Wednesday, November 28, 2007

clear skies ahead?

India's economy reaches the "takeoff" point. But will tumultuous politics put it in a holding pattern?

By Jason Overdorf/New Delhi
(Newsweek Web Extra - November 24, 2007)

India's politics may be in turmoil, but so far the chaos hasn't put a crimp in the country's economy. Last quarter, GDP grew by more than 9 percent, a huge improvement over the 3.5 percent the country averaged in its first 30 years.

The explanation for the disconnect, according to a recent report by Lehman Brothers, is that India's economy has reached what experts call a "takeoff" point where the "old blocks and resistances to steady growth [have been] finally overcome." The report predicts that India's economic momentum has become virtually unstoppable, thanks to two main factors: an average 6.9 growth rate in per capita GDP since 2003, and a trade-to-GDP ratio that has doubled over the past seven years.

The surge in per capita GDP to about $800—from less than $350 in 1995—has more than doubled the size of India's middle class to about 50 million, increasing demand for consumer goods and stimulating manufacturing. The increase in the trade-to-GDP ratio shows that India's economy has finally opened up to the world as dramatically as China's and South Korea's did before it. Meanwhile, a boom has boosted India's investment-to-GDP ratio into the 30 to 40 percent range, from about 15 percent in the early 1990s—hitting the level many analysts believe was essential to the rapid growth experienced in other parts of Asia. And the trends, according to Lehman Brothers, suggest that India is just getting started. If it continues to make economic reforms, such as simplifying taxes, loosening labor laws and changing the pension system to help build a healthy corporate bond market, the economy could soon hit China's mythic 10 percent annual growth rate.

But that's a big if. Prime Minister Manmohan Singh's reforms—most of which he made as finance minister between 1991 and 1996 (one reason he doesn't get credit for them now)—succeeded so well that they eliminated any sense of urgency. In this sense, the prime minister may be a victim of his own achievements. The problem, says Subir Gokarn, chief economist at Crisil, a credit-rating agency, is that "when the economy is doing so well, you cannot create a constituency for reform." The ability to make big changes, he explains, is "independent of the individual, independent of the party, independent of the system. When there's a widespread perception of crisis, then reform happens. When there isn't, it doesn't." In 1991, such a crisis atmosphere came from an exchange-rate drop that nearly depleted India's foreign-exchange reserves. But the country has faced no similar threat since 2004.

Thus reform has slowed dramatically. Singh's government has failed to take steps like relaxing India's stringent labor laws and selling off state-owned industries. That said, it has managed to make some important improvements in recent years—despite fractures within the governing coalition and the lack of an outside prod. For instance, after becoming prime minister in 2004, Singh, despite local opposition, began measures to allow foreign direct investment in the retail sector and to facilitate the creation of large domestic retail chains. He also moved to encourage public-private partnerships in infrastructure projects—potentially bringing more money and better management to one of India's biggest laggards. And he unleashed what could be the biggest stimulus for India's manufacturing sector since 1991, setting up a huge number (386) of special economic zones last year, where industry will enjoy preferential tax policies and government assistance in acquiring land. (Between 1965 and 2004, by contrast, India established only eight.)

The alignment of economic agendas between India's two largest political parties—Congress and the BJP--is perhaps the best sign of all for the country's economic future. Politics in India can prove unstable; four different governments ruled during the 1990s; the BJP-led alliance held sway from 1998 to 2003, and a coalition led by the Congress Party has ruled since 2004. But as the politicians have traded seats, economic reforms have continued apace. This suggests that despite some resistance and reluctance to make further changes, both of the major parties believe there's no going back on reforms already undertaken. Moreover, as the Lehman Brothers report points out, "The general pattern in democracies worldwide is that governments find it easier to push through reforms—and other potentially controversial legislation—earlier in their term of office." That means the 2009 general elections might give the Indian snowball another push, bringing 10 percent growth into view at last.

Tuesday, November 20, 2007

deal or no deal

By Jason Overdorf/New Delhi
Newsweek Japan (published in Japanese)

Not long back, Indian Prime Minister Manmohan Singh told a group of executives that his fractured mandate has made it difficult for his government to do “what is manifestly obvious” to maintain his country's impressive economic growth. For Singh, who is renowned, and sometimes even criticized, for his humility, that was as acerbic as it gets. But the message hidden between the lines is the one that international observers should heed: If doing the obvious is difficult, then achieving the unexpected and controversial is well-nigh impossible. And unfortunately, by pushing forward a nuclear deal with the United States, that is exactly what the man often called India's weakest prime minister in history has set out to do.

To many, the nuclear pact, which was clinched between the two governments in August, does indeed seem obvious. For India, it is essentially an invitation to come in from the cold without substantially altering its nuclear policies. The pact would finalize the rollback of sanctions imposed when India tested its first nuclear device in 1974, allowing for the free transfer of technologies classified as “dual use” because they can be used for both peaceful and military projects. That in turn would spark a boom in the construction of nuclear power plants in a country which desperately needs more electrical power to meet its future targets for economic growth. For the US, the deal would provide a measure of international oversight for India's nuclear program by requiring international inspections of some of its facilities, even though it would not bring India under the ambit of the Nuclear Non-Proliferation Treaty. It would facilitate billions of dollars worth of business agreements. And, perhaps most importantly, it would put an official stamp of sorts on India's gradual alignment of its foreign policy objectives with America's, making the one-time leader of the Cold War's Non-Aligned Movement into a full-fledged, bankable US ally.

But there's the rub, according to policy analyst Pratap Bhanu Mehta, president of New Delhi's Centre for Policy Research. India's left sees the deal as the first step in a major overhaul of India's foreign policy that will force it to take a strong position against Iran—which some see as a natural regional ally; reorient its military spending from Russia and other former principal allies toward the US; and take on a pre-scripted role as the US-friendly counterbalance to China in Asia. “Part of it is a trust deficit,” says Mehta. “The prime minister wants to say, 'Trust me, I'm not going to sell India out to the US. And the others are saying, 'Well.... you sort of are.'” Many in the left, in fact, believe it was only their opposition that prevented India from sending troops into Iraq. As a result, India's communists--who hold 59 seats in the parliament and thus have the power to bring down Singh's United Progressive Alliance coalition government if they choose—said in no uncertain terms that they will withdraw support for the UPA and force new elections if Singh moves to implement the pact. This week, the deal received a new lease on life as the left relented and agreed to allow the government to send negotiators to talks with the International Atomic Energy Agency (IAEA) on a nuclear safeguards agreement that needs to be signed before the pact can be implemented. But many observers suggest the move is designed to allow Singh to save face by conveniently letting the IAEA talks fail.

Because the question of a strategic alignment with the US is a sticky one, Singh, who has yet to give up, has of late begun to emphasize the economic benefits of the deal. India desperately needs more electrical power, the argument runs, and foreign-built nuclear plants will help meet that need while decreasing India's reliance on oil and gas imports and improving carbon emissions. "It's imperative for India to diversify its energy portfolio and enhance the share of nuclear energy because its heavy and growing reliance on [imported oil and natural gas] is going to be expensive and inflationary," argues Professor Anupam Srivastava, director of the Asia Program at the University of Georgia's Center for International Trade & Security. "The government cannot subsidize energy imports beyond a point, which makes 8-10 percent economic growth simply unaffordable. And as this growth slows down to around 5%, foreign capital and technology investment will also slow down, and in turn reduce India's ability to leverage economic gains in other strategic sectors."

To avert that problem, India plans through the pact with the US to increase the share of nuclear power in its energy mix from around three percent to as high as 20 percent by 2050—a goal that would involve building more than 40 new nuclear facilities. For US nuclear suppliers, but also for French, Canadian and Russian firms, this could mean orders running into many billions of dollars over the next several years. However, the deal's opponents argue that India's nuclear power targets may be overly ambitious, and may not even be necessary. In one recent study, for instance, the international development consultancy Dalberg found that even though India will need to increase its power generation capacity from today's 127 gigawatts to around 960 gigawatts by 2032 to meet its GDP growth target of 9%, that increase can be achieved without a dramatic increase in nuclear power production and the biggest gains in emissions will come through the use of clean coal technologies. “[The government's] projections are essentially doubling what they have done historically, so there are big questions about whether they'll be able to hit these numbers,” says John Stephenson, a senior consultant at Dalberg. “And even if they do hit these numbers, it [nuclear power] is a marginal energy source.”

However, focusing on the energy aspect of the agreement—whether to insist it is necessary or to denigrate it as trivial—is to ignore its real significance. And assuming, as do many pundits in India, that the ever closer political and economic relationship between India and the United States has attained an inevitable momentum may be a mistake. “India above all wanted to end its status as a 'nuclear outcaste,'” explains Teresita C. Schaffer, director for South Asia at Washington's Center for Strategic and International Studies. “The deal would accomplish this.” On the other hand, if Singh fails to push it through after the US has agreed to virtually all of India's demands, it could have serious consequences for India's future ability to conduct bilateral negotiations with the US and other nations. “It [India] will start to look like a country that can't take yes for an answer,” Schaffer says.

Meanwhile, this deal could be a “now or never” proposition. President George W. Bush's status as a conservative hawk who was willing to invade Iraq over the perceived threat of the proliferation of nuclear weapons grant him an authority to revisit the usefulness of the NPT in much the same way that former President Richard Nixon's anti-communist credentials made rapprochement with Mao Zedong politically feasible. If India blinks now, the deal will run into next year's American electoral campaign—guaranteed to put it on hold—and whatever president succeeds Bush will likely have neither the desire nor the mandate to put it back on the table. “I genuinely doubt that any successor, whether Republican or Democratic, would be in a position to make the same offer,” says Sumit Ganguly, a professor of political science at the University of Indiana.

Likely, that's music to the ears of India's communists.