Wordfall, by Kaleem Omar

There is a lot of hype in the international press these days about the emergence of India as an economic powerhouse that is likely to rival China in the next few years. The rapid growth of India’s IT export earnings is often cited as an example of the economic and technological progress that India has made on recent years. But there is a darker side to this rosy picture. According to the World Bank, about 500 million Indians still lack access to electricity. That’s nearly 50 per cent of India’s population of 1.1 billion, and more than the total population of the European Union.

The Indian government, for its part, says it aims to bring electricity to all rural areas by 2012 and has committed $ 3.1 billion for rural electrification. By contrast, rural electrification in Pakistan has now been extended to more than 90,000 villages (13,000 in the current fiscal year alone), and the Pakistan government says it plans to electrify all the remaining villages by the end of 2007.

On other fronts, too, India is in serious trouble. It has the world’s highest number of HIV infections: over four million infected people and 350,000 AIDS-related deaths in 2004. One in 50 pregnant women in urban areas tests positive and epidemic levels are reported among northern drug users. Some 350 million people in India live below the poverty line with a per capita income of less than a dollar a day. Another 500 million are not much better off, with a per capita income of less than two dollars a day.

India’s infrastructure is in shambles. Its roads are in an atrocious state. The antiquated railway network (which is one of the biggest in the world and carries over 13 million people to some 7,000 stations every day) is falling apart and horrific train accidents have become increasingly common.

Adequate housing is in chronic short supply and tens of millions of people in the cities sleep on the streets. Calcutta’s slums are the worst in the world for any major city, and even Bombay (India’s wealthiest city) increasingly resembles a huge slum. Hundreds of rivers and streams are choked with toxic waste.

India’s life expectancy, at 62 years, is lower than Pakistan’s, at 63, and India has one doctor per 2,165 people, as against one per 2,000 people in Pakistan.

For years, a severe fiscal crisis plagued Indian governments bedeviled by chronic and huge budget deficits. These deficits partly came from the bankruptcy of state-owned enterprises, ill-considered increases in social spending, and over-growth of the public sector. To sustain the deficits, successive Indian governments incurred heavy debt burdens. This forced them to cut back sharply on investment in both physical and social infrastructure. This, in turn, led to low wages and low employment rates, resulting in low consumption and poor motivation. These last two have resulted in low productivity.

Poor productivity, in turn, means poor profits, which, on the one hand, will discourage potential investors from investing more, and on the other hand, will affect the revenues received by the government. Diminished government revenues mean that only a slim budget can be assigned to build up India’s infrastructure.

It has been argued that, under global interdependence, the worst choice a country can make is autarchy (self-sufficiency). India lags behind in many key technologies because it opted for many years to do it itself. No country can make everything it needs; it must import the things that are better or cheaper from elsewhere. And it needs to pay for these imports with goods that it can export as a result of making these items cheaper or better.

Successive Indian governments have been proclaiming the promise of a strong Indian economy for years. “Strong and steady growth” has been the official mantra.

The trouble is that this growth has not made much of a dent in poverty. The often-cited figure of the emergence of an Indian middle class of 250 million people has been static for years. The question is, what about the other 850 million Indians? How long will it take them to emerge out of the swamp of poverty? Another 50 years? Another 100 years? Or what?

And India still lags far behind China in attracting foreign direct investment. FDI flows into India totaled $ 6 billion in 2005, versus $ 50 billion for China.

True, the Indian economy has been growing at the rate of over six per cent per annum in recent years. Even at this rate of growth, however, it will take decades to lift hundreds of millions of Indians out of poverty.

In 1991, the then-Congress Party government (in which India’s current prime minister, Manmohan Singh, was finance minister), threatened with a balance-of-payments crunch, started the painful task of deregulating industry and stripping special interests of their privileges. The result was brisker growth and the flowering of the software industry.

But the reforms have proceeded in a halting manner, and never produced the 8 per cent-plus annual growth rates that India really needs to relieve grinding poverty. Enough reforms have gone through to inflict enormous pain on ordinary Indians. But not enough reform has occurred to give businesses and workers the flexibility and speed they need to make it.

India has lowered tariffs sufficiently to let cheap imports come in and compete for consumers’ hard-earned rupees against locally made goods. The result has been a host of bargains for shoppers, but devastation for local factories. Since 2000, China has been dumping goods from toys to chemicals into the Indian market at 60 per cent of local prices. Small businesses are being decimated. To cite only one example, in Navi Mumbai, an industrial suburb of Bombay, more than 1,000 factories have shut down.

In theory, the flood of cheap imports will force local businesses to restructure and get more efficient (that’s the same argument one hears in Pakistan). But these businesses are hobbled by high costs – and no reform laws have been passed to lower them. Indian businesses are hampered by tough labour laws and high water and power bills..

The big, bitter pill is labour reform. Laying-off workers is all but impossible. That puts off foreign investment and leaves Indian industry hamstrung when it comes to serious restructuring.

India’s industry is also manacled by other archaic laws. The excise tax is so complex and arcane that you need a Ph.D. to understand it. The process adds 5 per cent to industry costs and wastes time. Multiply such expenses by all the thousands of small businesses, and the capital lost is huge.

The Indian government has now awakened to the immediate dangers and is trying to stem the flood of cheap imports. But fundamental labour reform or a simplified tax code? No such breakthroughs are on the horizon.