India’s Licence Raj Refuses to Die

India cannot afford a Hindu rate of growth in the twenty-first century, but necessary reforms are not forthcoming.

India’s central bank last week cut its growth forecasts for 2012 and moved to increase liquidity in an effort to contain a nearly 7.5 percent inflation rate. It specifically cited the government’s “policy and administrative uncertainty” as one of the reasons for India’s weakened economy.

The bank lamented “the absence of credible fiscal consolidation” and urged efforts to “induce investment that will help alleviate supply constraints in food and infrastructure.”

India has made it easier for foreigners to invest directly in domestic firms but structural industrial and labor market reforms, which are critical if the country of 1.2 billion is to live up to its economic potential, are unlikely to be enacted in the short term by the center-left administration in New Delhi.

Neither of India’s two major political parties has so far been willing to risk losing votes from people who dependent on government for their livelihoods by reining in a pervasive bureaucracy that is rife with corruption. Ridden by scandals, Prime Minister Manmohan Singh’s government lacks the credibility to push ahead with reforms which the former finance minister himself pioneered in the 1990s.

Starting a business in India takes up to two hundreds days if one is to complete the excessive licensing requirements and can cost more than sixteen times the average annual income. That is, unless an entrepreneur has the financial resources to bribe officials and streamline the process.

Corruption is a major impediment to growth in itself. Property rights are not effectively protected nor enforced. Judicial procedures tend to be protracted and can be subject to political pressure.

The economic liberalization of India has lifted hundreds of millions out of poverty and allowed the country to attract international business and investment. The process has stalled at a time when China, India’s largest competitor for access to food, hydrocarbon, mineral and water resources abroad, is expanding its reach across the Indian Ocean.

Even as it enjoys an informed workforce that speaks English, laborers in China are better educated on average than their Indian counterparts. They are also more productive. China enjoys an almost complete industrial supremacy over its competitor. It produces nearly half of the world’s steel, ten times India’s output, while Chinese infrastructure receives three times the investment that India’s does.

There is mounting apprehension in India about the other Asian giant’s rise but also a huge disparity between the upper middle class’ recognition of what needs to be done to boost India’s competitiveness on the one hand and the everyday struggles of the nation’s poor on the other. The World Bank last year estimated that 32 percent of India’s population lives in poverty. Two-thirds of its people depend on rural employment for a living.

The agricultural economy nevertheless faces considerable challenges which the government has largely failed to address. There aren’t good roads to allow farmers to take their products to market but there is ample regulation of foodstuffs to discourage expansion.

Irrigation systems are poorly maintained when fossil aquifers are rapidly depleting. India’s food production is stagnating yet the country is projected to add almost half a billion people before 2050. Climate change further raises the specter of diminished river flows if Himalayan glaciers melt.

There is no question that India cannot afford a “Hindu rate of growth” anymore. If it is to meet the challenges of the twenty-first century, it must work to stamp out corruption, lift the regulatory burden that stifles innovation and growth and invest in its road and water infrastructure instead, else it may not be able to feed its people in the long term.