Why India needs to be afraid, very afraid

What can you say about an economic growth engine that has been chugging along merrily at an astounding 8 per cent rate for almost a decade?

We have heard many answers to that question, ad nauseam, throughout 2010. That its per capita income has more than doubled from $422 in 2001-2002 to $982 in 2009-2010.

That its 300-million-strong middle class is driving the nation's consumer boom like at no other time in its illustrious history.

That many of its roads are a pleasure to drive on. That its stock markets are booming.

That its policies and skills helped it emerge almost unscathed from a global recession. That it is the darling of investors.

That the world is beating a path to its door...Blah, blah, blah...

Till a dozen or so years ago, India attracted the Western world's attention only during floods, famines, or accidents; but now it is considered a global power.

Two decades of economic reforms have transformed India -- which was then a nation on the brink of bankruptcy, mired in acute poverty and a crushed under a mountain of debt with nary a hope in sight for its millions -- into an economic powerhouse.

The reforms, initiated in 1991, more out of desperation than foresight, launched the Indian economy into orbit.

Explosive economic growth rates have since then thrown up a large middle-class in India with formidable purchasing power.

More and more Indians are now showing a paradigm shift in the consumption pattern and spending huge sums on frequenting expensive restaurants, buying luxury cars and designer clothing, acquiring fancy gadgets, etc.

This is one of the reasons why the Indian economy is 'shining' despite the problems of multi-billion-dollar scams, high inflation and higher fiscal deficit, inept governance, poor economic policies, rampant corruption, and a possible economic bubble that might be taking shape in the country.

More blah, blah, blah...

Politicians, newspapers and analysts would want us to believe that India is already an economic superpower and that it will continue to sustain its blistering growth rate for the next few decades.

Reports also suggest India will be the world's third-largest economy in the next 20 years.

But newspaper headlines, like politicians, hide more than they reveal. Wrapped in the warmth of an ostensible 'feel good' blanket, many have failed to notice the chilling dangers that lurk round the corner.

And that is why there is reason to be afraid -- very afraid.

There are a hundred things that could go wrong for India. One of the biggest mistakes India could make is to rest on its laurels.

Lulled into believing that everything is hunky dory, it is easy to be complacent.

It is in this environment that economic bubbles emerge and thrive, putting a country into such a stupor that it begins to believe that the growth party will last forever.

Take, for example, India's biggest strength: Its demographic dividend. India is one of the world's youngest nations.

More than 52 per cent of India's 1.1-billion people are under the age of 25, and almost 35 per cent under 18.

This throws up incredible possibilities as its work force is slated to be the world's largest and youngest over the next few years, even as most countries turn grey.

When that much work force puts its shoulder to the wheel, one can barely imagine the earthshaking productivity that it would generate, catapulting the economy into stratosphere.

Provided this work force gets jobs, that is.

So, does India have a plan to create jobs for the millions who will soon attain an age where they would need to be gainfully employed? The short answer is 'No'.

There is no apparent long-term plan. There are only short-term attempts to weakly address the issue -- like the National Rural Employment Guarantee Act, which is more a security net than a proper job.

Although it is a laudable effort to provide some succour, it certainly is not enough.

Now consider India's gargantuan fiscal deficit. Fiscal deficit is essentially the difference between what the government spends and what it earns.

It is expressed as a percentage of the gross domestic product. Higher the fiscal deficit, weaker the economy.

India's fiscal deficit will be at around 5.5 per cent of its GDP in 2010-2011, as a surge in revenue collections has offset high expenditure. Public debt has almost reached four-and-a-half years of revenue.

Therefore, there are reasons to worry.

High fiscal deficit restricts the government's ability to fund development projects, retards growth, does not propel employment-generation and leads to higher interest rates.

Also, government spending on social welfare, education, health, poverty alleviation is severely hampered due to high fiscal deficit.

If a developing country's resources are deployed properly, deficits are not necessarily a bad thing.

But if the revenues keep dropping due to mismanagement and a profligate government lets its expenses get out of hand, disaster is a given. Argentina, Ireland and Greece are just a few cases in point.

Considering that all of India is shedding tears over the astronomical price of onions, take the case of inflation.

Fuelled by high wages, rising property and food prices, inflation in India is at an almost unsustainable 10-per cent level.

High inflation conceives several problems: Among other things, it leads to high interest rates, results in lack of investment into the economy and drop in employment, eats into people's retirement funds, puts goods and services out of reach of people's hands, and slows down the economy.

A whole lot more could go wrong for India if its minders take their eye off the ball.

The nexus between politicians, bureaucrats, industrialists and even the media, that caused scams worth $50 billion in just 2010 alone, has shaken the faith of the common man in the system.

These unprecedented levels of corruption could keep foreign investment from coming into the country as global investors look for cleaner markets to park their monies in.

The money that has been lost could have helped create much needed infrastructure and boosted economic activity further.

Now let's take the country's creaking infrastructure. Lack of progress on that front acts as a huge barrier to higher growth and shackles the country.

Many Indians still lack basic amenities like electricity, potable water, transportation, health care, education, etc.

While policy makers seem to be trying to do something about it -- and a lot of it was done during 2010 -- the pace of implementation of policies remains lethargic.

India needs to create world-class infrastructure, including an extensive network of good roads and highways; it needs to propel reforms in the power sector; it needs to create superb public transportation systems in its great cities, and provide adequate power and water to see its industries prosper.

Another danger that lurks around the corner is in the form of letting the exchequer bleed due to enormous scams, the impact of huge subsidies and loan waivers, the unrealistic pay commission recommendations, etc.

The country needs to get out of its habit of reacting to crises in a knee-jerk fashion, rather than formulating foresighted policies that control such crises or nip them in the bud.

For example, the country needs a better manufacturing policy that aids simpler clearances, encourages new technologies, and allows an easier exit policy. And this needs quick action.

Almost 25 million new jobs are created when the manufacturing sector grows by even 1 per cent.

Another fear that constantly keeps surfacing is whether there is a bubble in India's real estate sector and how badly would it impact the banking industry.

Astronomical real estate prices have put the dream home out of the reach of most Indians.

With easy access to funds from banks, builders created capacities, but with buyers keeping off -- due to high realty costs and steep interest rates -- a lot of this stock remains unsold. This is leading to the formation of a bubble.

With real estate companies feeling the unbearable strain of repaying loans to meet their financial obligations and buyers not coming forward, chances are that builders might be forced to slash prices.

This could lead to a crash in the entire sector as prices all round will drop.

While builders themselves created an artificial increase in prices and refused to sell at lower costs, their cash flows were hit hard.

Now with the banks demanding their money back, they are in trouble.

But if some of these builders default, banks will be left with cold stock and no one to buy it as property prices crash further.

The real situation may, however, not be as bad as it sounds and Indian banks might not go belly up, but it certainly is an issue that needs careful attention.

And this could happen over the next three months, unless banks extend further funds to help builders get out of this hole.

Year 2010 was full of murky economic affairs being hidden under distracting headlines.

There were a few good things too like billionaires donating more for good causes, jobs being generated, the information-technology sector looking up, etc.

But that is not nearly enough.

Perhaps, the New Year will see a reduction in the gap between the two Indias that exist cheek by jowl in this nation.

One is a thin sliver of the visible and the vocal bunch that is either rich and/or overspends on its credit cards, creating the illusion of a booming economy.

The other is the large mass that still has no access to education, health care, food, water, clothing or shelter.

Bridging that gap that is easier said that done. For that to happen, its lawmakers and bureaucrats will need to denounce corruption, introduce a robust work ethic, implement projects on time, and fulfil their promises.

That could be a good beginning for 2011.

So is India ready to bite the bullet? I fear I know the answer to that. And that is why I am afraid, very afraid.