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Grow up

31 May 2012 By Jeff Glekin

It’s time Manmohan Singh had a grown-up conversation with the Indian public. As the GDP growth rate slumps to 5.3 percent, the nation has gone on strike – up in arms over a sensible lowering of petrol subsidies. The government’s instinct is to pander and roll back, but people would respect Singh more if he told the truth about the economy. To do that, he’ll need to have a similarly frank discussion with his party’s political leader, Sonia Gandhi.

It’s time for some home-spun wisdom. The government is spending more than it earns – the fiscal deficit has risen to 5.9 percent of GDP – so a decade of free lunches and cheap fuel has to end. The country imports more than it exports – the trade deficit has ballooned 56 percent to around 11 percent of GDP – so excess is no longer affordable.

The hard talk continues. Subsidies don’t work. A lower price at the petrol pump means higher prices elsewhere and a less prosperous economy. Lower subsidies would mean less wasteful consumption, lower import bills and improved public finances. The 9 percent of GDP which the OECD estimates the government dedicates to fuel, food and fertiliser subsidies would be better spent elsewhere, for example on investment in infrastructure.

The declining pace of investment is the biggest cause of the slump in India’s growth. But the government could win back the confidence of both foreign and domestic investors with tough decisions, especially if the public could be persuaded to take an adult view of the situation.

Indian politicians have taken a more childish approach – just complaining or blaming foreign problems. But they should face the fact that the problems behind the slowdown are mostly domestic – and home-grown solutions are available. What is needed is a return to the urgency that infused Singh’s tenure as finance minister in the 1990s. Singh should dust down his “an idea whose time has come” budget speech and re-engage with the Indian public. In order to grow, India needs to grow up.

 

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