02-25-2011, 12:33 PM
[size="4"]Nothing Inevitable About India's Rise
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The bill from years of backward governance may at last be coming due.
Is 2011 the year that the India storyââ¬âcarefully buffed for the better part of a decade by boosters and dispassionate observers alikeââ¬âbegins to lose its sheen? If foreign investors are a bellwether, then the answer may well be yes.
In January, foreign institutional investors, driven in part by high inflation and the sluggish pace of economic reforms, pulled $900 million out of India's stock markets. According to the United Nations Conference on Trade and Development, foreign direct investment in India plunged 32% last year to $24 billion, making it Asia's only large economy to suffer a decline in that period. (China attracted more than four times as much FDI as India in 2010.) A recent survey of 89 fund managers by Morgan Stanley showed that only a quarter of buy-side investors believe that India will beat other emerging markets this year, the glummest outlook in two years.
It will take more than a handful of gloomy statistics to change the way the world has come to view the world's largest democracy in recent years, as a fast-rising but benign alternative to the model offered by authoritarian China. India's economy remains on track to grow a robust 8.5% this year. And the country's core strengthsââ¬âcompetitive private companies, a vast cohort of competent engineers and managers, a growing middle class and the cushion of long-term stability provided by democracyââ¬âwon't disappear overnight.
Nonetheless, the evidence of foreign investors voting with their wallets against Indiaââ¬âtiny Singapore, with fewer people than a mid-size Indian city, attracted more FDI last yearââ¬âraises a fundamental question. Can India's backward political culture produce the kind of governance the country needs?
Less than two years after the ruling Congress Party-led United Progressive Alliance returned to power with an enhanced mandate, investor optimism has been belied. Freed of the need to rely on obstreperous communists for support in parliament, Prime Minister Manmohan Singh's government was expected to step up the pace of economic reforms that had languished during its first term of office between 2004 and 2009. But instead of using increased political elbow room to unshackle business, the government has moved in the opposite direction, allowing individual ministers wide leeway to make decisions in their personal fiefdoms regardless of their impact on the broader economy.
View Full Image
Bloomberg News
A steel plant, coming soonââ¬âafter far too long a delay.
Take environment minister Jairam Ramesh, whose whimsical style of running his crucial ministry appears designed to grab headlines and win favor with his party's socialist wing rather than to create a transparent policy regime that protects India's environment while promoting growth. In August, Mr. Ramesh overruled state-level officials to halt a proposed $1 billion bauxite mining project in the eastern state of Orissa by London-based Vedanta Resources. Last week, the government cleared another large project in the same state, a $12 billion steel plant by South Korea's Poscoââ¬âIndia's largest single foreign investmentââ¬âbut only after tacking on dozens of riders redolent of the infamous license-permit raj of India's socialist past. Among them: a stipulation that Posco must spend 2% of annual profits from the plant on "social welfare."
Meanwhile, the Ministry of Home Affairs led by P. Chidambaram is in the middle of a protracted row with Canadian firm Research In Motion, maker of the popular BlackBerry smartphone. The home ministry wants India's intelligence agencies to be given access to encrypted corporate emails to ensure that BlackBerry is not abused by terrorists. Quite apart from the absurdly slim odds of Lashkar-e-Taiba using, say, Citibank's BlackBerry servers, the controversy sends a negative signal to foreign businessmen. After last year's so-called Radia tapes scandalââ¬âin which government recordings of private conversations between a lobbyist and prominent businessmen, politicians and journalists were leaked to a salacious pressââ¬âhow many corporate executives will sleep easy knowing that their encrypted emails can no longer be assumed to be private?
Similarly, in a decision that directly undercuts an expensive taxpayer-funded advertising campaign to attract more tourists, Mr. Chidambaram's ministry has imposed absurd visa restrictions on most visitors to India. Last month, Turkish Nobel laureate Orhan Pamuk had to cancel his participation in a literary festival in Sri Lanka because India's visa laws wouldn't allow him to return to the country for two months after departing.
Taken separately, each of these examples can be explained away. Perhaps Vedanta and Posco needed to be held to more stringent environmental standards than the government of Orissa demanded, and India isn't the only country where fears of terrorism have spawned cumbersome regulations. But taken together, the government's decisionsââ¬âalong with a broader tax-and-spend philosophy symbolized by a wasteful multibillion dollar rural employment guarantee programââ¬âcreate the distinct impression that India is coasting on its laurels. Or, to put it less charitably, the government appears to have drunk its own Kool-Aid about India's inevitable rise.
In truth, there's nothing inevitable about India's progress from poverty to prosperity. In terms of per-capita income and most human development indicators India lags not only its fellow BRICsââ¬âBrazil, Russia and Chinaââ¬âbut also all but the poorest parts of Southeast Asia. With linguistic and religious tensions never far below the surface, and a Maoist rebellion in full swing in large parts of eastern and central India, the country can't even take its alleged demographic dividendââ¬âthe relative youth of its population compared to Chinaââ¬âfor granted. Foreign investors are already voting with their feet. India ignores the message this sends at its own peril.
http://online.wsj.com/article/SB10001424...%3Darticle
[/size]
The bill from years of backward governance may at last be coming due.
Is 2011 the year that the India storyââ¬âcarefully buffed for the better part of a decade by boosters and dispassionate observers alikeââ¬âbegins to lose its sheen? If foreign investors are a bellwether, then the answer may well be yes.
In January, foreign institutional investors, driven in part by high inflation and the sluggish pace of economic reforms, pulled $900 million out of India's stock markets. According to the United Nations Conference on Trade and Development, foreign direct investment in India plunged 32% last year to $24 billion, making it Asia's only large economy to suffer a decline in that period. (China attracted more than four times as much FDI as India in 2010.) A recent survey of 89 fund managers by Morgan Stanley showed that only a quarter of buy-side investors believe that India will beat other emerging markets this year, the glummest outlook in two years.
It will take more than a handful of gloomy statistics to change the way the world has come to view the world's largest democracy in recent years, as a fast-rising but benign alternative to the model offered by authoritarian China. India's economy remains on track to grow a robust 8.5% this year. And the country's core strengthsââ¬âcompetitive private companies, a vast cohort of competent engineers and managers, a growing middle class and the cushion of long-term stability provided by democracyââ¬âwon't disappear overnight.
Nonetheless, the evidence of foreign investors voting with their wallets against Indiaââ¬âtiny Singapore, with fewer people than a mid-size Indian city, attracted more FDI last yearââ¬âraises a fundamental question. Can India's backward political culture produce the kind of governance the country needs?
Less than two years after the ruling Congress Party-led United Progressive Alliance returned to power with an enhanced mandate, investor optimism has been belied. Freed of the need to rely on obstreperous communists for support in parliament, Prime Minister Manmohan Singh's government was expected to step up the pace of economic reforms that had languished during its first term of office between 2004 and 2009. But instead of using increased political elbow room to unshackle business, the government has moved in the opposite direction, allowing individual ministers wide leeway to make decisions in their personal fiefdoms regardless of their impact on the broader economy.
View Full Image
Bloomberg News
A steel plant, coming soonââ¬âafter far too long a delay.
Take environment minister Jairam Ramesh, whose whimsical style of running his crucial ministry appears designed to grab headlines and win favor with his party's socialist wing rather than to create a transparent policy regime that protects India's environment while promoting growth. In August, Mr. Ramesh overruled state-level officials to halt a proposed $1 billion bauxite mining project in the eastern state of Orissa by London-based Vedanta Resources. Last week, the government cleared another large project in the same state, a $12 billion steel plant by South Korea's Poscoââ¬âIndia's largest single foreign investmentââ¬âbut only after tacking on dozens of riders redolent of the infamous license-permit raj of India's socialist past. Among them: a stipulation that Posco must spend 2% of annual profits from the plant on "social welfare."
Meanwhile, the Ministry of Home Affairs led by P. Chidambaram is in the middle of a protracted row with Canadian firm Research In Motion, maker of the popular BlackBerry smartphone. The home ministry wants India's intelligence agencies to be given access to encrypted corporate emails to ensure that BlackBerry is not abused by terrorists. Quite apart from the absurdly slim odds of Lashkar-e-Taiba using, say, Citibank's BlackBerry servers, the controversy sends a negative signal to foreign businessmen. After last year's so-called Radia tapes scandalââ¬âin which government recordings of private conversations between a lobbyist and prominent businessmen, politicians and journalists were leaked to a salacious pressââ¬âhow many corporate executives will sleep easy knowing that their encrypted emails can no longer be assumed to be private?
Similarly, in a decision that directly undercuts an expensive taxpayer-funded advertising campaign to attract more tourists, Mr. Chidambaram's ministry has imposed absurd visa restrictions on most visitors to India. Last month, Turkish Nobel laureate Orhan Pamuk had to cancel his participation in a literary festival in Sri Lanka because India's visa laws wouldn't allow him to return to the country for two months after departing.
Taken separately, each of these examples can be explained away. Perhaps Vedanta and Posco needed to be held to more stringent environmental standards than the government of Orissa demanded, and India isn't the only country where fears of terrorism have spawned cumbersome regulations. But taken together, the government's decisionsââ¬âalong with a broader tax-and-spend philosophy symbolized by a wasteful multibillion dollar rural employment guarantee programââ¬âcreate the distinct impression that India is coasting on its laurels. Or, to put it less charitably, the government appears to have drunk its own Kool-Aid about India's inevitable rise.
In truth, there's nothing inevitable about India's progress from poverty to prosperity. In terms of per-capita income and most human development indicators India lags not only its fellow BRICsââ¬âBrazil, Russia and Chinaââ¬âbut also all but the poorest parts of Southeast Asia. With linguistic and religious tensions never far below the surface, and a Maoist rebellion in full swing in large parts of eastern and central India, the country can't even take its alleged demographic dividendââ¬âthe relative youth of its population compared to Chinaââ¬âfor granted. Foreign investors are already voting with their feet. India ignores the message this sends at its own peril.
http://online.wsj.com/article/SB10001424...%3Darticle