MUMBAI (Reuters) - "The tragedy of India is its political system."
That admission by a government minister captured the frustration of delegates at this week's India's World Economic Forum (WEF), where blame has been heaped on corruption and the policy paralysis in New Delhi for a darkening economic outlook.
The government was running scared just a few months ago when a group of activists whipped up popular rage over a rash of corruption scandals, bringing millions of people out onto the streets of the country's cities in peaceful protest.
The crowds have long gone, but the pressure is far from off Prime Minister Manmohan Singh and his government. And some of India's top industrialists warned that Asia's third-biggest economy needs to quicken reform and improve governance.
The calls have added urgency with signs the economy is heading for trouble.
GDP growth may come in at 7.2 percent in the current fiscal year, a respectable enough number but a sharp fall from 8.5 percent in 2009/10. Industrial output has slowed sharply, consumer confidence is waning and inflation remains near double digits despite 13 interest rate increases.
"We shouldn't say that because the institutions of democracy are there, we will be paralysed," said Mukesh Ambani, head of Reliance Industries and India's richest man. "And because there is an opposition and a party in power, we would do nothing. That's what worries me."
"This path from 20th century mindset and institutions to a 21st-century delivery model to meet the expectation of each citizen requires a dramatic shift in terms of our governance. We need to align and move a lot faster."
Farooq Abdullah, the renewable energy minister who bewailed the "tragedy" of India's political system, conceded that the onus was on the country's leaders: "Change will come when we change," he said.
Kiran Bedi, a prominent member of the anti-graft movement, warned of fresh protests if the Lokpal bill setting up a powerful authority to prosecute corrupt bureaucrats and ministers is not passed in the winter session of parliament that opens next week.
"The whole country will be back to the streets ... people are fed up," said Bedi, a former police officer who shot to fame in the 1980s after she towed away ex-Prime Minister Indira Gandhi's car for a traffic violation.
Exasperation with India's rampant corruption and its dirty politicians is not confined to the urban middle classes, who put aside political apathy to support the movement led by a self-styled Gandhian and serial hunger striker, Anna Hazare.
Perhaps the most popular session on the first day of the two-day economic conference in Mumbai, attended by the country's most powerful businessmen and captains of industry, was one on corruption - ominously entitled "The Indian Spring".
CLIMATE OF FEAR
India ranked number 87 in Transparency International's index on corruption in 2010, behind rival China.
Corruption is widely blamed for the parlous state of India's infrastructure and its services, and it is a drag on an economy that has grown at around eight percent per annum over the last few years.
"If we are able to fight corruption in this country successfully, I think it will considerably increase foreign investment into India," Adi Godrej, chairman of the consumer goods and real estate Godrej Group, told the forum.
"If we are able to reduce corruption very considerably it can add about a percentage point to India's GDP growth."
The crisis into which Singh's Congress party was pitched by the popular outrage has taken a toll on governance. Several key bills, including one on land acquisition reform, and plans to open up the retail sector to foreign companies, have stalled.
A climate of fear - former telecoms minister A Raja has already been arrested in a case involving millions of dollars in kickbacks in the sale of mobile phone licenses - has led officials to sit on their hands rather than take policy decision or project initiatives that might somehow be construed as corrupt.
Very few steps have been taken to open up the economy since Singh became prime minister in 2004, which was fine for business leaders as long as economic growth was charging along.
"The government should start governing again," said Udayan Sen, chief executive officer for Deloitte in India. "I think we really have a governance paralysis and there is an enormous lack of confidence in ... the government."
Nitin Gadkari, president of the opposition Bharatiya Janata Party (BJP) - which has failed to make much mileage out of the Congress party's troubles - branded the new mood in the country a "crisis of political credibility".
It fell to the minister of state for planning, science and technology and earth sciences to take the heat at the World Economic Forum over corruption on Sunday.
Ashwini Kumar conceded that the spotlight on India's corruption has tarnished the country's image and cost it economic growth, and he promised the passage of robust legislation to tame it in the next parliament session.
But he warned against expecting too much from the anti-graft bill. "Has law, anywhere in the world ... stopped prostitution, gambling or corruption?" he said.
For more Reuters coverage of the World Economic Forum India Economic Summit, click:
(Additional reporting by Swati Pandey and Sumeet Chatterjee; Editing by Alistair Scrutton and Raju Gopalakrishnan)
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