India in 2012: Another 2011 coming up

Rajeev Srinivasan predicts grim prospects for the year based on poor economic leadership and the worsening security environment.

I think there will be little disagreement if I say that 2011 CE was an annus horribilis for India. Unfortunately, it looks like the next year will likely be as bad or worse. This is because of both self-inflicted wounds and a worsening global environment. I would like to consider a couple of areas.

Economy:

In the past year, India, in the eyes of the world, dropped precipitously from something along the lines of 'the leading alternative to China' to 'the worst-performing currency in the world and the worst-performing economy among the BRICs' (Brazil, Russia, India and China). In fact, pundit Farid Zakaria suggested that the 'I' in BRIC was no longer India, but Indonesia.

He has a point, because clearly the Indian economy is rapidly going downhill: The rupee is tanking, the stratospheric growth rates are plummeting, and the stock market is taking a beating, not to mention FDI figures. I haven't looked at Indonesia's figures carefully, but I suspect it's doing a lot better than India is.

The underlying problem, though, is what must be called 'leadership' for lack of a better word. It is an axiom in business that any innovation will give a competitive advantage for a brief period, until the competition figures it out and either copies it or takes remedial action.

In India's case, Prime Minister P V Narasimha Rao, facing the balance of payments crisis in 1991, was forced to innovate, and the liberalisation that ensued -- albeit with a substantial currency devaluation -- brought substantial benefits to the economy. But that has run its course; after 20 years, the old trick is no longer useful, we need a new trick.

Unfortunately, the masters of the universe who run India know only one trick: That of Socialism, the license raj, crony capitalism and outright loot of the public exchequer. Okay, I exaggerate: They also know how to shed crocodile tears about the common man, without doing anything for them in actuality, lest they climb out of poverty, and spared from desperation and destitution, dare to vote them out of office.

There was an issue of The Economist on October 22, 2011 (Business in India) which provided a lot of data about the Indian economy in the recent past. What was evident, but left unsaid by the author, was that there was a flowering of the economy, with an entrepreneurial ferment, up to 2004.

An iron curtain descended thereafter, and the opportunity was shut firmly to all but the well-connected, which is to say, those large family-run firms. The era of the entrepreneur had come and gone in the blink of an eye. And so had India's economic future.

The fact that this closure coincided with the United Progressive Alliance's new term, and that things have been going steadily downhill, should not surprise anybody. It is but natural.

I have an analog from nature: What might be called 'goat theory of everything.' The natural habitat for goats is thorny, semi-arid scrubland. And wherever goats go, they turn the surroundings into just that, a hardscrabble environment. They do this by the expedient of grazing plants all the way to the ground which prevents them from regenerating; and their sharp hooves damage the soil, making it vulnerable to erosion when it rains. Thus even the lushest grassland can be turned into scrub by goats.

Similarly the Congress in India has a genius for turning any economic environment they inherit into a. the Nehruvian Rate of Growth of 2 to 3 percent in GDP; b. high inflation; c. stagnation; d. devaluation of the rupee; and e. the magical disappearance of large sums of money. And that is precisely what they have done.

Like the goats, they are comfortable in their own arid scrubland.

It is hard to see any improvement in this in 2012. In a hard-hitting comment, Stephen Roach of Morgan Stanley, long an optimist on India, said that India is the only economy in Asia with a current account deficit and a big budget deficit, so he believes the Reserve Bank of India will have no option but to keep rates high, thus strangling the 'green shoots' in the economy. 1970s style stagflation, in other words.

There has been what appears to be a deliberate attempt to create inflation with the incidental benefit of appeasing vote banks: a. The National Rural Employment Guarantee Act, which is wasteful and has serious side effects, with costs estimated at about Rs 70,000 crore; b. the farmer debt forgiveness, costing Rs 30,000 crore; c. the implementation of the Sixth Pay Commission Report, thus enriching babus greatly, costing another Rs 50,000 crore, and many other such schemes, all intended to get votes from pliant groups of beneficiaries.

The ill-considered Food Security Bill, which has the potential to destroy agriculture altogether and cause hyper-inflation, is another such invention and surely will head the list of disasters imposed on India in 2012.

Foreign Affairs:

Remarkably in 2011 India appears to have embraced the American world-view. Whether this is a dhritarashtra-alinganam remains to be seen, especially given the US president's general tendency to be mean to friends and deferential to enemies. It is also a good question as to whether India's economic woes are correlated with its friendship with America.

There are some good things happening on this front, though. After years of being taken to the cleaners by the Chinese, Indian mandarins finally appear to have acquired a spine, and begun pushing back albeit feebly. This, I suspect, is based on large doses of Dutch courage supplied by Uncle Sam, who really needs a few victories against the rampaging Chinese.

There is the beginnings of what looks like a cordon sanitaire in the making around China, as the US is explicitly asking its partners in Asia to react to China's alleged 'peaceful rise' which has been accompanied by much belligerence. The tripartite India-Japan-US talks in the recent past, the Japanese prime minister's cordial visit to India, and the surprise decision by the hitherto hostile Labour Party in Australia to agree to supply India with uranium all point to the possibility that there is an entente cordiale between the US and India, which -- one hopes -- will benefit both.

Other moves made by India -- for instance the raspberry to China over the latter's protests about India drilling in Vietnamese waters (the Chinese, though, claim the South China Sea to be their private lake. It's got the name 'China', see? What more do you want? That's about as solid as their other claims such as to Tibet etc.), the deployment of Indian forces along the Tibetan border, and the refusal to kowtow to Chinese demands about the Dalai Lama are all quite positive moves.

Perhaps there will be more of the same in 2012, with India asserting itself a little more as an 'Indo-Pacific' power (by the way, that name itself is an acknowledgment by the US of the importance of 'rimlands' or littoral States as compared to continental States or 'heartlands'). Perhaps India will inch towards an Indo-Pacific century.

Of more immediate concern, of course, is the US withdrawal from Afghanistan. This is likely to leave more of vacuum in the region, which will be filled by Pakistani-inspired and funded terrorists.

I would not be surprised if there is a spectacular act of Pakistani terrorism in India in 2012 intended to celebrate the triumph over the hyperpower. Of course, the home minister of India will once again mouth the terrifying formula: 'If there is another terrorist attack, we will...'