BREAKINGVIEWS - India is still unravelling
(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)
By Jeff Glekin
MUMBAI (Reuters Breakingviews) - India is still unravelling. Nine months ago, Reuters Breakingviews published a three-part series on the state of the country's economy. At that time, most economists projected GDP growth of around 7 percent in 2012, a sharp drop from the near-double digit expansion of the boom. Today, India has fallen further behind. The case for economic reform - and a realignment of the political system - remains as strong as ever.
Notwithstanding recent policies unveiled by Prime Minister Manmohan Singh on what has been called "Big Bang Friday", growth expectations have fallen further. And though the political gridlock that has dogged the Congress-led government throughout its eight years in office may finally have been broken, missed opportunities, government handouts and corruption scandals have taken their toll.
India faces three big economic challenges: reforming its energy industry; drawing a line under the era of crony capitalism; and reducing the burden of regulation. Achieving these goals might require a new political force to put its hands on the reins of power.
Indian energy is unsustainably cheap. The $35 billion debt of India's state-run electricity boards - now in the process of being restructured - is just one manifestation of how power has been under-priced. Fuel subsidies, meanwhile, are crippling the government. The OECD estimates that cheap diesel alone costs the government three percent of GDP every year: equivalent to half of last year's budget deficit.
Pricing power properly would not only ease the pressure on government finances: it would also boost the value of state-owned firms. For example, Coal India (COAL.NS) sells its output at around 70 percent of international market prices, according to The Children's Investment Fund. The company generates $8.30 of EBITDA per tonne of coal: China's Shenhua makes $45.70 per tonne. If Coal India could double its EBITDA per tonne that might add $20 billion to its value. More efficient power pricing would also improve resource allocation, stimulate investment, and increase supply. India's recent huge power outage, which left half the nation without electricity in August, demonstrates how critically that is needed.
Then there is the state's lackadaisical approach to guarding its assets. Valuable telecom spectrum was given away for $29 billion less than it was worth in 2008. Next came the "coalgate" fiasco, where the government stands accused of handing out coal blocks to corporate giants at a loss of $33 billion. The Supreme Court has already insisted that the government must in future auction such assets. That's sensible, but it's not the end of the story. The government still needs to address the perception that there has been a huge transfer of wealth from the state into private hands. Even if the businesses were only following the rules, there's a case for levying a one-off tax to claw back the windfall they received.
Finally, India needs deep structural reform which promotes productivity and wealth creation. The reforms of 1991 heralded an end of the "License Raj" during which time businesses were strictly controlled by the state. But progress has been slow. The World Bank last year ranked Indian 132nd out of 183 countries in terms of ease of doing business. Starting a new business in India still requires 57 different approvals. New Delhi, meanwhile, boasts a total of 77 ministers with overlapping remits in areas such as drinking water, sanitation and water resources.
A reforming government could set about rationalising bureaucracy and archive archaic laws which are no longer relevant. Some in the government are already trying. Jyotiraditya Scindia, the Stanford-educated son of a Maharaja who is now a junior commerce minister, has launched a website that will allow entrepreneurs to apply for all the clearances they need to start a business. Simplifications of this kind will make India friendlier to business.
The key question is whether recent reforms can be sustained. A small reduction in diesel subsidies is a good start, as is allowing foreign direct investment (FDI) in the retail and aviation industries. But even these measures face resistance. One of the least positive aspects has been the right wing opposition's stance. Instead of holding Congress to account for its economic mismanagement, the BJP has led the fight against recent reforms.
India's youthful population is badly served by this system. In the last decade, the country has alternated between coalition governments of either the left-leading Congress Party or the Hindu nationalist BJP with a collection of parochial regional parties. In India, the need for a new voice is great. A party with a national agenda, not beholden to any one region, could make the country's political system more effective.
Such a movement would need to develop a new style of political campaigning, targeting 50 or so winnable seats. It would also need untainted cash. Mass fundraising could be a way of both campaigning and building momentum. India's 100 million internet users and 900 million mobile phone owners could be tapped for small sums. And roping in a Bollywood hero like Aamir Khan, whose TV show has made him the India's answer to Oprah Winfrey, could add glamour and mass market appeal. With only two years to go before the next election, time is running out. But if India's reformers get their act together, they could change the nation.
(Editing by John Foley and David Evans)
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