Photo Gallery: India Falls Behind

Foto: Arun Sankar K./ AP/dpa

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.

Self-Created Plight

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.

Hesitant Companies

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.

Future Plans

Politicians in Delhi are certainly hatching ambitious plans. In 2011, they decided to increase the proportion of India's total economic performance made up by industrial manufacturing from 16 to 25 percent in 10 years. That would leave India still lagging behind China, where the same figure is 30 percent, but there's a bigger problem as well -- India's industrial sector is now growing even more slowly than it was when this grand plan was first implemented.

The plans the elite in the capital think up often don't end up getting implemented in the rest of the country. Many of India's 28 states are governed by local parties, and funds, once allocated, often don't reach those they're intended for. Carmaker Bhargava, too, blames day-to-day corruption for the way India is lagging.

Bhargava differentiates between two different types of rackets. There's the "high-level" type, for example when politicians demand a cut of a certain project. Then there's the "everyday" corruption, where people have to bribe officials to obtain services that they are actually entitled to by law. "I call that extortion," Bhargava says. The Maruti Suzuki chairman speaks for many company heads, who are in uniformly angry about the current state of affairs.

Hopes for Reform

And little is likely to change in the coming six months. After nine years in power, the coalition around the Congress party of Prime Minister Manmohan Singh has completely lost steam.

No more daring reforms are expected from the 81-year-old prime minister before the election. In fact, the head of state with the blue turban symbolic of his Sikh faith is seen as a tragic figure of the country's faded economic miracle. Yet Singh, an economist who studied in England, was one of the politicians who first opened India up to a free market economy in the 1990s, after decades of hefty government intervention. At the time, he was finance minister. These days, though, the prime minister lacks the necessary authority within his own party. Indians find his stiff public appearances boring and many mock him as a "robot."

For many, India's new hope is Narendra Modi, 63, a man with a fastidiously cropped gray beard, who wears a different colored long shirt, known as a kurta, almost every day. He is the leading candidate for the opposition Hindu nationalist Bharatiya Janata Party (BJP), and especially corporate leaders and young urbanites long for him to deliver them from the collective torpor.

Modi showed his chops as a reformer in the western state of Gujarat, where he is now in his third term as the state's chief minister and governs with as firm a hand as a Chinese party secretary. The son of a tea-seller, he is considered incorrupt. During his terms in office, the economy of this state of 60 million people has grown more than 50 percent faster than India's average.

For example, when protesting farmers in West Bengal prevented the Tata Group from building a factory there for manufacturing its small city car the Nano, business-friendly Modi was quick to bring the project to Gujarat. When it comes to social progress, on matters such as healthcare and education, however, on some issues Gujarat performs worse than other Indian states.

Still, Western investors are speculating that Modi as prime minister could have what it takes to renew India. The American investment bank Goldman Sachs recently revised its pessimistic forecast for the subcontinent and, with its eye on Modi, is once again recommending the purchase of Indian stocks. The title of the paper that presents this viewpoint makes its message clear: "Modi-fying our view."

Reaching Mars

It's a little early, though, to be siding with Modi so strongly. The Hindu economic reformer is hated by many voters of the country's Muslim minority. In 2002, during Modi's term as Gujarat's chief minister, anti-Muslim violence and mass killings broke out there. Over 1,000 people died on the authorities' watch. Modi refuses to this day to take political responsibility for those events.

Even if Modi does manage to take power in Delhi, like the unlucky incumbent Singh, Modi, too, would most likely need to haggle over compromises in a coalition. Even within his own BJP, representatives of powerful interest groups are resistant to further opening up India's economy, such as to foreign supermarkets.

But regardless of who ends up governing the country, India can expect to celebrate one success in the fall of 2014 -- the Mars mission. At least, that's assuming the probe reaches its destination by then.

Translated from the German by Ella Ornstein
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