India Falls Behind: Corruption Plagues Rising Economy
Two decades after the start of its economic miracle, India is falling behind its rival China. Corruption is rampant, and investors are pulling out of the country. Will parliamentary elections next year offer a fresh start?
It rumbled and thundered, then India's first Mars rocket shot into the sky above the Bay of Bengal, trailing a long tail of fire behind it. It was one of those rare moments when Asia's third largest economy showed its modern side, with everything running punctually and precisely. On the ground, the head of India's space program rejoiced, and declared: "Any mission is not beyond our capability."
That was early November, but this country with a population of 1.2 billion could celebrate its actual triumph 10 months from now, when the Indian-designed space probe is scheduled to reach the red planet and orbit it several times. If the mission proceeds as planned, it will make India the fourth space-going power to successfully reach Mars, following the United States, Russia and Europe. And, most importantly, India will achieve this step before its greatest rival, China.
The space mission shone in the sky above India like a glimmer of hope for a country where back on the ground hardly anything is going according to plan. The competition with China for dominance in Asia -- colorfully described for years by Western authors as a duel between the dragon and the elephant -- has long since been decided, economically and thus geopolitically as well, and not in India's favor.
Hailed for two decades for its miraculous ascent, India's economy is now faltering. Growth, once around 10 percent, is now less than half that. The International Monetary Fund (IMF) predicts it will ultimately be under 4 percent for the current year, as it was last year as well.
That would mean India's economy is growing only half as fast as that of China, which serves as factory to the world. China's economy, too, is flagging at the moment, but at a comparatively luxurious level. India, though, faces the challenge of freeing its population from poverty. One third of all Indians scrape by on less than $1.25 (0.90) a day. Only high growth rates will help them move closer to prosperity.
The disappointing state of the economy can also be seen in the depreciation of the country's currency. The rupee has lost about 12 percent of its value against the dollar since the beginning of 2013, which makes imports, especially oil, more expensive. India's hunger for that particular resource is the primary reason why the country's trade balance is so deeply in the red.
The rupee has somewhat recovered from its dramatic plunge over the summer, when investors fled en masse from India and other developing nations, fearing an end to the US Federal Reserve's relaxed credit policies. Some of that speculative money has since flowed into the country once again, boosting stock market prices in Mumbai. Still, the end of the US' policy of quantitative easing -- and with it a potential rude awakening for India's economy -- has only been postponed.
India's plight is a self-inflicted one. Politicians and bureaucrats in New Delhi failed during the boom years to attract enough investors, who would have built factories and created jobs. The country's elite failed to modernize India's antiquated infrastructure by constructing new roads, bridges and, most importantly, a reliable power supply.
Instead, India's arrogant and deeply corrupt bureaucracy scared off foreign firms over and over. British communications giant Vodafone was retroactively slapped with a special tax. In July, South Korean company Posco, exasperated by endless delays, gave up its plan to construct a $5.3 billion steel plant in eastern India. The same month, Indian-Luxembourgian corporation ArcelorMittal nixed a similar plan. And in October, Australian-British company BHP Billiton announced its intention to withdraw from several projects involving the extraction of oil and gas.
'India Grows at Night'
These sorts of projects often fail in democratic India because of the justified resistance of environmental activists. Often, though, they fail because local bosses, politicians and officials are simply out to rip off everyone else.
"What India needs is an effective government with a more robust legal system and greater accountability," says Gurcharan Das, who formerly headed the Indian division of consumer goods giant Procter&Gamble and has written a book with the sarcastic title "India Grows at Night" -- in other words, when the bureaucrats are asleep.
Certainly, Indian businesspeople are accustomed to maneuvering through this bureaucratic thicket, in which many of the rules are still the ones first devised by the country's former British colonial rulers. But the current system is no way to create jobs for the 12 million additional workers who stream into megacities such as New Delhi each year.
Chasm Between Rich and Poor
It's morning in Kusumpur Pahari, the largest slum in the southern part of the Indian capital, and Roshan Vedwal is hanging around in an alley with his friends. Uncovered rivulets of gray wastewater flow past them. Vedwal, 29, grew up here in the jungle of this shantytown, where at least 100,000 people live and work. Drinking water is available only at certain times, distributed by tanker trucks. People here do not have toilets. They relieve themselves outdoors, as do half of all Indians.
Vedwal has been looking for a job for two years. Before that, he worked as a server in a hospital cafeteria. These days, though, jobs are in short supply. Vedwal says he lives on money from his relatives, who work as guards or cooks at nearby villas. The chasm between rich and poor in India is the modern continuation of the caste system. In 2010, the wealth of the 100 richest Indians accounted for one-quarter of the country's gross domestic product.
The country's poorest, meanwhile, rely on food distributed by the government. The slum's distribution center is open today and a group of people is waiting there. One woman displays her ration card. "I'm supposed to get 25 kilograms (55 pounds) of wheat," she complains, then indicates a small plastic bag filled with grain. "But I only got half that."
Complaining about this cheating is no use, residents say, because the distributor is in cahoots with the police. They say the officials get a "big cut."
Lately, many politicians have been dropping by the slum, promising to make things better, ahead of parliamentary elections that will be held in May at the latest. Nearly 150 million of those eligible to vote for this new parliament will be voting for the first time. India is a young country, with nearly 60 percent of its population under the age of 30. Economists welcome this younger generation as future consumers, celebrating the "demographic dividend" that will allegedly give India a competitive advantage over rapidly aging China.
But if India fails to provide enough jobs, especially for its many frustrated young men, that putative advantage could turn out to be a demographic disaster. Unlike China, India has modernized starting from the top, as IT giants such as Infosys transform the subcontinent into the world's service provider, chock full of software producers and call centers. This, though, benefits primarily the English-speaking elite. Around 2.8 million of India's workforce of 450 million work in the IT sector, but these pioneers are suffering as global demand flags. American companies, in particular, are hesitant to outsource further services.
In the high-tech city of Bangalore, Infosys broke with its own principles and called company founder Narayana Murthy back from retirement into active management in the hope that the IT legend would be able to get Infosys back on track. The company has since reported higher earnings, but this is primarily due to the rupee's low exchange rate, which inflates profits earned abroad.
"The dismal mood in the IT industry is putting a damper on consumption," says Ravindra Bhargava. The chairman of the Indian-Japanese car manufacturer Maruti Suzuki receives guests at his villa in southeastern Delhi. A servant serves tea and chocolate cake as the energetic 79-year-old with the high forehead takes the time to discuss India's plight in depth.
Maruti Suzuki itself has little reason to complain. Unlike many of its local competitors, the company is currently selling more cars than it did last year. But these new customers won't be enough, Bhargava says. "There's no getting around it -- our country must build up a solid base of industrial mass production in order to create enough jobs."
Whether it's Japan, South Korea or China, the veteran car manufacturer knows that no Asian country has risen to become an economic power without first mastering its industrial revolution. China alone produces over five times as many cars as India does. And although India manufactures vehicles to an acceptable standard, production here is too expensive. One important reason is that complex electronic components such as computer chips often must be imported.
- Part 1: Corruption Plagues Rising Economy
- Part 2: Future Plans
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