An elephant, not a tiger

A special report on India December 13th 2008

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For three days India’s most cosmopolitan city and aspirant international nancial centre echoed with gun re. have grown fastest. Page 8 Where invisible threads fray A litany of trouble spots. At the same time Mrs Gandhi and her prime minister. They gave the world images of India that jarred with the shining message of its recent progress.economist. Som Mittal. a patchy monsoon.com/audiovideo A country brie ng on India is at www. India’s economy is slowing rapidly and con dence is fragile. as so often. T. India has had a remarkably successful past few years. In the past ve years the economy has grown at an average annual rate of 8. She will say little about what this government has actually done: there hasn’t been much.com/specialreports An audio interview with the author is at www. To make amends. The Congress party. groaning Infrastructure is India’s biggest handicap. India’s coalition government will face the judgment of 700m voters. Suhel Seth. Page 6 Creaking. Sachin Pilot. Chetan Ahya. Amid the slaughter wrought by just ten well-organised assassins many individual Indians acted heroically. Yet for most poor Indians terrorism re- mains a small part of their troubles. To deal with those. not a tiger Also in this section The democracy tax is rising Indian politics is becoming ever more labyrinthine. As global credit has dried up. Sunali Rohra. Page 12 For all its chaos. has been struggling to lay its hand on capital.8% (see chart 1. Sanjay Ubale.N. Rajiv Kumar. Aditi Phadnis. is likely to su er for this. have brought particular hardships: high in ation. and Maharashtra’s chief minister. next page). Previously soaring foreign investment in the country is expected to dip. schools and jobs. Manoj Joshi. In a worrying time. Montek Singh Ahluwalia.The Economist December 13th 2008 A special report on India 1 An elephant. Page 5 The world is rocky But computer-services rms are in good shape to survive the nancial crisis. will reissue a lot of unkept promises when the election campaign begins: to bring everyone electricity. But Indian manufacturing has also done well. Arun Shourie. moreover. bureaucracy and occasional violence. Congress sacked the interior minister.economist. Sudip Mozumder. they will not be happy. led by Manmohan Singh (pictured above).K. A world of fewer opportunities India is now facing harder times. Saumitra Chaudhuri. Services. Chandra Bhan Prasad. piped water. N. Its stockmarket has been sliding all year. Wilima Wadhwa. whence the terrorists probably came. Vineet Nayar. Yet the institutional response. Pramod Bhasin. Properly trained troops took over nine hours to arrive at the scene. even Tata Motors. Suman Bery. the state of which Mumbai is the capital. Tony Jesudasan. have presided over the biggest investment-led boom in India’s history. one of India’s best companies. Infosys. Page 10 India elsewhere An awkward neighbour in a troublesome neighbourhood. Nobody yet knows how serious the 1 . Yogendra Yadav A list of sources is at www. Its impressive run culminated in January with the launch by Tata Motors of an ultra-cheap family car. J. Manvendra Singh. above all India’s computer-services companies. India’s best prescription remains continued rapid growth. its sts against Pakistan. perhaps in April. Sonia Gandhi.com/india ARLY next year. was poor. which contribute more than half of GDP. John McCarthy. thankfully. Page 13 E Acknowledgments In addition to those named in the text. Creon Butler. Irani. which leads India’s ruling coalition and runs Maharashtra. Ninan. Surjit Bhalla. Page 3 Storm-clouds gathering What the world recession will do to India’s economy. has also raised a cry though not. Wajahat Habibullah.J. Most of the 188 victims died during that time. Kapil Sibal. the Nano. Sanjaya Panth. The government. James Astill asks how it will cope with an economic downturn Ruled by Lakshmi Though inequalities are widening. Particular thanks are due to: Omar Abdullah. Recent months. the terrorist attacks in Mumbai on November 26th-29th came as a particularly harsh blow. Being mostly poor. TCS and Wipro are now world-famous names. Mr Singh. Nitin Desai.economist. a slowing economy and vanishing jobs. Congress’s leader. Vishnu Prakash. Singh. the author would like to thank all those who generously assisted in the preparation of this special report. Jairam Ramesh.

India will be badly hit by climate change. Half of India’s people are under 25 and 40% under 18 (see chart 2). the pattern of its progress suggests. reducing poverty through rapid economic growth. The government’s own estimates are lower. m MALES 150 80+ 70-79 60-69 50-59 40-49 30-39 20-29 10-19 0-9 Source: US Census Bureau 2 FEMALES 0 50 100 150 100 50 surgency in eastern India. it will succeed. In the medium term that should not be too di cult. lived below the poverty line. but its problems are also growing. the invisible threads that bind India. that Indians have prospered everywhere outside India. in the phrase of Nehru. India’s current rulers. which may be optimistic.1m children died in India. it will need to manage four potential constraints. Pick another wretched statistic: there are plenty of them. but in theory a reces- sion in the rich world should hurt India less than other emerging markets: exports amount to only about 22% of India’s GDP. seem at least to understand this. Where it is spreading. only 20% of jobseekers have had any sort of vocational training. But India’s task remains daunting. But. That makes India’s main priority. India’s other big constraints. But that is still insu cient. By one estimate. Roughly 14m Indians are now being added to the labour market each year. which was approved by America’s Congress in October. as it aims to do. India has also started to matter more. often stymied by his coalition’s leftist allies. not new.6% a year. against 37% of China’s. They cannot all work for Infosys. Government statistics 1 *Forecast 2 slowdown will be. many are not obviously skilled at anything. was the clearest sign of this: to let India in from the nuclear cold. he has been an e ective envoy for India. A courteous and scholarly former nance minister who launched reforms in 1991 that unshackled India’s mixed economy. In 2006 some 2. But their e orts to end these troubles remain unconvincing. or 42% of the population. Its democracy will be no defence. even more urgent. A Maoist in- Young and vigorous India’s population by age group. To escape throttling labour laws. because of India’s historic underinvestment in education. It is no coincidence. In 1981. and there are also fears about the quality of jobs being created. It refuses to consider cutting its carbon emissions. Indian entrepreneurs tend to keep their operations small: 87% of manufacturing jobs are with companies that employ fewer than ten people. he can claim that India. are. They are truly entrepreneurs. If India cannot nd employment for this lot. which accounts for less than 18% of GDP. to 2. 2008. India’s bureaucracy has at least accepted that. the developed world has made an exception to the counter-proliferation regime. If India is to sustain a growth rate of 8% or higher. are almost non-existent. the numbers were 420m and 60% respectively. % increase on previous year 12 10 8 6 4 2 0 1980 85 90 95 2000 05 08* Sources: CEIC. in 2005 some 456m Indians. more than ve times the number in China. At home. agrarian and broken places. arguing that they are still very low per Indian. 40% of the world’s total. India has 60m chronically malnourished children. Mr Singh can take much credit for this. According to the World Bank. by the same measure. More impressive even than the success of India’s best companies is the zest for business shown by millions of Indians in dusty bazaars and slum-shack factories. These tend to be both less productive than jobs in bigger companies and less protected by the law. and that number is rising. its rst prime minister. he has done much less well. But guided by Mr Singh. But the government’s response has long been inadequate. Indeed. Some 65% of Indians live on agriculture. But there is depressingly little sign that this will happen soon. To make a serious dent in poverty. poor and agrarian. In the end. should be easier to x. 7 . the mahouts to an elephantine state. But everyone agrees that poverty in India is falling much too slowly. India is getting stronger. The most pressing. being hot. its rotten infrastructure and the dreadful quality of its education. India needs to keep up economic growth of around 8% a year. In recent years India has been creating more jobs than the gloomier scenarios suggested. India is already worryingly violent. has started to get serious about climate change. poverty will not be reduced and India may face serious instability.2 A special report on India The Economist December 13th 2008 Growing ambition India’s GDP. is an obvious ill omen. But it may be a long and painful grind. its cumbersome labour and land laws. and with India’s burst of high growth these two problems have become more urgent than ever. as is often noted. among his few successes. Shifting them to more productive livelihoods and so reducing poverty would be hard even if the number of people of working age was not growing so fast. alas. Between 2000 and 2005 its rate of employment growth doubled. The US-India nuclear co-operation agreement. in poor. the world’s fourthbiggest emitter of greenhouse gases. which Mr Singh has called the greatest internal security challenge we have ever faced . Diplomatically.

Indians are justi ably proud of their democracy. It indicates the risks India’s governments will increasingly have to take to get support for any bold policy. The rest of the house jabbered and yowled. In 2004. where the state is often partial and corrupt. the government can also take some credit for India’s strong economic performance. Suspended animation This absurdly complicated and unrepresentative government has turned out to be more enduring than many expected. it has felt too weak even to try. after eight years in the wilderness. It is strong and independent: it can and does remove any o cial it suspects of undue bias. they opposed every liberal proposal on principle. But Indian politics has got much muckier in recent years because of two factors: the rise of regional and caste-based parties. Shortly before it took place. won 138. So Congress recruited outside support from another ve parties. The BJP. As a bilateral agreement. Both parties saw their share of the vote decline. On July 21st Manmohan Singh convened an historic gathering at the Sansad Bhavan. the low-caste Samajwadi Party (SP) from Uttar Pradesh. by 275 votes to 256. around 40 of these are accused of serious crimes. But because of opposition from the Communists the government was unable to seek the necessary approvals for the deal from the International Atomic Energy Agency and the Nuclear Suppliers’ Group. For Congress’s leaders. The deal was said to be o . But more broadly. by Indira Gandhi’s 21-month state of emergency. so Mr Singh asked parliament for its support. the deal would die with it. India’s rotund parliament building. This ensures that. but the UPA was still short of a majority. the government has expended far too much energy merely to sustain itself. according to their own electoral calendars. The Communists were the most obvious blockage. relieved of its Communist allies. She agreed. in many tongues. almost a record low. In September 2007 Congress’s regional partners urged Mrs Gandhi to forget the nuclear pact rather than risk an early election. now squabbling with the SP and with an election season coming. Most Indian politicians are presumed to be corrupt. In the 2004 election Congress and the BJP mustered only 283 seats between them. In a coup-ridden region. mediated between them and Mrs Gandhi. every ve years. indeed. Yet it increased its share of seats. they said. Congress returned to power after winning 145 seats in parliament. The nuclear deal epitomised its weakness. The government had been reduced to a minority. The Communists walked out. It has been interrupted only once: in 1975. as India’s foreign minister. the most important of which was a coalition of Communist parties. India’s Election Commission would issue a reminder. With competent managers in the main economic ministries.7%. If it folded. But the government survived by recruiting a new ally. By hook or by crook the government won. Of the 522 members of India’s current parliament. India holds a reasonably orderly and fair election. three members of the main opposition Bharatiya Janata Party (BJP) produced bricks of rupee notes: part of a bribe. At their next opportunity India’s voters threw out Mrs Gandhi and her Congress party. he and four other jailbird members (all pro-government) had been freed for the vote. the Left Front . Congress’s shrank more. to 26. it did not need parliamentary approval. which is less surprising. its survival is a formidable achievement: the party had never managed a coalition before. picture this. then on.The Economist December 13th 2008 A special report on India 3 The democracy tax is rising Indian politics is becoming ever more labyrinthine T O GET the measure of India’s political class. given by government supporters for their votes. a club of 45 nations. current seats by party Vacant 22 Allies 72 United Progressive Alliance Others 142 3 Allies 35 National Democratic Alliance Indian National Congress 151 Source: Lok Sabha Secretariat Bharatiya Janata Party 122 gether the United Progressive Alliance (UPA) with 12 other parties. in jeopardy. Over two days a few brave politicians debated the nuclear deal. This left regrettably little time for his other job. including mur- der and rape. Ruling in this arrangement would have been hard enough. over a period of a few weeks. Reaching a consensus is becoming impossible. these are tremendous accomplishments. The government had been abandoned by its Communist allies. Thereby they issued a message about the importance of timely elections that India’s leaders have never forgotten and if they did forget. for the television cameras. and the mutinous coalitions this has led to. In the event. A convicted murderer stretched out on a backbench. Pranab Mukherjee. a civil nuclear co-operation deal with America. The deal was resurrected in June only after Mr Singh allegedly threatened to quit. In India’s poor and fractious society patronage politics is inevitable. like India’s vast bureaucracy. The country’s politicians are mostly an unsavoury lot. Its 29 states do the same. The hope had been that the government. All last year this stando dominated the government’s business. partly because the BJP’s vote was spoiled by smaller par. a senior Congress leader who is close to the Communists. might push through a few nancial-sector reforms. If only the election commissioners could decide which Indians are t for election. so fragmented is the polity. This is troubling. a record low and only 11 more than is needed for a majority. signed by Mr Singh and President George Bush in 2005. reduced to a minority. But it has failed to pass almost any of the reforms India will need to keep up that performance. then o again. for the rst time in its history. 120 are facing criminal charges. For a vast and somewhat unruly nation.1 . To form a government for which 272 seats are required Congress put to- In the balance India’s parliament. which had run a fairly competent coalition government under Atal Bihari Vajpayee. putting Mr Singh’s great achievement. nakedly dedicated to delivering patronage.

when times were hard. A party for dalits. Congress’s performance in general elections does not fully re ect this: it actually does better at the centre than in the states. Elections this month in three important northern states. 1 Advani advances . has also been reinstated as the party’s prime ministerial candidate and uno cial leader. He has restored some of the BJP’s old sense of purpose. a fourth-generation leader of Congress and of India who was murdered in 1991. The general election will be an important test of Congress’s ability to reverse its long decline. to resign as its leader. Badly as it did in 2004. and six states in all. as the BJP found in 2004. attributed the election defeat to insu cient Hindutva. The Gandhi factor For almost four decades it ruled India by relying on three main groups for support: Muslims. its government has a number of lavish welfare schemes to boast about. the BJP responded by lambasting Muslims. would be a mistake not least because the BJP urgently needs to recruit new allies. In the past. It called that general election six months early. Madhya Pradesh and Chhattisgarh. including a programme of public works that it claims will provide work for 30m households this year. Indeed. the Bahujan Samaj Party (BSP). But it is not clear to what extent the Hindu nationalists can capitalise on this. has done a bit better than expected. that was another reason why the BJP lost in 2004. the party’s leaders remain forlornly faithful to the Gandhi dynasty. won a big majority. in Mizoram. A sweep for either of India’s main parties would be a big boost. based on the cult of the Gandhi family of which Sonia is the current representative. All that can con dently be said about India’s next government is that it will be a coalition. should o er clues as to which scenario is the most likely.Advani. on the back of poll victories in those same northern states. But the recent turn of events in India. including last month’s terrorist attack in Mumbai. It is the ancestral seat of the Gandhis and also the birthplace of India’s most powerful low-caste parties. even after the outrage in Mumbai. And because Congress’s state-level machinery is weak. India’s biggest state. A victory for the BJP in May in Karnataka its rst in a southern state was especially impressive. there is a slim third possibility: a government led by a regional. known as Hindutva. it is not obvious where it can make it up. it also placed less stress on Hindutva. an octogenarian bruiser. will make such things hard to boast of. though not conclusive. But after its 2004 defeat the party fell to feuding. As this special report went to press. caste-based or conceivably even Communist party. Such an arrangement could make the current government look positively united and progressive. Its Hinduist ideologues. Compared with Mr Vajpayee’s government. The Italian-born widow of Rajiv Gandhi.4 A special report on India The Economist December 13th 2008 2 ties. results were pending from Rajasthan. a small north-eastern state. which Congress has ruled for a decade. which are all currently held by the BJP. If neither party can make the necessary alliances to get a majority. many of whom had Muslim followings. Congress got 22 out 402 seat in UP. Under Mr Gandhi’s well-meaning but unimpressive leadership. Congress nonetheless got the oppor- tunity to form a government. where patronage politics is more intense. Congress knows this. including the three currently awaiting election results. Besides survival. probably led by Congress or the BJP. In the past two years the party or its allies have won six out of 11 state polls. If it loses ground there. she could not restore Congress to anything like its former power. In 2005 they forced the party’s prime ministerial candidate. Results are also due from elections being held this month in Delhi. Rahul. But this momentum may not take it very far.K. but possibly not much better. or Hinduness . with restoring the party’s fortunes in UP. During the 1990s the BJP built a base of Mayawati thinks big perhaps 15% of Indian voters typically high-caste and from the north who liked its Hindu-chauvinist creed. Mr Advani. A BJP-led government would o er India a better prospect of reform than the current arrangement. the BJP performed well in a few populous northern states. This re ects the party’s highly centralised leadership structure. That may be because of a residual fondness for the Gandhi family. But to do that. it is not good at advertising even these small successes. like this government. and lost. To avoid o ending its allies. But even if Mrs Gandhi was better than she is. the party tried to expand its base into a broad temple of right-of-centre nationalists. Since 2004 it has scored some modest hits. Its modernisers were demoralised. The fragmentation of Indian politics is partly a consequence of these groups turning to other parties. Sonia was persuaded to take over the party in 1998. the BJP would probably be a smaller component of the coalition. But having no strong ideology to unite its squabbling factions. a more powerful group. She. and in troubled Jammu and Kashmir. high-caste Hindus and Hindu dalits (formerly untouchables ). with outside support from one of the two national parties. Congress has won in only three minor states. In power. The BJP’s fortunes have since improved. for a reason beyond either party’s control: the BJP’s allies fared unexpectedly badly. as the anti-incumbency tick suggests it might. This was painfully obvious last year when the party charged Mrs Gandhi’s 38-year-old son and heir apparent. The terrorist attacks in Mumbai should also improve the chances of the security-obsessed BJP. L. Even in good times Indian voters tend to be disappointed with their governments. In di cult times it would be reasonable to suppose that Congress is in for a hiding in the coming election. But it will not restore the party’s lost base. from 1998 to 2004.

Even so. the BSP. like Ms Mayawati’s income tax. merchandise exports are struggling. This has put pressure on the rupee. the RBI has been trying to boost liquidity. She has declared her ambition to be India’s rst dalit prime minister. But so. And Mayawati is trying hard to increase her reach outside the state: in February she drew 80. on the back of two years of tightening monetary policy. then the nance minister. 7 Storm-clouds gathering What the world recession will do to India’s economy I T IS an acknowledged truth that the world’s nancial breakdown has proved the need for public ownership of banks. limits on borrowing abroad and strict prudential rules at home.9% in August. is its ability to pay. one.2%. Led by Manmohan Singh. especially its important computer-services industry. but India might still be the world’s second-fastest-growing big economy after China. three-month average 4 14 12 10 8 6 4 2 0 2002 03 04 05 06 07 08 Source: CEIC nies have been turning to Indian banks for money. does not speak well of her judgment. Like a rocket Consider the growth gures. the central bank. has been selling up to $2 billion a day from its foreign-exchange reserves. including brahmins. Or so some Indian policymakers now reckon. For the rst time in four years the RBI has also been cutting its main short-term lending rate. nowhere near the 6% that had been expected. which hit a 16-year high of 12. But at least India is less reliant on trade than most emerging nations: exports amount to only about 22% of India’s GDP. and even that may be optimistic. its economic performance justi es pride. In response. Mayawati has a reputation for egomania and gross corruption (though this has never been stood up in court). Thus it aped Congress’s own historic strategy. Because India has been constrained in this manner. have turned tail. in common with others.4% on a year earlier. That would be worrying. in October they were 12. from 9% to 7. CMIE *Forecast 5 rupee is a blessing for India’s exporters. To support the currency.5%. have estimated her personal income at $12m. whose main market is American banks. India’s stockmarket has crashed. More broadly. The weakening Don’t stop now Savings and investment as % of GDP 40 Investment 36 32 28 24 Savings 20 1990 92 94 96 98 2000 02 04 06 08* Sources: Ministry of Finance. India grew at an average annual rate of 5. is rising. Things could be worse. Foreign portfolio investors. unable to raise capital abroad. she could play a big part in deciding the composition of the government. on the back of some modest liberal changes to its mixed economy. it cut taxes and tari s and 1 . would depend rst on whether it was again shackled by the Communists. which has lost some 20% of its value against the dollar since January. Of the other possible coalition leaders. All this.The Economist December 13th 2008 A special report on India 5 2 And Mr Advani is not the deft coalition manager that Mr Vajpayee was. Even before global con dence dived. They then sell rupees for dollars to nance their foreign operations. India’s democracy tax. which is led by an autocratic former primary-school teacher called Mayawati.4 billion. however. The global nancial freeze has accelerated the currency’s fall. the RBI is now worried about growth.5%. The dalit party’s victory in UP was a stunning achievement. by recruiting leaders of other castes. which is in UP. which have dropped by nearly $63 billion from a high of $316 billion at the end of May. Until then. has captured India’s imagination. Newspaper reports. possibly to 5. But with investors struggling to nd cash. losing 60% of its value this year. Meanwhile. Her support for an unsuccessful scheme to append a shopping mall to the Taj Mahal. That would be truly inspirational for members of a still downtrodden group. and they have a case. Part of the problem may be that. twice the gure for her party. now at 7.000 people to a rally in Delhi. India’s economy was slowing. working from her tax return. Indian compa- Losing momentum India’s industrial production % increase on previous year. UP alone commands 80 seats in parliament. the Reserve Bank of India (RBI). Most independent forecasters see a further drop next year. is still well above the RBI’s comfort zone. castebased parties had struggled to attract much support from outside their narrow base. The RBI has already revised its forecast for GDP growth this year downwards. given another chance. In 1991. This is yet another historic weakness that India can feel brie y relieved about. But it might be disastrous for India. Another bene t of a tightly controlled nancial sector is that the central bankers have many options. who last year put in $17. when the market peaked. India’s banks are sound and its foreign debt is manageable. The rise in wholesale prices. through skilful negotiations.1% down on a year earlier.5%. If Mayawati can replicate this success in the general election. though dropping fast. On several occasions they have cut the minimum amounts that lenders must deposit with the RBI. at least to some extent. has brought India its own credit crunch. Between 1982 and 1992. In August industrial output was up by only 1. prompted by a currency crisis. the government brought in swingeing reforms. The BSP succeeded. Whether Congress could make a better st of bringing change. its economy has remained relatively undamaged by the global nancial meltdown. since mid-September.

another Indian IT-services giant that had big contracts with Lehman. Several. moreover.8%. which accounts for less than 10% of their revenues was considered their main weakness. Its $1 trillion economy would double in size in eight-and-a-half years. would be a blow to the national economy. N. This. It’s been tough. this has boosted investment in manufacturing. boss of Wipro. as China has been. says a slowdown will be an opportunity for some useful re-tooling . set nerves jangling on November 14th when it said it would give its workers year-long sabbaticals to do charity work. which became operational on April 1st. Between 1992 and 2002 the annual economic growth rate was 6%. says Girish Paranjpe. This is a China-like level. IT spending in America could fall. Poverty would be reduced at a speed previously unimaginable. Another fear for India’s IT rms is America’s new president. Barack Obama has promised tax breaks to American rms that resist the temptation to shift work abroad. the average rise in IT wages has halved. a former boss of Infosys. and explicable by the same demographic change that China has undergone. Chandrasekharan. This has generated huge excitement in India which the government has encouraged. rising to 10% from 2012.000 last year. the shining India story in a paragraph. Next year could be worse: by one estimate. that would be bad. But Indian IT rms still see opportunities in it. Partly becaue of falling demand. Most Indian computer-services companies are at least in ghting form. foreign direct investment has been catching up. of which India urgently needs more to create jobs.5% last year. Yet there are some darker sides to this hopeful tale. Optimists point to India’s soaring investment rate. Until this year India. savings have risen from 28% in 2003-04 to 35. India’s computer-services companies. India would be transformed. The rst is in ation. in 2001. to its friends cut its predicted revenue growth for the year to 13-15%. with annual revenues of over $50 billion. In October TCS agreed to buy Citigroup’s Indian back-o ce operation for $505m. Computer services. India’s IT rms already enjoy a tax break that is due to run out in 2010 but may now be extended. Everyone agrees that India’s long-term potential growth rate has leapt. wise guys said. In October Infosys or Infy. portant incentive for the engineering colleges mushrooming in south India. caused partly by the Asian currency crisis. India’s outsourcing rms have struggled to clinch deals. like all emerging markets. During the 1990s this was around 25% of GDP. which employs 2m people. The upside Harder times have already eased another industry problem: ballooning wage bills. Smaller rms. when growth in India’s computer-services slowed down a bit and then rebounded vigorously. more than twice the equivalent gure for last year. had seen a surge in foreign investment. rising to 12% last year. and 30-40% from nancialservices work. is the savings rate. The planning commission’s latest ve-year plan. In the rst quarter of this year inward direct investment was worth $10 billion. envisages an average annual growth rate of 9%. which has $2 billion in the bank and no debt. A young population should be su cient to keep India’s savings rate close to the current level for the next two decades. Parsimonious habits The crowning reason for optimism. Most big rms are hiring fewer people this year: Tata Consultancy Services (TCS) will recruit 30. One of TCS’s bosses. But the biggest have little debt and lots of cash. however. In the past two years. account for about 16% of India’s exports. a huge number but down from 35. come from essential services keeping the lights on in industry-speak which their customers could not easily cut back. In the past ve years Indian manufacturing has grown at an average annual rate of 9%. which o er imaginative and perhaps dispensable niche services could struggle in a slowdown. has also caused excitement abroad. will be hit hard by the nancial crisis. which derive around 85% of their revenues from exports to America and Britain. This became apparent 1 The world is rocky I NFOSYS. The current slump is far more serious.000. It would have been higher but for a late dip. but that is another story. A big slowdown in India’s IT industry. but since 2003 it has averaged 35%. Nandan Nilekani. Mr Nilekani is loth to draw a comparison with the previous global downturn. In an industry that has grown by nearly 30% a year for the past decade. says recent mergers between big Western banks may also send fresh business to India: the job of integrating huge IT systems is the sort of labourintensive work in which its rms excel. As much as 80% of their revenues. India’s bulging working-age population gives it a high ratio of earners to elderly dependents. Since Lehman Brothers went bust in September and nancial markets froze. to around 10% a year. however. In the past ve years it has recorded an average annual growth rate of 8. driven by a shortage of skills and the butter y habits of Indian IT workers. Since then India’s economy has taken o with a whoosh. Until recently India’s investment splurge has mostly been covered by domestic savings: as a share of GDP. Or gardening. In current conditions it may prove a strength. but the size of the jump is hotly disputed. which has risen in similar measure. The indirect e ect could be far-reaching: India’s success in IT is a national con dence-booster and an im- But India’s computer-services rms are in good shape to survive the nancial crisis rates have fallen by a similar amount. including Infosys. If it could keep this up. but most of it was speculative. one of India’s biggest and trendiest outsourcing rms. Before the nancial meltdown the failure of India’s computer-service companies to offer higher-value functions such as consulting.6 A special report on India The Economist December 13th 2008 2 largely dismantled a system of industrial controls (the licence raj ). Attrition . At its recent rate of growth the economy was prone to overheat. are looking around for cut-price acquisitions. Of course it would be better if all these companies paid their dues and got on with business. Encouragingly.

A scally straitened government can either cut spending. or boost revenues. In a slowing economy it might therefore consider selling a few of the state’s many lossmaking companies. Reasons for hope What reforms the next government might introduce will depend on the make-up of its coalition. that more politicians will make sustaining rapid economic growth their highest priority. poor-quality fertiliser with which Indian farmers poison their elds and themselves. Because the government eats up so much of India’s savings. the most recent splurge is well timed: the rst tranche of a civil-service pay rise was handed out in October. Another. Yet there are some slim reasons for hope. though not this side of the election. If passed. the prospects of either this government or its successor dismantling the subsidy raj are dim. If only the spree had been more productive: a massive investment in India’s infrastructure would have been overdue. and liberalising certain industries. for which there is no obvious justi cation. it will include raising the current 26% ceiling on foreign ownership of Indian rms to 49%. it’s important that we accelerate reform if we want to meet the target. and growth with it.4% this year. in ation jumped to nearly 7%. The government’s spending on fertiliser subsidies is expected to run to $23 billion this year. That was why the RBI began tightening. At the same time. Perhaps the petrol subsidy. Public expenditure has risen by over 20% in each of the past two years. at least. reform of India’s throttling labour laws. In middleclass India. there would not be time for it to be approved under the present government. Sadly. the government has been on a spending spree. Ine cient government spending puts this at risk. Asked what reforms are most pressing.The Economist December 13th 2008 A special report on India 7 2 early last year: as credit soared and the cur- rent-account de cit widened. Madcap subsidies India’s subsidy policies are crazy. If the current high cost of borrowing deters private investment. The total subsidy bill is estimated at over 3% of GDP. Alas. the prime minister’s chief economic adviser. the recent run of high growth has become a source of national pride. the government will have little scope to o er a public alternative. so the subsidy is smaller than it appears. but even if it does. on how serious the slowdown is.5% of GDP). too. India taxes these products as well. say as much. more tentative. It will depend. But this still makes the budget nances hostage to the oil price. But in a more carefully regulated world it should become less reluctant. reason for hope is political. 7 . there seems almost no prospect of another raft of liberal measures. privatisation of public enterprises. Instead. But none has been able to change them much. They include. especially. High public spending also contributes to in ation. nearing the end of its term. it also subsidises petroleum products. Hardly any of its prescriptions. he notes. On October 30th the cabinet approved a draft bill on insurance reform. may be eased. including coal and sugar. now mercifully falling. to manufacturers of nitrogen-based fertilisers. kerosene and diesel. been proved right in opening its nancial sector to globalisation only cautiously. The investment rate will then come down. India imports 75% of the oil it uses. As it happens. no matter that. by xing the price at which they are sold to consumers. which limits the RBI’s freedom to cut interest rates. The insurance bill was supposed to come before parliament this month. including of subsidies. the medium-term target of a 9% GDP growth rate was clearly based on an assumption that we will push ahead with reform Given the global crisis. So it is reasonable to hope. half the supply of subsidised kerosene is creamed o by corrupt middlemen. The government’s pro igacy makes it all the more essential that it retains the condence of private investors. so far. The subsequent spike in commodity prices contributed even more to India’s in ationary surge. This is one of seven nancialsector reforms (others cover banking and pensions) that have been awaiting approval for four years because the Communists were obstructing them. They produce lots of low-cost. The best way would be to surprise them with some long-awaited reform. which would be di cult. in order of importance: scal reform. the government’s largesse was handed out in the usual wasteful ways on oil and fertiliser subsidies and public-sector pay increases and on some high-prole welfare schemes. India’s scal problems are nothing new: its de cit has often been around 10%. For example. India has. just as worries about in ation gave way to fears about growth. Even bullish Indian economists. Mr Virmani tosses over a book in which he describes them. One is duress. which increases India’s reliance on oil to meet its energy needs. But the more ruinous kerosene subsidy is likely to remain as long as most poor Indians have no access to electricity. Making nitrogenous fertilisers uses a lot of natural gas. in ever bigger quantities. after a temporary improvement thanks to buoyant tax revenues. including petrol. Mr Virmani’s book was published in April 1999. the country relies unduly on foreign capital to sustain its high Ripe for reform investment rate (its current-account de cit recently widened to about 3. Reformists in the government appreciate this. opening state-controlled banks to more private ownership. have been followed: We have to start acting faster. by an o cial estimate. Economists at Goldman Sachs expect a budget de cit of around 8. con dent in a high-growth future. Sadly. What is new is India’s realistic hope of sustaining economic growth of 8% a year. According to Arvind Virmani. The third reason is intellectual. This has returned India’s public nances to their traditional mess. the government hands cash. as all its governments have realised.

By 2010 the main airports in Mumbai and Delhi will have been modernised. businesses were cut o for 24 hours at a stretch. An estimated 700m Indians have no access to a proper toilet. with some decent results. including new roads. but in reality a dozen permissions at both central and state level are still required. yet its cities are already choking.1 A matter of drains . to $475 billion over the next ve years. but factories shut down. Its prize national highways a vaunted infrastructure success of the previous government account for only 2% of the total. South Asia’s biggest city. or 8. tight land and rent controls have destroyed Mumbai’s land and property markets. The city’s rail network is overloaded and its roads are clogged up. Maharashtra’s has nonetheless embarked on a $60 billion makeover of Mumbai. linking Delhi to Mumbai.000 faecal coliform bacteria per 100 millilitres. which has more voters. By one estimate. India’s urban population is expected to double over the next two decades. Many cite the shallowness of India’s corporate-debt markets as an obstacle. With the number of air passengers in India growing at 30% a year in the past two years. 9% of potential industrial output in India is lost to power cuts. As it enters the city. an American novelist. It takes an average of 21 days to clear import cargo in India. In the past year or two the problem has become extremely urgent.000 pilgrim-bathers. has 17m inhabitants. At such times computer-services rms grumble and switch on their generators. but most of it is pitiful. India needs to follow a simple mantra: Fewer inspectors. The general rottenness of India’s infrastructure has long been recognised as the likeliest constraint on the country’s economy. for example. promised that these obstacles would be cleared in one go. For fear of being stuck with immovable tenants. more drains . In places. Singapore’s main port can handle 40. The Jawaharlal Nehru Port Trust in Mumbai. half of whom live in slums. The second reason is longstanding underinvestment in Mumbai by the state government of Maharashtra. But they were wary even before their credit crunched. has berths for nine cargo vessels. India plans roughly to double its investment in infrastructure. All of the country’s roads are perilous. as predicted by Tata. Corpses. an industrial town in Maharashtra. called ultra-mega power projects .000 times over the safety limit. and it is not clear where the extra cash will come from. In Pune. Hinduism’s sacred river contains 60. though greatly delayed. or about 8% of GDP a year. According to the World Bank. the creaking of its four main airports was almost audible. it has also sabotaged Mumbai’s municipal government. which handles 60% of India’s container tra c. Hyderabad and Bangalore each opened a new airport this year. railways and airports have been operating close to or beyond capacity. India’s giant cities need powerful mayors to manage their development. First. Water-borne diseases caused by poor sanitation are a big reason why India’s children are so malnourished. and only 12% of them. of semicremated adults or enshrouded babies. landlords have left an estimated 40.500km road and rail network. Four miles downstream. which has four times as many cars. The government has also launched a plan to build a 1. rails and a metro line.1 billion people produce is treated. but state governments are opposed to the idea.000 Indian children die of diarrhoeal sickness every day.000km. take a wary stroll along the Ganges in Varanasi. But this is still nowhere near enough. Following in its predecessor’s footsteps despite the Communists’ rowdy objections it has pushed public-private partnerships (PPP) for building roads and airports. the Ganges becomes black and septic. Last year peak demand outstripped supply by almost 15%. only 13% of the sewage its 1. 60% more than in China. Some 600m Indians have no mains electricity at all. But this year’s investment is likely to be only around 4.000 properties vacant. are dual carriageways. and studded with manufacturing hubs. with inputs from 24 gushing sewers and 60.8 A special report on India The Economist December 13th 2008 Creaking. India’s ports. as a drain-inspector’s report . With green eld develop. This might sound familiar. It will require a total investment of $100 billion and is meant to be completed by 2013. groaning Infrastructure is India’s biggest handicap T O KNOW why 1. Innumerable bureaucratic and legal impediments are also putting them o . to 575m. the car’s maker. Last year 130. roads. A vaunted scheme to encourage big privately owned power stations. even before a million Nanos a year are added to them. India’s 3. Why nothing works There are two main reasons for the decrepitude.3m km road network is the world’s second-biggest.6% of GDP. the concentration is 3. By the end of 2007 China had some 53. 120 times more than is considered safe for bathing. To protect this source of patronage. drift slowly by. The government has given unprecedented attention to India’s infrastructure de cit. India’s urban roads are choked: the average speed in Delhi has fallen from 27kph (17mph) in 1997 to 10kph. The government expects private investors to contribute three-quarters of the additional investment in infrastructure and 40% of the total. Mumbai. as China’s cities have. An even bigger worry is India’s shortage of power. India’s sanitation is execrable. It has preferred to divert Mumbai’s revenues to rural Maharashtra. Almost a century ago Mohandas Gandhi disparaged a book about India by Katherine Mayo. It is promising.000 people died on India’s roads. in Singapore it takes three.600km of highways with four lanes or more.

Bihar. In 2005 the government recognised power as one of Indians’ basic human needs . this bureau- cratic process. The boss of the Delhi Metro Rail Corporation. (It still lost the poll. ASER’s survey also suggests that. the central government introduced a bold re- form in 2003 which sought to separate (or unbundle ) power generation. a hugely successful venture. Powerless Attracting private investment is hardest where it is needed most. or allow it to be stolen. and 37% were informal. A draft law awaiting parliamentary approval would make similar changes across India. It has increased the overall education budget.The Economist December 13th 2008 A special report on India 9 Still xing primary education 2 ments proliferating in India. 35% were government-run. according to a World Bank study. Yet in 2001 only 65% of the population was literate. suggests that this will not necessarily deliver the goods. put the enrolment rate at 96%. China added 100. but not much. 23% were private but o cially approved. and ve better-governed ones contribute 78% of the cash pro ts. In the next ve years the government plans to increase India’s generating capacity by an annual 14%. But private investors fear they would not get paid for their electricity. has earned the moniker the permit raj . having to rely on the government to obtain bureaucratic approvals is a strong reason for not going into partnership with it: India is not often feasible for PPP. The private schools were better. That would require a huge increase in private investment. its abysmal record on supplying Indians with basic health care and education. only half of Indian teachers show up to work. Half of ten-year-olds could not read to the basic standard expected of six-yearolds. Their teaching materials could then be upgraded and standardised.000MW. Last year it added only about 7. A study of a Hyderabad slum. where distribution has been privatised. like to give it away to voters. it never does. and that was a considerable improvement on the recent past. things have improved. the theft rate has dropped from 48% to 18%. One reason is that. In a standardised test the informal private schools actually came out best. He was fortunate to have a helpful patron.5% in English. because state governments.000 villages carried out last year by ASER. by James Tooley of Britain’s Newcastle University. Five of them contribute 80% of the total losses of India’s state utilities. roughly halved its truancy rate last year. big improvements are possible even in state-run schools. optimistically de ned. But India will not meet its target. with an average mark of 59. To deal with this problem. Half of Indian children leave school by the age of 14. to which they have long been entitled. The state electricity boards are therefore bust. which control most of the sector. Primary education is a particular worry. Last year it represented 2. But many of the states have ignored or undermined this law. many of them turn to private schools. describes having to go personally to Delhi’s chief minister on several occasions to get permission to fell a few trees. Over 60% could not do simple division. Before an election in Punjab last year the state government promised free power to farmers even though it was already covering losses by the state utility that accounted for more than half its scal de cit. They prescribe an extra 20. But it is equally possible that the worst-performing states will slip further behind.000-25. It is hard to teach illiterate Indian women basic hygiene. In September the central government tripled a nancial incentive available to the states for developing the power sector. compared with 22.000MW. Higher education is another candidate for reform. found that of 918 schools. or 90. That should not be too ambitious. with a few sensible steps. riven with corruption. India’s most unlettered state. transmission and distribution. Alas. But it also pointed to the appalling quality of education on o er.4% in the government schools. In the past ve years the rate of 1 Not good enough Total public education spending. By making teachers accountable to local governments. Let the market provide Or rather.8% of GDP.) Where reform of the system has started. in power. Consultants at McKinsey argue that India’s power-generation targets are in fact much too modest. Illiterate men are not equipped for productive employment. about half the gure in Kenya. an NGO. Many of these are wholly unregulated. Public-sector projects get equally bogged down. It should make it easier for private schools to get approval. According to Amitabh Mundhra of Simplex Infrastructures. but apparently no worse for it. Clearly the government should support the grey market in education that its own failings have given rise to. which it hopes will stimulate healthy competition among them. At least almost all Indian children now go to school: a survey of 16. on which poor Indians spend 2% of their incomes.000MW in 2007. compared with 90% in China. In north Delhi. The current government is no exception. which would involve a $600 billion investment over the next decade. so 35% of India’s power is still stolen. 2005 As % of GNP As % of GNP per person 12 10 8 6 4 2 0 India Source: UNESCO 6 Sub-Saharan Africa . a big infrastructure builder. especially farmers.000MW a year. even though every Indian government for the past two decades has vowed to x primary education.

This was not the jihadism as displayed by the nihilists in Mumbai. then here we remind you: that those days have gone. the terrorists targeted Jews. For corrupt state-level rulers. Getting approval to open a nursing college in India can take years even though there is a dire shortage of nurses.000 caste-crimes against dalits last year. With demand for higher education outstripping supply. They insert their supporters to run the racket. a tightly regulated university system has many bene ts. trials and tribulations in icted on us will not be answered back. the central government has announced plans for 30 new centrally run institutions. around 140 people were killed in a summer bombing spree by a terrorist group called the Indian Mujahideen. Of mosques and temples Yet apart from Kashmir. the terrorist outrage in Mumbai on November 26th-29th was unprecedented. they have many grievances.500 Indians died in con ict. a Delhi think-tank. the IT industry’s lobby group. They seem to be a subtly di erent sort of Islamist killer from those in Mumbai. su erings.10 A special report on India The Economist December 13th 2008 2 enrolment in higher education has taken o . They have emerged from a long campaign by Pakistani and Bangladeshi militants to stir revolt among India’s 150m Muslims. and indeed many of them own universities. 7 Where invisible threads fray A litany of trouble spots A S AN assault on the commercial heart of India. In their complaints. But the attacks last month (which. Many private establishments (which must be a liated to a public university and cannot be run for pro t) su er the same de ciencies. But the new central institutions will be much better than most Indian public universities. for two reasons. Understandably. Even before Mumbai. These will not be rst-rate. NASSCOM. whereas India. only two were from India. The second reason is that outside the cosseted places where rich Indians and foreigners gather. where nearly 1. It has become fashionable to describe the attacks as India’s 9/11 . In a recent paper on India’s higher education.000 colleges is generally poor. Almost the only investors who would submit themselves to this process are the politicians who control it. Politicians. In these places the teaching is mostly dreadful. The institute also recorded 27. In a chilling letter claiming responsibility for the Delhi blasts. tortures. or their lackeys. India’s deadliest theatre is its northeast. the Indian Mujahideen may have more in common with India’s horde of peasant revolutionaries. Cumbersome and politicised regulators add to their woes. In response to an urgent need. 25% are unemployable without extensive further training. mostly from private colleges. has been more restrained. In Kashmir. illegally. Poor and often marginalised. murders. where a separatist struggle melds into an Islamist-tinged proxy war with Pakistan. they have little incentive to improve. For the rst time in India. though forgivable. In Jaipur. they milk pro ts. following al-Qaeda’s example. They went on to say: If you still think that the arrests. mostly Americans and Europeans. too. including multiple bomb blasts on its railway in 2006 that killed 180 people. 525 have perished. But the comparison. In a recent ranking of the world’s 500 best universities by Shanghai Jiao Tong University. reckons that of the 350. syllabuses are outdated and facilities can be a health hazard. nearly 2. which carries a threat of international war.000 have been killed this year. Pratap Bhanu Mehta and Devesh Kapur call it the collateral damage of Indian politics . As India’s rst home-grown Muslim terro- rist group for so it is considered the Mujahideen are a particular worry. India’s voluble English-speaking elite was profoundly shocked by this prominent desecration. according to the Institute for Con ict Management. But the quality of teaching at India’s 348 universities and some 18. Its usual cause. This goes a long way to explaining why India is much more violent than is often supposed. expulsions. with only 30% of nursing jobs in rural hospitals lled. Well-known Indian businessmen and 22 foreigners. the 2001 attacks in America have become almost synonymous with the country’s bellicose response. were indiscriminate. which are run by state governments. First. killings. regional separatists and low-caste champions. admitting students and awarding good grades. In eastern and central India a Maoist insurgency has claimed around 600 lives. they then grant themselves permission to open a private one from which. Indians have long been used to con ict and terror. the Indian Mujahideen gave a list of allegedly statesanctioned crimes against Muslims. Bangalore and Delhi. India’s politicians would clearly be mad to reform this system. and half are just unemployable. if not their atrocious methods. religious violence may be the most worrying of India’s con icts. cases. have been blamed on Pakistan-based Islamist militants) pinpointed the rich and in uential. this had been a violent year. discrimination against non-Hindus. an Israeli rabbi and his wife were killed. happily. collect bribes for appointing faculty. were among the dead.1 Too many Mumbais . Having destroyed a public university. is imprecise. Previous atrocities in the city. like many before. All demand the legal protections that the Indian state guarantees and often fails to provide. is profoundly corro. Ahmedabad. In the rst 11 months of this year. fake encounters.000 engineering graduates who emerge each year. from 7% to 13% of young Indians.

The Naxalites hold little territory. It also raises hopes that India may start reducing poverty faster. after the West Bengali village where they launched their struggle in 1967. The government in Delhi seemed to think Kashmir had become manageable. Mr Modi. on the border with Myanmar. Indian-held Kashmir erupted into its biggest pro-independence protests for over a decade. But they have an army of ragged revolutionaries estimated at 12.000 people were killed. it has a history of religious massacres. Kashmir’s ups and downs These events shocked India’s government.000. heavily reliant on tourism. have spent most of the intervening years ghting each other. Even in the countryside. where the caste system is almost defunct. The other was an ongoing war against Christians in BJP-ruled Orissa. spontaneous and mostly peaceful. During the 1990s it advanced from anonymity to national power on the back of a single issue: a campaign to demolish a 400-yearold mosque in Ayodhya. there is a danger that. But the BJP’s Hindu fanatics have not gone away. In the short term. In 1990 nearly three-quarters of dalit households in western UP earned a living from skinning animals. Many of its leaders are less Hinduist than nationalist. But the urban trend in India is against endogamy. a Kashmir separatist leader. an untouchable occupation. India’s peacemaking record is wretched. Its in uence has now spread to 220 of India’s 611 districts. In June. apart from some roadless forest in Chhattisgarh and Maharashtra. Many NGOs are campaigning on behalf of Gujarat’s Muslims. there is better news though it might not be obvious. where the district administration is weakest. But in 2004 they united to form the Communist Party of India (Maoist). Such crises also bring out the best in secular Indians. That happy complacency is over. who has been denied a visa by America. In a study of a small steel town in rural MP. It pointed the nger at Mr Modi. and across the north-east.The Economist December 13th 2008 A special report on India 11 2 sive of the state. According to Yasin Malik. But rapid economic growth is not the only thing Mr Modi is associated with: he is charged with complicity in a state-sponsored pogrom against Muslims in 2002 that left over 2.000 dalit households in UP by researchers at the University of Pennsylvania. 7 . They were sparked by a decision of the state government to give land to a Hindu shrine organisation. This is cheering. India is now taking these con icts more seriously. is considered an extremist even within his own party. Its militants. an investigative magazine. religious con ict may increase.6%. Gujarat is also an outlier in India: at the con uence of Muslim and Hindu Asia. But there is a long way to go before the north-east submits to being Indian. boosting its economy. Their champion is Narendra Modi. there is surprising change. Despised dalits. In big cities the gure is higher. the demagogic chief minister of Gujarat. has over 20 tribally based separatist groups and also India’s highest concentration of HIV. they represent a law-and-order problem which India needs to address more urgently. killing six Muslims. Advani. Jonathan Parry. the death-toll in Kashmir has been falling. In 2007 this had come down to 0. Naxalites crop up. estimated that 10-15% of households included someone who had married outside their own caste. no scheduled castes. but a troubling precedent has been set. Away from the border. as recently in West Bengal over land disputes. On Kashmir. It has made big investments in the region’s road network. apparently because the local dalits had got rich enough to refuse such employment. in poor and crowded parts of Uttar Pradesh (UP). India’s Maoist insurgency is getting less attention. in Uttar Pradesh. The Indian Mujahideen identi ed this as one of their main complaints. The region’s 42m inhabitants are among India’s poorest and most rebellious. Since 2004. The rise of the BJP has contributed to Muslim and Christian grievances.K. advertisements for a spouse often end: SNSC which stands for sorry. Across India Mr Advani preached a thinly veiled message of communal hate. Manipur. which forms part of India’s only Muslim-majority state. the BJP’s would-be prime minister. That has already started to lessen India’s caste divisions. But in the end the only solution to the Maoist problem will be the Chinese one: rapid economic development. Before an election there last year Tehelka. has been to bribe the insurgents to keep quiet and squash those who refuse. dalits were much less poor and caste-bound than expected. has been growing fast. In most of India. as India modernises. Unlike the insurgency there. Under Atal Bihari Vajpayee it also became known for liberal economic management. Madhya Pradesh and Bihar.000 churches and Christian houses have been torched this year and over 50 people killed. They are a symptom of India’s corrupt and malfunctioning state: thriving. The local economy. will not die soon. where Indians have grievances. In September Hindu extremists allegedly including a serving army colonel exploded bombs in Maharashtra and Gujarat. But the renewed protests might be seen as a useful rede nition of India’s problem in Kashmir. Caste prejudices survive mainly in the marriage market: in Delhi’s newspapers. sparking Hindu-Muslim riots across India. Over 3. According to a recent survey of 19.000 dead. waged by Hindu fanatics. This attitude. have been quick to migrate to India’s cities. it should be stressed. published a brave report on the 2002 riots. Over 30 protesters were killed by Indian troops. where caste prejudice is still virulent. and big ambitions. an anthropologist. in which 2. which is still burning. after four years of relative calm. but he won the poll with a landslide. being landless. Since winning power for the rst time in 1998. The government claims to have dismantled the Indian Mujahideen. The campaign was led by L. In the north-eastern states. the legacy of a centuries-old apartheid. of which 76 are considered seriously a ected . India is likely to su er more terrorism from aggrieved Muslims which may draw a violent Hindu response. the BJP has improved its reputation. He was also present in 1992 when Hindu fanatics demolished the mosque in Ayodhya. and build a temple to the Hindu god Ram in its place. Muslims and Christians live peacefully together. alas. when peace talks with Pakistan started. The army’s counter-insurgency policy in Manipur. With its new interest in trade. our struggle has transitioned to non-violence. known as Naxalites. By contrast. the protests were indigenous. Hindus. Increasingly. In India’s richest state investors eulogise him.

democratic India is often no more principled abroad than communist China. Referring to its passage through the 45-nation Nuclear Suppliers Group (NSG). and his wish to bolster India against it. was outworn. 55% of Indians approved of Mr Bush. as Mr Emmott does. But what sort of rising power is India? On foreign policy. for example. is also still relatively small. at least openly. But the deal is much more signi cant for the country as recognition of its growing importance in the world. in which until recently India had little interest outside South Asia. which restricted sales of nuclear fuel and technology to India. calls it Mr Bush’s Richard Nixon moment in reference to that American leader’s historic overture to China. it worries about them. he said: The people of India deeply love you. in the thick of the nuclear-deal drama. But the deal has also generated enthusiasm abroad. The process has been more or less stalled for over a year. as it has done after previous terrorist attacks. a former editor of The Economist. But both know that the current arrangement. It did not threaten Pakistan with a military reprisal. was the main motive for the nuclear detente. In particular. and have fought three of their four wars over it. In fact. Its foreign trade. with which it is negotiating to build a $7. access to natural resources and foreign markets. That explains the carefulness of its post-Mumbai message to its neighbour. which has oil and gas that India needs. The summit in Delhi was dominated by private companies.5 billion gas pipeline. it has seemed reluctant to settle the rivals’ main dispute. A messy part of the world But India’s biggest foreign worries. it is starting to look a bit like China. Bill Emmott. and all that you have done to bring our two countries closer to each other. It should provide India with some useful electricity. There is some evidence for this. According to a survey by the Pew Research Centre in June. India and Pakistan both claim all of Kashmir (though o cially Pakistan says Kashmiris must decide their fate). That was silly. to condemn brutish governments in Myanmar. India apparently did not consider withdrawing from a four-year diplomatic e ort to normalise its relations with Pakistan. Speaking in a di erent tone. are still in its messy region especially Pakistan. is unlikely to change. which are leading India’s overseas investments. mainly because of political chaos in Pakistan. In a sign of an enduring preoccupation with their neighbour. Rivals . Addressing George Bush in Washington. at around $30 billion a year. Last year. is increasingly writing foreign policy to meet its economic needs: chie y. That was the message of a summit India held for 14 African leaders in Delhi in April. for making a distinction between the world’s biggest democracy and the nu- clear proliferators next door. A big reason must be the nuclear deal between India and America: it has moved India’s world. America urged India to rebuke Iran. as the Mumbai terrorist strike has shown. Impressively. but not that Pakistan’s government was behind them. in which India has the rich valley of Kashmir and Pakistan a poorer portion. In a public statement. their latest turmoil is humiliating. on the status of the divided region of Kashmir. the NSG waiver was India’s. including this newspaper mostly agreed that the existing sanctions regime. A decade ago India’s two-way trade with Africa was twice the size of China’s. Most Indians considered the fact that the rich world was rewriting its rules for India to be more pleasing than any detail of the deal. like China. India told America to back o . It is safe to assume. and in Iran. India no longer exults. But India has also contributed to the deadlock. India’s foreign service is still tiny. Pervez Musharraf. in Pakistan’s problems. with around 600 diplomats. It is now less than half the size. But India. though rapidly growing. It refuses. DC. many Indians considered the nuclear deal most pleasing for having de-hyphenated their country from it: that is. Even governments and commentators that disliked it and there were many in Europe.12 A special report on India The Economist December 13th 2008 India elsewhere An awkward neighbour in a troublesome neighbourhood O N SEPTEMBER 26th Manmohan Singh expressed an unfashionable sentiment. the Times of India gushed: If the Beijing Olympics was China’s coming-out party. Pakistanis tend to agree: set against India’s recent progress. India said that the terrorists were Pakistani. This helps to ensure that India escapes much of the opprobrium heaped on China for consorting with dictators. that Mr Bush’s fear of a rising China. 1 Kashmir still divides the spirits . But that inaugural India-Africa summit also illustrated important di erences from China in India’s approach to building its economic ties. In his recent book. who resigned as Pakistan’s president in August.

a deal was blocked by India.000 acres of farmland. for a planned petrochemicals hub. It was to have produced the little Nano car. this symbolised for many India’s next big problem: its di culties in making land available for industrial development. India seemed keen to take responsibility for this failure. maybe chaotic but not inscrutable and possibly malign.eld. Last year another bungled acquisition. about 2. Mr Singh’s answer. as a measure of the bilateral relationship that India is starting to worry about most. like to speculate about the circumstances that could drive India and China to con ict. His vision is to have breakfast in Amritsar. More important. But so long as Pakistan is as unstable as it is currently. to a stunning victory. India will be unlikely to bite. In East Asia the gure was 20%. its agents bribed and divided the eld. farmers are feasting on kedgeree and tea. swept local elections in Singur in March. Indeed the nuclear deal is testimony to it. Subcontinental hopes Bangladesh. though its progress has been painfully slow. 1 . After an opposition party. in which it takes unseemly pride. Asif Ali Zardari. A well-advertised asco. Meanwhile. As a sop to Kashmiris. probably as much peace as can be hoped for. Even by India’s teeming standards. India has a habit of obstructionism. Its latest attitude of angry forbearance towards Pakistan is. In international negotiations.) But there is a way to go. Kamal Nath. Mr Musharraf’s successor as president. China and America. That is still modest: China’s trade with South Korea is worth four times more. Its obstreperous chief negotiator. Indian strategic thinkers. If only to manage climate-induced problems. a man in a suit and tie drags a small red car o a green paddy. to start by boosting regional trade. as terrorists . is another worry. led by a probusiness Communist poet. As a neighbour. But India does not often return the world’s compliments. he also suggested that the newly demarcated border in Kashmir should be a soft one. is the best there is. According to a World Bank report released last year. when India had its paw-prints all over the country’s rst proper election in a decade. South Asia is the least integrated region in the world. But India did not trust Mr Musharraf. optimistically. whom India disliked most. Most states have also exempted SEZs from some labour laws. There is no better solution. who tend to be of a traditional bent. and proud of it That should be a big advantage for India. lunch in Lahore and dinner in Kabul . and increasingly gets. The central government. had o ered Tata 1. has sounded even more accommodating to India: he has described Islamist separatists in Kashmir. It had secured the land through a 19th-century land-acquisition law. From this tiny base. two-way trade between India and Sri Lanka. As the seas rise. but it is bad for India’s reputation abroad. on trade and climate change. like its economic progress. This sort of thing has happened before in West Bengal. Di cult. which signed a bilateral free-trade agreement in 1999. It has a long history of meddling in other countries’ politics. which is currently under military rule and often under water. Mr Tata pulled the plug. Illegal Bangladeshi migrants are already sparking con ict in India’s north-eastern state of Assam. A regional freetrade scheme came into e ect in July 2006. the fourarmed Hindu goddess of wealth. Seeking to secure a pliable new government. This is bold thinking: India’s armed forces are. West Bengal’s government. Beneath this mural. The government claims. there is at least a promise of an advance. in turn. and to Pakistani pride. But India does have an advantage over its giant neighbour in the way much of the world perceives it: as well-intentioned and democratic. including Pakistan’s. sparked violence in which at least 50 people were killed. the UN’s Intergovernmental Panel on Climate Change calculates that another 35m will have crossed into India by 2050.000 refused the government’s compensation. this almost certainly helped a party of Maoist guerrillas. two-way trade between India and China is climbing: from $4. But it is an encouraging basis for a relationship between two giant countries that fought a border war in 1962 and still claim portions of each other’s territory.000 people who claimed a stake in the land. formerly backed by Pakistan. chairman of the Tata Group and the man depicted. 7 Ruled by Lakshmi Though inequalities are widening. Buddhadeb Bhattacharya. But unlike its fellow protectionists. India is itself far from ideal. Mr Bhattacharya was forced to move the hub. the protests turned bloody. to abandon a factory he was building on their elds. a seat at the world table. India’s best prescription remains continued rapid growth U NDER the eye of Lakshmi. for example. a semi-hostile nation of 153m delta-dwellers. at least a decade behind China’s. Those disputes continue to fester. At the most recent Doha-round negotiations at the World Trade Organisation in July. Trinamool Congress. diplomats josh.8 billion in 2002 to $38 billion last year. South Asian countries have got to co-operate better.The Economist December 13th 2008 A special report on India 13 2 had therefore proposed legitimising it. last month Chinese o cials reasserted China’s claim to India’s entire north-eastern state of Arunachal Pra- desh. in a village in West Bengal’s Singur area. India’s defence spending is also less than half China’s. (And wake up in hospital. They are celebrating a triumph for which many praise Lakshmi: a decision on October 3rd by Ratan Tata. or enclaves for export-driven businesses that o er light taxation and other perks. That sort of nonsense might play well with Indian voters. Nepal witnessed an embarrassing example of this in April. was garlanded on his return to India for having de ed the Western imperialists. brie y had to put on hold a cherished infrastructure policy of which the hub was a part: a scheme for special economic zones (SEZs). Trade between its members accounted for less than 2% of their combined GDP. so it dragged its heels. It demands. that the scheme will give a huge boost to India’s industrial infrastructure and create 4m new jobs by the end of next year. China has pro ted from this. But out of the 13. for now. is ballooning. which gives the government the right to take over privately owned land for the public good. but its table manners are sometimes regrettable.

But how much improvement it can bring to an abjectly poor state of 90m people. rated India’s states on eight social and economic measures. The richer. Sadly. there is no reason to hope for much the states can still make a lot of progress.5%. more important. scored 1. Maharashtra.1%. as the Nano’s new home. These parts of the country are a huge drag O er to readers Reprints of this special report are available at a price of £3. as this report has suggested. Narendra Modi. in Bihar. so will the regional disparities. There is no country more remarkable. including 42 in Tamil Nadu. As competition among states grows. or as quickly as it might. India’s emergence will continue. As a result. why the World Bank rates India. Moreover. As India’s economy grows rapidly. though. Send all orders to: The Rights and Syndication Department 26 Red Lion Square London WC1R 4HQ Tel +44 (0)20 7576 8148 Fax +44 (0)20 7576 8492 e-mail: rights@economist. the state government of Nitish Kumar has been much better than its predecessor.com/specialreports . It will not come as quickly as Indians want.7% and Delhi at 7. land and labour. Yet the problem is not insuperable. more chaotic ones in the east. The boss of Tata’s automobile division. Many of the areas described in this report. Uttarakhand and. which accounted for one-third of India’s population. please visit our website www. 7 Future special reports Business. Gujarat.5 or less. So long as that happens.economist. That would be an enormous help. much of it purchased directly by the developer. Of India’s sti ing labour laws. drafted by the central government. this can be di cult. almost all states increasingly let companies evade these strictures. for example. Some 200. are wholly or mostly controlled by them. there is not much evidence that rising standards in India’s better states are percolating to their backward neighbours. on an overall scale of one to ten. This explains.8%.4%. Uttar Pradesh at 4. there were only 285 strikes and lockouts last year. including Andhra Pradesh and Gujarat. In choosing Gujarat. Yet Mr Tata is a hugely respected gure in India even the farmers feasting in Singur spoke highly of him so this should serve as a warning to all India’s political spoilers. Conversely. where only a third of the women can read.4% and Madhya Pradesh at 3. But. Mamata Bannerjee. states can sabotage them. It jarred with many people to hear the hate-mongering Mr Modi praised. it will require sustained high economic growth.50 plus postage and packing. says that compared with infrastructure bottlenecks. compared with 674 in Not the best place to do business 2001. The rich are getting richer Competition between the states. and it should. Of 260 SEZs that have so far been fully approved. Please contact us to discuss your requirements.14 A special report on India The Economist December 13th 2008 2 West Bengal presents an extreme case of the di culties inherent in providing industry with land. a big majority are in India’s richest states. It is also reasonable to hope that debacles like Singur will teach state governments to acquire land more carefully. in the absence of reform at the centre and. If the centre introduces reforms in these areas.3%. which remain a serious disincentive for the large-scale manufacturing the country needs. including jobs. A putative new law. A minimum order of ve copies is required. Corporate o er Customisation options on corporate orders of 100 or more are available.economist. including infrastructure. education.com For more information and to order special reports and reprints online. India is seeing far less industrial action than it used to: for example. but it will be relentless. nance. But it illustrates one reason why India’s prospects are less bleak than they sometimes seem. in Karnataka. for example. better-run and more literate states broadly. was the way ve states conspicuously competed to o er the Nano a new home. especially by using contract labour. Among the poorest and most populous states. some hope that the overall performance of state governments will improve. Managing this schism e ectively would require enlightened and skilful government. though not for the disconsolate Mr Bhattacharya. many richer states grew faster: Gujarat at 8. A recent study by two economists. Mr Tata compared the helpful e ciency of its chief minister. would provide better compensation.000 hectares (500. has widened the already huge disparities between them.000 acres) of land has already been secured for SEZs. when the Indian economy grew at an average annual rate of 7. have begun reforming theirs. western India have proved more attractive to investors than the poorer. Laveesh Bhandari and Bibek Debroy. The ve worst. Also encouraging. 38 in Maharashtra and 23 in Gujarat. getting hold of suitable land is a minor problem. Ravi Kant. It will be sometimes exhilarating and often frustrating to watch. Between 1999 and 2008. for the dispossessed. This does not deal with the problem of India’s labour laws. as only the world’s 122nd-best place to do business 45 places behind Pakistan. Over 60% of the state is cultivated. with the Trinamool Congress’s rabble-rousing leader. 47 are national and 157 are state-level regulations. Tata Motors has bought or been provided with land for four big green eld developments this year. so most green eld schemes involve moving peasants and where peasants have votes. This trend will exacerbate Indians’ existing grievances and perhaps lead to more con ict. Haryana at 8.com/rights on India’s performance. especially since the 1991 reforms. which is home to many excellent companies. A few states. remains to be seen. economics and ideas The sea January 3rd 2009 The future of nance Jan 24th 2009 Growth in emerging markets February 14th 2009 Waste February 28th 2009 Entrepreneurship March 14th 2009 Previous special reports and a list of forthcoming ones can be found online www. There are just a few promising signs: for example. of which India has too little and not much prospect of more. Bihar grew at 5.

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