India needs new direction urgently

India has quickly come to regret Manmohan Singh's second term as prime minister. The country's most respected bureaucrat was handed a powerful mandate by his country's voters two years ago and had a magnificent opportunity to modernise the economy. How distant that dream now seems.

Far from being in pole position among emerging markets, as it deserves, India trails in terms of attracting foreign capital and beating inflation. Some economists and industrialists fear India's economy could shrink back from initial projections of 9 to 7 per cent this year. There is even speculation that the Singh government may not last the distance until elections in 2014 — though those who predict this may not appreciate that India's electorate has nowhere else to go.

Senior executives complain bitterly about New Delhi's painfully slow or inconsistent decision-making. Many local companies are focusing their investments on Africa or Latin America. Singh's administration will totter "on its last legs for the next three years", says one executive. A more profound question is being posed: does India, with its 1.2 billion people, suffer such a lack of vision and accountability that those apparently bright prospects of two years ago can never be achieved?

Then, India had sound hopes of narrowing the development gap with China and competing with the damaged economies of the West, not least by attracting capital looking for a home of high return. A clear parliamentary majority, supported by able — if elderly —policymakers, held the promise of momentum to build on the financial reforms of 20 years ago and push ahead to double-digit economic growth.

Growth and stability

Back then, few could predict that Singh, the veteran reformer who has just celebrated his 79th birthday, had passed his best — as most now acknowledge. Equally, none could have foreseen that the government's ability to act would be hampered by the illness of Congress president Sonia Gandhi, the silent power behind executive government, and the seeming shyness of her 41-year-old son Rahul Gandhi.

But there can be no psychological excuses for the scandals such as the corruption one that has besmirched the government.

When taken in the full context of post-independence history, Singh's watch of course deserves plaudits for high economic growth and stability. There have been no communal massacres between Hindus and Muslims and no wars with regional rival, Pakistan.

Yet with its young population and fast rising prices India urgently needs new direction — and Singh urgently needs to salvage what until a year ago could have been seen as a near Nehruvian legacy. He has tried to wriggle from the mire with two limp cabinet reshuffles. Now he needs to execute his strongest suit, administrative reform, to restore a sense of principled purpose.

The four critical reforms are all potentially near at hand — but often appear elusive. The first is the overhaul of the arcane tax system, repeatedly delayed by opposition from powerful states. Direct sales tax and goods and services tax reform would iron out disparities between India's 28 states, improve compliance and end a Byzantine system in which taxes are levied on taxes. Leading industrialists such as Adi Godrej, chairman of the Mumbai-based consumer goods empire, identify this as the single greatest move Singh can make to accelerate economic growth.

The second is new land reform laws, which are crucial to unlocking India's much-needed industrialisation and create jobs.

Third is the mines and mineral development bill. This sector has committed heinous, but largely unobserved, wrongs to the environment and rural communities. India has plenty of natural resources to feed its factories but either they are illegally exploited or untapped.

Finally, Singh must cleanse the state's procurement processes. He can lean on internet technology to run honest tenders and secure financial transfers.

There are a string of other reforms, including raising the foreign investment caps in the insurance sector, opening multi-brand retailing to foreign direct investment and boosting farm output. But Singh's chief aide, Montek Singh Ahluwalia, warns that approaching India's parliamentary democracy with a shopping list of reforms is an exercise in futility. Reforms, like the clipping of subsidies, take place at the margins. Or they come in response to calamity, most notably in 1991 when India's balance of payments problems threatened default. Today's crisis is not yet showing up in the current account.

Many Indians sense their country's economy might never fulfil its potential, especially if Singh's leadership continues to falter and the political system jams.

— Financial Times