Massachusetts Daily Collegian

Stultified Indian growth is a lesson for us all

By Nikhil Rao

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As much of the Western world seeks to escape the economic turmoil that has been plaguing it since 2007 or so, there is something that must not evade its attention: The slowing growth and lack of reforms in emerging markets. There was a time when emerging markets were hogging the limelight. In 2001, Jim O’ Neill, chairman of Goldman Sachs Asset Management, bullishly coined the term “BRICs” (Brazil, Russia, India and China) to describe the rapidly growing emerging economies of the day. As the more politically and economically inclined readers may already know, that growth is stagnating, if not stalling. China’s normally robust GDP growth has slipped down to 7.6 percent Quarter 2 (Q2 ) data and the GDP growth of the country that this column focuses on, India, has sputtered – the relevant data from Q2 is 5.5 percent. This column now seeks to describe many of the problems that India is facing, both fiscally and politically. There also seems to be an underlying theme that can be extrapolated to the relevant field of discourse here, in the United States.

India currently has many problems on its hands. With a current account deficit of 4.4 percent of GDP and a budget deficit of 5.6 percent of GDP, the country is looking like one that espouses an ideal of “buy today, pay tomorrow.” (A current account is roughly the difference between a nation’s exports and imports of goods, services and transfers while the budget balance is the difference between a nation’s revenue and spending for that fiscal year.) As investors implore the country’s leadership to provide more reasons to invest and consequently shore up the aforementioned shortfalls, they are being met with reforms tenuous in nature or signs of an environment that is hostile to business.

For starters, the country foots a gargantuan subsidy bill that deals predominantly with petrol, diesel, liquefied petroleum gas – which is used for cooking – and fertilizers. Essentially, the coalition government revises fuel prices upwards or downwards from time to time, which means that as world oil prices skyrocket, the price that the consumer pays at the pump remains the same. Thus logic dictates that if the price that consumers pay stays static while the market price climbs steadily, the bill the government of India must be growing larger.

Flickr/BriYYZ

In addition to that, inefficiency abounds in many sectors. The government’s stubborn desire to retain failing public enterprises and allow monopolies to persist is hurting the good investment name of India. Cases in point: the airlines Air India and the dominance of India’s chief coal mining giant, Coal India. Though the data that I perused provided values that were relevant only until 2009, they paint a more-than-lucid picture of the reasons for the government to let go. The airline’s already paltry profits diminished to negligible profits and eventually began to post outright losses. As anyone will learn in an elementary microeconomics class, many public enterprises care neither for quality, nor for efficiency – and let me be clear, Air India can boast of neither. It merely is a parasite on the government’s Exchequer, sapping away money. Regarding the coal monopoly, we observe that it prevents the efficient satisfying of its domestic demand as it crowds out private enterprise. The coal that is recoverable can only be mined if the miners involved have acquired permits to do so. The effect of this is two-fold. It allows only a few miners to ply their trade, and quite obviously, these lucky firms cannot wholly meet domestic demand. The government then is forced to look elsewhere (that is, outside the country) for coal and ends up paying a higher price for it. India possesses 10.2 percent of the world’s recoverable coal resources, according to a 2006 statistic, and yet overpays for imports to meet a relatively large 20 percent of its domestic demand. Secondly, as the monopoly rests in the hands of the ham-fisted government, it is sometimes free to pick and choose who is permitted to mine and who is not, as is evinced in the existence of a large number of such allegations befouling this practice.

Investors are by no means deficient in powers of observation; they have been noticing inefficient and oft-corrupt practices of some within the country. In addition to this, the government attempted to enact a business-attacking measure, the General Anti-Avoidance Rule. It was designed to retrospectively tax corporations for profits that they had earned in India. Needless to say, investors were shell-shocked and foreign money was pulled out of the country quickly.

It is this author’s desire to impress upon the reader the issues that are vitiating the Indian economy. As the government draws up the courage to address these problems, a select few trouble makers are pandering to the unfounded doubts of the people and propounding their own brand of populism. Such opponents argue that the government must always strive to keep fuel prices low and subsidized as immediate increases will cause inflation, currently at 10 percent to stay high forever, the odd feature being that they didn’t seem to care much about inflation prior to this.

What must not be forgotten is that a lot of these lessons can be applied to situations in the United States. It is imperative that the government takes its boundaries into account while aiming to prop up the economy; crony capitalism of the flavor described above just will not do.

As governments across the world stretch their budgets in vainglorious attempts to placate their constituents, it is time they remembered about the preservation of economic stability, health and freedom in the long run.

Nikhil Rao is a collegian columnist. He can be reached at [email protected]

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