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The World's Most Important Election


The economic failings of Manmohan Singh’s government have not yet become fully apparent.

The economic failings of Manmohan Singh’s government have not yet become fully apparent.

In terms of the world economy, relatively little was resting on the outcome of last November's U.S. presidential election. John McCain was on the side of the big-government wing of the Republican party, while President Barack Obama, after an initial burst of public spending, will be forced by economic reality to retrench during his remaining years in office.

There is, however, an election pending which will have far more important economic impact on the fate of mankind, causing a fifth of the world's population either to remain mired in poverty, or to move rapidly toward economic growth and prosperity. That election is in India.

The British colonial oppressors did some things well in India, but they got one thing horribly wrong: their exit. Apart from causing a civil war with 500,000 casualties, they essentially handed the country on a plate to the leftist Congress Party, run by economic illiterates (not that British economic policy between Neville Chamberlain and Margaret Thatcher was that much better). As a result, India suffered for the next four decades in an economic backwater with around 1 percent per capita economic growth and an endless proliferation of bureaucracy, the so-called "permit raj."

There was a gradual easing of controls in the 1980s and a somewhat more vigorous one after 1991 under Prime Minister Narasimha Rao and his finance minister, current Prime Minister Manmohan Singh. But Indian economic growth thereafter appeared to relapse into its usual torpor until the advent in 1998 of the Bharatiya Janata Party (BJP) government led by Atal Bihari Vajpayee.

The Vajpayee government pursued market-opening policies with considerably more vigor than any of its predecessors, with the result that by 2004 Indian growth was running around 8 percent annually and the country had been included among Goldman Sachs' BRIC group (Brazil, Russia, India, and China) of emerging markets that would in future dominate the planet.

In an exhibition of voter ingratitude unequalled since the British electorate threw out Winston Churchill in 1945, Indian voters in 2004 rejected Vajpayee and the BJP sufficiently firmly that a Congress-dominated coalition was formed under Manmohan Singh. There was much talk of further economic reform, but in reality reform essentially ceased, although economic growth did not.

However, like all Congress governments, the Singh administration proved to be addicted to public spending and fiscal indiscipline, with the spending outcome for the 2008-09 fiscal year being fully 20 percent above the budget estimate for that year. Since most Indian states also run budget deficits, the overall Indian fiscal deficit has widened in the global downturn to around 12 percent of gross domestic product.

Trouble Ahead

"The Economist" poll of forecasters predicts Indian growth of 5 percent in 2009 and 6.4 percent in 2010, but if the fiscal deficit persists at these levels, that growth will almost certainly be curtailed by financing difficulties. Indian inflation in the 12 months to February ran at 9.6 percent, while 3-month interest rates are currently at 4.5 percent. In spite of India's magnificent export successes in last decade, the current account deficit is already running at 3.7 percent of GDP.

In other words, under present policies the Indian economy is an accident waiting to happen, with an inflationary crisis and seizure of financial markets the most likely way that a breakdown could happen. The rupee is already down 20 percent against the dollar in the last year, and could easily collapse if things go wrong enough.

Nevertheless, the potential of the Indian economy remains enormous, if only the country can find a proper government. The recent announcement of Tata's new $2,000 Nano automobile demonstrates why. The combination of a vast supply of extremely cheap labor and a large enough domestic market for economies of scale to be achieved is rare.

The Tata Nano has become a symbol of India's market potential.
Outside India and China, emerging market automobile producers have the enormous problem of an inadequate domestic market, and so are forced to rely on export markets, in which it is very difficult to achieve enough volume quickly. Malaysia's Proton automobile company had most of the advantages of Tata, but without an adequate domestic market it was never able to expand enough to make itself truly internationally competitive.

However, the Tata saga also highlights some of India's problems. Tata had originally intended to launch the Nano last October, manufacturing it at Singur, in the state of West Bengal. It had obtained permission from the Communist government of West Bengal and had spent $350 million on the plant. Nevertheless, in early October, it was forced by local protests led by West Bengal's opposition party, the Congress offshoot Trinamool Congress, to abandon the plant and transfer production to a new factory in Gujarat, which will not be ready until 2010.

Meanwhile, Tata is being forced to manufacture Nanos at its plant in Pantnagar, a facility that will only allow annual production of 50,000 vehicles, compared with the 250,000 that Tata believed it could sell in its first year. (With 51,000 advance orders in the first 10 days following the product's official launch, Tata's estimate of the Nano's sales potential may even have been low.)

Two Possible Extremes

The stakes in the Indian election are therefore high. At one extreme, India could continue its progress as an emerging market with Chinese-style growth rates and a population that is expected to exceed China's by 2025. Such an India would be a highly important strategic counterweight to China, and a magnificent ally for the United States and Europe, balancing China and Russia's authoritarian leanings. Most important, Indian economic growth over the next generation could help lift a fifth of the world's population out of poverty.

At the other extreme, India could suffer a financial crisis that ends the current growth spurt, followed by a reversion to the "Hindu rate of growth," leaving the country mired in poverty, and conflict with nuclear-armed Pakistan an ever-present possibility.

The Indian election will take place in five phases between April 16 and May 13. The chance of the optimal outcome must be reckoned as slender. Vajpayee, who is 85, has retired from politics. The new BJP leader, Lal Krishna Advani, 81, is not particularly economically oriented and has ties to Hindu extremism that may prove highly off-putting to Muslim voters and somewhat off-putting to moderates.

Nevertheless, the reformist Jaswant Singh, who was finance minister in 2002-04, is still active in the party, leading the opposition in the upper house of parliament. In this election he is standing for election in Darjeeling, West Bengal, and at 71, he is a stripling by Indian political standards.

The economic failings of Manmohan Singh’s government have not yet become fully apparent. India is in the "stimulus" phase of excessive public spending, which creates spurious economic growth, but has not yet run up against financial constraints, nor made its disadvantage in accelerating inflation and "crowding out" private investment fully apparent.

Thus a BJP absolute majority is not very likely -- nor is a position so close to a majority that it could easily govern with the support only of like-minded free-market parties in the National Democratic Alliance.

Elder Statesmen

The most likely outcome is a renewal of the Congress-dominated coalition, which is currently leading in opinion polls, but without an absolute majority. Manmohan Singh would presumably continue as nominal prime minister. But at 76 and still recuperating after a January 2009 heart surgery, he may increasingly become a figurehead, deferring to Sonia Gandhi and her son Rahul, 38, the natural next leader of the dynastically-dominated Congress. (Rahul is the son, grandson, and great-grandson of Congress Party Indian prime ministers.)

Since Congress is likely to expand only modestly from its current 150 seats (out of 545), even if Manmohan Singh wished to return to his 1990s reformism, he would be unable to do so because the coalition would include the Communists or other antimarket elements. Rahul Gandhi is Western-educated and has worked for the Monitor strategic consultancy, but his family tradition of state control makes him an unlikely reformist. But in spite of his youth, he would probably be more able to control the left of a Congress coalition than Manmohan Singh.

Given the weakness of Congress and BJP, it may well be that neither Advani nor Manmohan Singh will be able to form a government, with regional parties holding the majority of seats in parliament. A group of those parties, mostly left-oriented, has formed a Third Front, which would most likely ally with Congress, although its leader, Kumari Mayawati, chief minister of Uttar Pradesh, might be an alternative prime ministerial candidate. Mayawati has held no non-political jobs other than schoolteacher; it is therefore interesting that in 2007-08 she was the highest taxpayer among Indian politicians, paying 260 million rupees ($5.2 million) in tax.

It's a pretty grim prospect. The chances are that after the dust clears in mid-May, India will elect another antimarket government, or possibly immerse itself for a couple of years in political squabbling. In either case, its stellar growth record is likely to come to an unpleasant end.

Given that Russia no longer qualifies as a growth market, the BRIC group of emerging growth markets will in that event have narrowed to Brazil and China. With the United States, Europe, and Japan also mired in low growth and excessive budget deficits, the next decade promises to be economically miserable worldwide.

Martin Hutchinson is the author of "Great Conservatives" (Academica Press, 2005). An earlier version of this commentary was published on the Prudent Bear website, www.prudentbear.com. The views expressed in this commentary are his own, and do not necessarily reflect those of RFE/RL.

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