GDP growth in the January-March quarter slumped to 5.3%, the lowest for nine years. The quarterly debacle dragged down annual GDP growth to 6.5% in 2011-12, lower even than the 6.9% achieved in the great recession year of 2008-09.
Sundry businessmen have urged the government to come out with a revival package. Sorry, but the current malaise cannot be tackled by a tax cut here or an interest rate cut there. There’s a deep structural problem.
Politics is supposedly public service, but it has become the biggest business of all. Controls imposed in supposed pursuit of high ideals are routinely used to extract enormous sums from all business actors.
The supposed economic liberalization of the last two decades freed only a few sectors. In other sectors, controls galore continue. Businessmen say it has steadily become impossible to do business honestly in many sectors. But it has been possible to do business with pay-offs. That, say businessmen, has constituted an unwritten “social contract” between politics and business.
But no more. Public anger at corruption has exploded, upsetting old equations. The comptroller and auditor general has become a public hero. Anna Hazare’s stature as an anti-corruption crusader may have been diminished, but the anger he once represented remains great. The DMK spent unprecedented sums in the Tamil Nadu state election but was decimated because of its association with the 2G scam.
Suddenly politicians are running scared. In New Delhi, no minister wants to take the responsibility for a decision, and forwards every proposal to an empowered Group of Ministers (a Cabinet committee). Even honest ministers fear accusations will bring them down. Instead of demanding money for favourable decisions, crooked ministers would rather take no decision at all.
This has killed the old social contract. Earlier, you could not do business honestly, but could do it dishonestly. Now you cannot even do it dishonestly. Industrial growth in a miracle economy should be in double digits. But in 2011-12, it fell to an annual rate of 3.4%, and in the last quarter was a wretched 1.7%. Manufacturing actually fell 0.3% in the last quarter, against growth of 7.3% in the first quarter.
This cannot be blamed just on Eurozone woes or a slowing global economy. Nor it can be blamed just on high inflation, fiscal deficits and interest rates — all three were high in 2009-10 and 2010-11, which were boom years. One new factor has been the uproar over corruption. The uproar has not ended corruption. But it has ended the social contract.
While this has led to an industrial slowdown, it is nevertheless a welcome development. We can hope for a substantial reduction of corruption and crony capitalism. This will benefit the economy as well as honest businessmen at the expense of crooks.
However, for faster growth we need not only less corruption but a total overhaul of rules to make clearances more automatic. Forget leftist accusations that India is following neo-liberal policies. The continuing web of controls, and the corruption it makes possible, shows that the real problem is illiberalism in a new form. Call it neo-illiberalism. We must end a neo-illiberal system that makes honest business impossible, makes entrepreneurs dependent on favours from above, and rewards crookedness over honesty.
Strong evidence of illiberalism comes from the annual Doing Business reports of the IFC/World Bank. In the 2011 report, India was a lowly 132nd of 183 countries in overall ease of doing business. In ease of starting a new business, India did worse — it came 166th. In ease of getting a construction permit —a prime area of corruption— India was 179th, or fourth last in the world. In enforcement of contract—something supposedly essential for any business —India came 182nd of 183 countries!
In these circumstances, the wonder is not that India’s GDP has slowed down to 6.5%, but that it ever touched 9.5%. Cynics will say this is proof that the social contract produced fast growth. I disagree: growth would have been even faster with better governance.
What is the way forward? The response of the UPA government to corruption charges must not be to simply brazen it out, or point fingers at state governments run by other parties. The UPA needs to come out with a purposive programme to slash hurdles for business, make clearance automatic, and demonstrate that honest business can thrive. Many of the permits required are at the state government level. The UPA must move ahead with aggressive reforms in the states it rules, and make them showpiece states (instead of letting Narendra Modi corner kudos on this count).
