Can Dr. Singh Cure his Economy?
Abstract:
In May 2004, when India unexpectedly voted into power the Congress and its allies (later renamed the United Progressive Alliance) and Manmohan Singh became prime minister, it was a dream come true for proponents of economic reform. As finance minister in 1991, Dr. Singh -- who meets President Bush today -- had steered his country out of a major macroeconomic crisis. He went on to liberate India from its "license raj," with its myriad of controls on imports and investment. The measures he put in place in his five-year term delivered a handsome annual GDP growth of 7.5% from 1994-97 and 6% during the 1990s.
Four months into UPA rule, prospects are less rosy. GDP growth, which had touched 8% in 2003-04, is set to decline to 6% this year. Inflation, at 3.4% in 2002-03 and 5.4% in 2003-04, has edged up to 7.5%. Until April, everyone was betting on the appreciation of the rupee. But it has depreciated more than 6% against the dollar since then, despite the sale of several billion dollars by the central bank. The stock index Sensex has declined 10% from its April peak.
Some of this results from events beyond Dr. Singh's control: The lower growth-rate projections are largely attributable to the expected decline in agricultural growth due to bad weather; and inflation has been fed by increased world prices of oil and metals, especially steel. But some of the scaling down of expectations is due to UPA policy. Pessimists are justifiably alarmed over two developments. First, having embraced the view that its election success owes much to the neglect of India's rural poor in the past decade, the UPA plans to increase expenditure substantially in agriculture, education and health. Second, the intensification of India's economic reforms is in doubt. The UPA has abandoned the privatization program that had finally gained some momentum under the BJP government and has ruled out labor-market reforms.
The view that the past reforms neglected the rural poor and agriculture is questionable. The '90s and early 2000s saw poverty decline in rural and urban areas; and though public investment in agriculture declined, its adverse effect on farm incomes was more than offset by increased subsidies on agricultural inputs (electricity, irrigation, fertilizer) and price supports. Moreover, because the reforms concentrated on the liberalization of the industry, the terms of trade shifted in favor of agriculture, helping private investment grow faster than output in the sector.