it to be more capital intensive and less labour intensive than it should ideally be, thus discouraging new employment generation to the extent that India?s labour surplus would indicate.

Corporate sector

Capable though it may be, India?s corporate sector does not yet apply world standards of corporate governance, especially when it comes to consumer and investor protection, and to related party transactions; i.e. when the interests of promoter families invariably supersede those of other shareholders, institutional or retail. Despite such shortcomings, India?s corporates have rapidly become world-class. They have demonstrated beyond doubt their ability to meet the challenges of the future. If restrictions on the foreign corporate sector from participating more freely, more widely and deeply in the economy were relaxed, and eventually removed, aggregate corporate capacity in India would increase, as would movement towards greater competitiveness and better corporate governance?of the kind that global shareholders demand.

When it comes to global competitiveness, India?s corporate world has proved it can deliver. But, can its polity and administration? Prima facie, it is arguable whether government (at any level) in India is up to the task of transforming its economy and polity in the manner that its future demands. Misplaced complacency has caused the relentless dissipation of India?s national political parties. It has resulted in vote-bank issues of the lowest common denominator permeating politics.

Regional politics

That trend has been bolstered by the continual fracturing of small regional parties with no discernible agenda?other than the enrichment and aggrandisement of self-styled local ?leaders? exercising power irresponsibly in the ostensible cause of the ethnic, tribal, caste, religious or lingual group they purport to represent. Their actions violate internal peace, harmony, law, order and justice. They are inimical to the very concept of sovereign nationhood. Consequently, national interests concerning Indian unity, development, equity, modernisation and growth have been compromised. Indian politics have fragmented continually since the excesses of the 1970s and 1980s. They have become a zero-or-negative sum game whose aim is to divide resources and spoils across different interest groups demanding special treatment through quotas of one sort or another. Politically dispossessed groups (like Naxals) resort to militancy. They now pose as severe a threat to India?s security as its paranoid neighbours, failed or totalitarian.

The disintegration of national parties, with the kaleidoscopic reformulation of regional ones with single issue interests, has weakened India?s political system and made parliamentary institutions at Central and state levels dysfunctional. It has also thwarted constructive political transformation in a quasi-mature democracy that aspires to be a force for good in the world. It is now almost impossible to fathom what most of India?s political parties and politicians stand for, and what their economic, social or political agenda is. Steady decay in political standards, values and behaviour, with accompanying deterioration of law and order, has compromised the capacity and quality of government at all levels?particularly state and municipal/local.

Amassing private wealth quickly, and exercising (abusing) power irresponsibly, rather than serving the public, are now the principal motives for entering politics in India. A political career is now seen as the best short-cut to wealth. The recent case of the CM in Jharkhand exemplifies the point yet again. Corruption is now so pervasively embedded in India that rooting it out poses a challenge of insuperable proportions. Indeed, most Indians no longer see it as objectionable or harmful but as a way of life that has to be accommodated.

The pettiness and anti-Indian nature of ethnic and lingual posturing in recent state elections, and the continual calls for the breakup of states into smaller lingual entities have reached insufferable heights. This has been seen at its worst in Maharashtra where the two Senas seem intent on destroying Mumbai?s credibility as India?s premier commercial and financial centre. It has been seen in Karnataka and the same virus has now infected Andhra. In these three states the future of three major urban centres that are the key to India?s future are being put at risk. The politics of violence are now tacitly tolerated if not encouraged. Police services, state-owned enterprises, public-sector banks and other public service enterprises, as well as the judiciary and legal system, have become increasingly ineffectual in preventing their politicisation to an egregiously petty level.

So, on the political frontier, portents have been unfavourable. India has been heading in the wrong direction; although?to those who are exceptionally optimistic?the last general election might suggest that the tide may slowly be turning. Although they now seem hopeless, with a growing middle class demanding more from political leadership, India?s politics may eventually improve in the same way that its economy did?with a U-turn after decades of going down the wrong track.

?(To be continued)

The author is an economics and corporate finance expert