Will Serious Roadblocks Prevent Much-Needed Reform In India

Is the Indian economy about to take a great leap forward under the leadership of the newly elected Prime Minister Narendra Modi? His overwhelming victory as head of the Bharatiya Janata Party in May's general election was widely hailed by the business sector, including many of the country's diamantaires, as he is recognized as having a business-friendly approach.

Indian diamond industry heads and executives taking part in the July 17-21 India International Jewellery Show in Mumbai also expressed their enthusiasm for Modi's victory. His campaign promise to cut red tape and move ahead with bold economic reforms was particularly welcomed in a country known for often snail-like progress on socio-political issues.
"Our country absolutely needs an economic boost," said one diamantaire. "We need to see a rise in consumer spending. We need more people in the shops." His comments were echoed by the head of a diamond manufacturing firm who said that the solid but far from spectacular sales seen at the show indicated that demand badly needs a boost. "There were many buyers here, but they were, for the second year running, very cautious. They placed orders, but there was no large-scale stocking. Precise orders to fit conservative forecasts was what we mostly saw."

The government forecasts that the country's economy will show an improvement during the current fiscal year, with a slow rise in investment creating economic activity. However, high inflation of more than 8 percent and the likelihood of below-normal rainfall levels this year, which would hit agricultural production and boost food-price inflation, will cause economic damage. Higher inflation naturally reduces demand as disposable income is stretched by spending on necessities.

Analysts expect growth of 5.4 percent-to-5.9 percent in the current year, an improvement on the 4.7 percent figure seen in the fiscal year that ended on March 31, but far below the 9 percent annual growth rate posted in 2011. While the forecast figure for this year is higher than economic expansion seen last year and impressive in absolute terms, particularly when compared to the low growth rates in the West, it is not high enough for the Southeast Asian country which needs consistently high growth due to its population expansion and to help reduce youth unemployment, not to mention talking hundreds of millions of people out of poverty.

One in three people in an Indian city is a young person, and forecasts show that by around 2020, the median individual in India will be aged 29, and likely to live in a city. It is also forecast to be the ‘youngest country in the world’. The number of Indians in the 15-34 age group increased to 430 million in 2011 from 353 million just a decade before. Current forecasts show an increase in this segment of the population to 464 million by 2021.

The government has commented that institutional reforms to speed up the implementation of large-scale projects would help bring about higher growth. It also said that improved fiscal management, with regulations to bring in transparent policies and enforcing fiscal deficit targets are critical. Such targets were discarded by the previous Congress Party-led government which opponents said courted voters with higher spending on social projects.

Prime Minister Modi pledged to ease operating conditions for businesses and open up more sectors of the economy to foreign investment ahead of the election. However, comments by the Indian Finance Minister, Arun Jaitley, last week as he presented his budget proposals will hardly cheer the business community.

Recognizing political reality, Jaitley explained that far-reaching reforms need a considerable time to be introduced and implemented, describing reforms as being "the art of the possible" and suggesting that the public might not be ready to accept painful broader economic changes. "You don't do reforms in a manner that the political system is unwilling to accept," Jaitley said in an interview with an Indian TV program.

Asked about widespread changes to the country's labor laws, Jaitley appeared to hand over the problem to the country's state government, by suggesting that they should be the ones to decide on legislative changes while protecting jobs and industries and simultaneously creating new ones. Would labor reforms be introduced either via parliamentary laws or changes at the state level, he was asked, to which he replied that there is no sense in proposing changes that might not be passed. "You reform those areas which are very easy and possible to reform. The more challenging ones, you go on that course in times to come." While elegantly deflecting the question, reading between the lines is a relatively straightforward task.

What does that mean for the Indian economy? According to a diamantaire at the IIJS, the analysis was simple. "There will be some changes, but possibly no more than cosmetic. We need far deeper reforms, but no government will be willing, even if it helped in the long-term to improve the state of the economy, to be that radical. Governments don't act in that way because they fear social upheaval – followed by their own upheaval out of office.

"In many ways, this is yet another government, not just in India, that recognizes the limits of power when it gets into office. In that sense, we may not be very different from the political systems in European countries like France, Italy and Spain which find it politically challenging – not to say impossible – to bring in changes that will improve the labor market and help businesses to be more flexible. We also have a highly sclerotic political and economic system that rejects widespread change. Watch this space, as they say, but don't disappoint yourself by expecting too much."