Tuesday, July 26, 2011

India Loosing Its Growth Momentum


India got freedom to grow in the early 1990s under the down of Rao - Manmohan policy of liberalization and Globalization the journey completes two decades of high growth. However the windfall gain has became sluggish as the growth momentum appears to have lost its steam, ironically under the belt of same man Manmohan Singh who had actually initiated it. 

It is visible on statistics that India’s economic marathon has started losing their strength under the very leader who initiated it in the early 1990s. 

First, the economy has given the indications of slowing down and, then came the report of foreign investors no longer regarding India as their favorable destination, preferring other emerging markets over New Delhi.

The sluggish economic performance of the country is explicable given the fact that India is beleaguered by a series of big scams, poor governance tumbling out of government armory. For understanding the matter, it is must to look into the very process of economic reforms that flagged of in 1991 on the reaction of the economic crisis of the early 1990s that forced the Government of India to introduce a number of economic reforms policy as a precondition for receiving IMF funding. These were aimed at trade, industry, infrastructure, disinvestment, Allowance of Foreign Investments.

The reforms have given completely new dimension to Indian economy. The GDP growth of India rose from an average of 3.1% of Hindu rate of growth in the past to an average of 7 to 8% in the last one decade. 

The high economic growth of country helped the middle class of India to emerge to a size of 350 million, making India one of the biggest consumption markets in the world. The economic liberalization revitalized the dying private sector of the country, which today constitutes almost 20% of the economy. The country’s savings rate also surged up from 22% to 35% in two decades.

Despite the beginning the reform process remained halfhearted as the crisis vanished, country went back to its old traditional way of functioning. No wonder, crony capitalism continues to prevail in many sectors and there are no steps of administrative reforms taken by the government so red tapism is still an important feature of Indian governance.

It is ironical to see that country hasn't been able to take large-scale institutional changes, which was must needed steps to maintain the growth momentum. For each doubling of GDP, the way government functions needs to be reformed, unlike the developed world, whose GDP doubles every 25 years, India has seen its GDP doubling every 10 year. 

The result has been a sharp gap between our existing state structures and the need of the Nation. India ranks 134th among 183 countries in providing conducive environment to business, as per the Doing Business series of the World Bank/International Finance Corporation.

India must require a revamp in labor laws,because the multiplicity of labor legislation is an important roadblock for country sustainable growth. Out of a workforce of more than 400 million, 92 % are in the unorganized sector. 


Telecom sector in India has been a success story due to liberalization policy adopted by government. The telecom story of India was also ushered in after 1991, leading to the phenomenal surge of mobile phones. More Indians have cell phones today about 860 million than they have access to sanitation and toilets. 

But there is a complex twist in the tale. The Indian telecom story wasn’t as successful as that of neighboring Pakistan. Islamabad had witnessed spectacular surge in 2005-08, with respect to India’s slow but steady advance, so slow that it was overtaken by small country like Bangladesh for a brief moment. But, of course, slow is a relative term. To those observing it in isolation, the Indian telecom sector seemed like a rocket. It was indeed a rocket, but so were its peers.

Every religion has their own way of deal with death that is instructive we must grieve, but not forever. According to Buddhism teachings, we have an alms giving after 7 days and then in 90 days. 

The policy makers appear to have lost all sense of their proportion. Only some of us appear to remember this is not the first time a Telecom Minister behaved this way, despite the Sukh Ram scam verdict being given as recently as in 2009 for money illegally amassed in the 1990s from this very industry.

The prime danger is that the media-stoked angst can derail investments and delay decisions in a fast-moving industry as it is reflected after the surfacing of telecom scam in India FII had sold good chunk in Indian market and telecom share has became the under held sector in the market.

 Now India requires another big burst of investment to kick-start the broadband revolution. Despite its difficulties, India is ahead of its large neighbors in broadband, and extremely well placed to surge ahead because of the issuance of 3G frequencies last year. To cash the advantage the investment is needed but investment sentiment is lost somewhere in poor corporate governance.

Reform is definitely difficult thing to do but for the strong government it is just a matter of willingness. Something has definitely gone wrong with the Indian dream of liberalization. Sri Lanka started on the reform path in 1978, well before India. While planning people in India initially rejected mobile telephony in favor of Government-led technology development, however Sri Lanka welcomed 100 per cent foreign-owned mobile operators as early as 1989.

India’s  GDP growth rate is highest in the region but in the case of human development India is not country is still struggling to settle the basic issue of governance.

Pakistani telecom growth in 2005-08 was the product of policy reforms implemented in 2003-04 under the Pervez Musharraf regime policy reforms included taken by him as the Auctions for the 4th and 5th GSM licenses that yielded $291 million apiece

A license- renewal policy significantly reduced the uncertainty for the investors in Pakistan, thereby safeguarding the investment climate, while also ratifying the problems caused by ad hoc licensing in the past.

The proper enforcement of well-crafted policy in Pakistan under the military regime led to good performance in country. Foreign Direct Investment into the sector has seen super surge from negligible $6.04 million in 2002, to $1905.06 million in 2006 and $1824.25 million in 2007.

Increased investment resulted to significant improvement in the performance of the sector in terms of connectivity, low prices and better choice for consumer. The surge of investment proliferated by the reforms allowed Pakistan to move ahead however it was like a wind-up toy. 

Pakistan started to lose its momentum in 2008, and by 2010 India was again ahead. The tortoise overtaken again, not because it has taken a nap, but because it lacked persistence.
 It was a patch full compromise among various interest pillars, primarily those entrenched within state run BSNL/MTNL. One way Pakistan conducted a transparent auction but India has followed faulty process. Pakistan handled the license renewal transparently, eliminating the confusion for the service provider and realized enormous money for the exchequer. 

India is just beginning to address the first license renewals without a clearly stated principle in place. India’s Department of Telecommunications collects too much money in universal service levies, gave most of the money, especially in the early years, to BSNL, and is now unable to get rid of billions. Pakistan’s USF (Universal Service Fund) company has succeeded in disbursing around 90 per cent of the fund without favoring any operator, and supporting green technology as a bonus.

Yet, India is pulling ahead. It is pulling ahead because it is fundamentally a consultative, democratic polity. Democracy cannot produce the clockwork efficiency that a well-functioning dictatorship can; but neither will it produce quasi-democratic dysfunction that follows the rare, brief interludes of efficient authoritarianism.

But is this patched together workaround system optimal? No. The collective self-flagellation that is known as the 2G scam has surely gone on for too long. Bad things were done. Someone falls on the sword or is pushed to the sword, remedial actions are taken and life must resume.

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