India’s Economic ‘Party’ Not Over, But Pitfalls Ahead

Posted On : Oct 04, 2012

Senior Bharatiya Janata Party leader Yashwant Sinha at Stanford University. (Richard Springer photos)
  • PALO ALTO, Calif., United States

    Three of India’s top political leaders agreed here Sept. 26 that any postulating that the “party is over” regarding India’s steady march to become a world economic powerhouse is premature, if not wrongheaded.

    They had varying suggestions, however, on the reforms the country needs to take to keep the ball rolling.

    At a panel discussion at Stanford University hosted by the Stanford Center for International Development and the Center for South Asia, the topic was: “Is the Party Over? Reform, Planning and Growth in India.”

    The three panelists, interviewed by CSA director Thomas Hansen, were senior Bharatiya Janata Party leader Yashwant Sinha, a former finance and foreign affairs minister of India; Sitaram Yechury, a member of Parliament and senior leader of the Communist Party of India (Marxist); and Rajya Sabha (India’s upper house) member N.K. Singh, a former finance secretary who held top civil service posts in the Finance and Home Affairs ministries.

    Credited with taking proactive steps when he was finance minister under prime ministers Chandra Shekhar and Atal Behari Vajpayee to set the Indian economy on a growth trajectory, Sinha said that for India to avoid near-term setbacks “anything less than eight percent (growth) is a disaster. People are not prepared to wait…for their basic demands to be met.”

    He attributed the growth in India since 2002 to the “unleashing suppressed demand” from domestic consumption. Sinha said that the biggest danger to growth is still inflation.

    Yechury criticized recent “mega scandals in India” and a “slew of tax concessions” totaling about 5.28 billion rupees that have not filtered down to help people at the bottom of the pyramid. He said the emphasis should remain on development of agriculture and housing.

    The ruling government’s recent approval of multi-brand retail, which is limited to cities of one million or more, will hurt small business owners, lose jobs and not amount to a significant foreign investment, Yechury said. He pointed out that total FDI in India amounts to only about two percent of the country’s total GDP. 

    Singh opined that controlling the Current Account Deficit is a key for India. “We need to put macro-economic stability back in place,” he said.

    (The CAD, 4.2 percent last fiscal year, is likely to moderate to 3.1 percent of GDP in the current financial year due to modest imports and a stronger rupee, credit agency Crisil reported Oct. 1.)

    Singh was critical of the government for trying to impose taxes retroactively on Vodafone, not because it didn’t have the authority, but because it led to “shooting down investor confidence” worldwide.

    In the question-and-answer period, the panelists agreed that India’s Parliament has the authority to undo the Supreme Court’s decision that ruled that Vodafone wasn’t liable for a $2.2 billion bill for back taxes and penalties from the acquisition of mobile phone company Hutchinson Essar in 2007.

    Singh also pointed out that, according to recent press reports, Vodafone has indicated it may be willing to settle its tax bill, provided any interest and penalty charges are waived. “This may indicate that they (Vodafone) may know it is not fully in the right,” Singh said.

    All the panelists agreed that economic decision-making in India is shifting from the center to states. “Regions are becoming more powerful,” Sinha said.

    N.K. Singh pointed out that directives and decisions made by the federal government can still frustrate state officials. “Parameters still have to be set by the center,” he said.

    Regarding multi-brand retail, Singh said the “jury is still out” on whether it will lead to a net rise or a net fall in jobs. He said it did not play a major role in reversing the damage done in the foreign investment community by the Vodafone public relations debacle.

    Singh said better measures that could have been taken by the Manmohan Singh government to signal that it is a prime destination for FDI would have been to approve reform bills on pensions, opening up the insurance sector and finance and banking reform.

    Yechury disagreed, saying that if India had liberalized its banking and insurance sectors before the international banking crisis, the country “would have been devastated in the global meltdown.”

    The panelists agreed that India needs to encourage FDI for India’s infrastructure and to support new technologies.

    “As to India’s growth story, Singh said, “the party has just begun.”