Tag: India

India’s Faltering Economic Revolution: Lost Opportunity, Lost Future

Last year Narendra Modi won an unusually strong majority in India’s parliamentary election. Modi subsequently visited the U.S. and was warmly welcomed by both the Obama administration and Indian-Americans.

Although ethnic Indians circled the globe as entrepreneurs and traders, the Delhi government turned dirigiste economics into a state religion. Mind-numbing bureaucracies, rules, and inefficiencies were legion.

Eventually modest reform came, but even half-hearted half-steps generated overwhelming political opposition. Last May the Hindu nationalist Bharatiya Janata Party, led by Modi, handed the venerable Congress Party its greatest defeat ever. He seemed poised to transform his nation economically.

As the anniversary of that visit approaches, the Modi dream is fading. He simply may not believe in a liberal free market.

Moreover, few reforms of significance have been implemented. The failures overshadow the Modi government’s successes and highlight its lost opportunities. Critics cite continuing outsize budget deficits and state direction of bank lending.

Former privatization minister Arun Shourie observed last December: “when all is said and done, more is said than done.” Unfortunately, Modi has missed the “honeymoon” period during which his political capital was at its greatest. Time is slipping away.

How Capitalism Is Undermining the Indian Caste System

Karl Marx was wrong about many things but right about one thing: the revolutionary way capitalism attacks and destroys feudalism. As I explain in a new study,  in India, the rise of capitalism since the economic reforms of 1991 has also attacked and eroded casteism, a social hierarchy that placed four castes on top with a fifth caste—dalits—like dirt beneath the feet of others. Dalits, once called untouchables, were traditionally denied any livelihood save virtual serfdom to landowners and the filthiest, most disease-ridden tasks, such as cleaning toilets and handling dead humans and animals. Remarkably, the opening up of the Indian economy has enabled dalits to break out of their traditional low occupations and start businesses. The Dalit Indian Chamber of Commerce and Industry (DICCI) now boasts over 3,000 millionaire members. This revolution is still in its early stages, but is now unstoppable.

Kerry, Obama Pressuring India on Climate Change

Secretary of State John Kerry is currently in India as advance guard for President Obama’s visit later this month. The president is going there to try and get some commitment from India (or the illusion of a commitment) to reduce its emissions of dreaded greenhouse gases. Until now, India, along with China, has resisted calls for major reductions, effectively blocking any global treaty limiting fossil fuel use. The president is very keen on changing this before this December’s United Nations confab in Paris, where such a treaty is supposed to be inked. 

Kerry’s mission is to get India ready for the president. Speaking at a trade conference in the state of Gujarat, Kerry said, “Global climate change is already violently affecting communities, not just across India but around the world. It is disrupting commerce, development and economic growth. It’s costing farmers crops.”

In reality, global climate change is exerting no detectable effect on India’s main crop production. 

As shown below the jump, the rate of increase in wheat yields has been constant since records began in the mid-1950s, and the rate of increase in rice yields is actually higher in the last three decades than it was at the start of the record.

Further, if Kerry was saying that climate change is reducing crop yields around the world, that’s wrong too. The increase in global yields has also been constant for decades.

India Tosses out the WTO’s Agricultural Subsidy Disciplines

The World Trade Organization (WTO) seems on the verge of approving an agreement with India to allow the Trade Facilitation Agreement (TFA) to move forward.  The TFA is to be applauded.  It will make a useful contribution toward helping goods move across borders more efficiently, which will tend to increase trade and promote economic growth.

The problem is not with the TFA, but rather with the high price that the global community seems ready to pay for it.  India has asked that it be allowed to exceed the level of domestic agricultural subsidies to which it agreed twenty years ago in the Uruguay Round negotiations.  For the first time in history, those talks led to limits on the ability of countries to use trade distorting agricultural supports.  Those subsidies had been rampant, often leading to surplus production that depressed crop prices in global markets.  Farmers who were being subsidized generally were happy enough with that arrangement, but it was a very different story for unprotected farmers in other countries.  Many of the world’s farmers are quite poor to start with.  Government-driven decreases in commodity prices make them even poorer.

A teachable moment is slipping away because no WTO member has been willing to stand up and explain what’s going on.  India sanctimoniously declares that it needs to promote food security through use of a robust public stockholding program, and would like the world to believe that existing WTO rules prohibit them from doing so.  This is simply not correct.  The Uruguay Round includes specific provisions detailing how public stockholding may be used for food security purposes.  A great deal of time, effort and tough negotiating went into developing those provisions.  There is no limit on government expenditures to provide food – including free or reduced-price food – to low-income people.  However, there is a clear requirement that purchases of commodities for public stocks must be made at open-market prices.  It is not allowable to purchase commodities at above-market prices in order to provide a subsidy to farmers. 

Subsidies and Votes — in India and the United States

When Americans suggest that government transfer programs might affect the way people vote, the mainstream media react with the indignation that greeted Mitt Romney’s “47 percent” comment. Of course, in other contexts the media certainly know that programs like Social Security, Medicare, and farm subsidies impact voting, but Republicans seem to get pounded for making that point.

But when it comes to other democracies, such as India, journalists don’t seem to have any trouble seeing the electoral advantages of government spending. Jim Yardley reports from India for the New York Times:

Frustrated by delays in Parliament, and eager to gain favor with rural voters ahead of national elections, India’s cabinet has approved a sweeping executive order that establishes a legal right to food and will create what is likely to be the world’s largest food subsidy system for the poor….

For the governing Congress Party, the new ordinance fulfills a campaign pledge made by Mrs. Gandhi and provides her party with something tangible to offer voters as the country prepares for national elections next year. The coalition government has been battered by corruption scandals and a sinking economy. With polls suggesting a loss of public support for the Congress Party, the food ordinance is good politics, some analysts say, if uncertain economics.

I noted a few months ago that the Washington Post had made a similar point:

Trying to rekindle the fire of India’s economy, Finance Minister P. Chidambaram promised Thursday to rein in a runaway deficit even as he raised spending on welfare schemes that the government hopes will woo voters in elections scheduled for next year….

“The finance minister faced two counter-veiling pressures: to present a populist, voter-friendly budget and also control the huge fiscal deficit,” said Vir Sanghvi, a political analyst. “What he presented was a ‘this-is-the-best-we-can-manage-under-the-circumstances’ kind of a budget. . . . He is hoping that the economy will improve and prices will come down by the time of the election. That is a big political gamble.”

Chidambaram promised to increase spending on rural welfare schemes, rural roads and jobs, food guarantees for the poor, women’s safety programs, tax breaks on loans for first-time home buyers and a women’s bank.

Is it really so hard to imagine that American politicians might also see transfer programs as measures that would benefit them on election day? Of course, the more fundamental impact of transfer programs may be to make both parties afraid to cut spending. What politician in either party wants to propose cuts in Social Security, Medicare, student loans, or farm subsidies? It’s not that transfer recipients all vote for the same party; it’s just that both parties fear the loss of votes if they interfered with the flow of subsidies. And not just in India.

A Map of Economic Freedom in India

Economic freedom in India has improved notably since the beginning of the country’s market reforms in the early 1990s, stimulating high growth from a very low income base. Though India’s level of economic freedom is still low—it ranked 111 out of 144 countries in the latest Economic Freedom of the World index—assigning one overall rating to this vast country can be a bit misleading. The map below shows that, rated on a state by state basis, the levels of economic freedom in India in fact vary greatly. The state of Gujarat, for example, has the freest economy in the country and ranks far above West Bengal, one of the least free states.

The data comes from the Economic Freedom of the States of India: 2012 report, co-published today by Cato, the Friedrich Naumann Foundation, and Indicus Analytics in New Delhi.

Economic Freedom in India

This annual report shows a positive relationship between economic freedom and growth. It is a reminder to policymakers at the state level that they need not wait for national leaders to restart the reform agenda; much can be done at the sub-national level to improve freedom. My colleague Swami Aiyar, one of the co-authors of the report, suggests some reforms in his chapter(.pdf) describing Punjab’s decline.

The study discusses reforms in two other areas that would have a significant impact on Indian growth. In his chapter (.pdf), Ashok Gulati, the head of the Indian government’s Commission for Agricultural Costs and Prices, describes the extent to which Indian agriculture is so incredibly screwed up in every step of production and sales, and he suggests sweeping liberalization. Economist Bibek Debroy describes India’s extremely rigid labor laws (.pdf), which help explain India’s large informal economy and why the country has failed to create labor intensive export industries as have developed in other Asian countries.

U.S.-Pakistan Relations: The Afridi Affair and Its Aftermath

Yet again, U.S.-Pakistan relations have hit a new low. Days after a deal to reopen NATO supply routes into Afghanistan fell through, and two back-to-back U.S. drone strikes rocked northwest Pakistan in a 24-hour period, tensions flared again after a tribal court sentenced Dr. Shakil Afridi—a Pakistani citizen who helped the United States track-down Osama bin Laden with a fake vaccination program—to 33 years in prison.

Republicans and Democrats on Capitol Hill were appalled, and Secretary of State Hillary Clinton called the move “unjust and unwarranted.” Apparently, U.S. officials and lawmakers are surprised that the chasm separating Washington and Islamabad is growing wider after years of papering over their differences.

Yesterday, in response to Dr. Afridi’s 33-year sentence under the Frontier Crimes Regulation, the Senate Appropriations Committee voted to cut aid to Pakistan by a symbolic $33 million. That’s not enough—it represents just 58% of the amount the president requested for Pakistan. Washington should go further and phase out assistance entirely.

Today in the New Jersey Star-Ledger, my coauthor Aimen Khan and I argue that ending aid to Pakistan is the right course for both countries:

The U.S. must carefully calibrate a policy with Pakistan that continues diplomatic relations absent large sums of aid. While cutting aid to Pakistan might be temporarily destabilizing, Pakistan’s support for militant Islamists is arguably more harmful to regional stability. Moreover, while emergency-type humanitarian aid can be beneficial to the Pakistani people, economic development aid intended to promote growth has been detrimental, allowing Islamabad to avoid confronting its rampant corruption and budgetary problems with the necessary urgency.

The Pakistani government and people stand united in their belief that Pakistan does not need the U.S. Phasing out U.S. aid to Pakistan benefits both parties and better reflects strategic realities.

As is common with U.S. military and foreign aid to unstable governments, it typically serves to entrench the prerogatives of military and civilian elites. Quite perversely, in return for the tens of billions of dollars that American taxpayers forked over to Islamabad, many in Pakistan have come to blame Washington for their deteriorating situation. Even well-intentioned assistance under the much-lauded Kerry-Lugar aid package was viewed within Pakistan as an infringement on sovereignty, mainly because it came with intrusive strings attached. Furthermore, U.S. aid and arm-twisting have failed to pressure or persuade Pakistan to go after militants we deem to be a threat to our interests, including the Afghan/Quetta Shura/Karachi Taliban, Hekmatyar, and the Haqqanis.

From the 30,000-foot view, from Islamabad to New Delhi, it appears that Washington is slowly making a long-term pivot in South Asia. But as this author argued years ago, reconciling this pivot in the context of Afghanistan has been nothing short of a failure. The United States and Pakistan do not trust one another, NATO slouches toward an exit, and Pakistan has become more radicalized, destabilized, and encircled by India and militants.

But I digress. Please click here to read the full op-ed. Enjoy!