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India: Economy Grows, Politics Stagnates


India is at a socio-economic and political crossroad. Despite promising economic trends, the country’s leaders must take immediate steps to combat corruption if they want to salvage the respect of the people and maintain India’s long-term global economic prominence and some of its greatest assets.


By Harsh Pant for ISN Insights

By all accounts, India is on a self-sustaining trajectory of economic growth. This may seem hard to believe, given that its economy was in such dire straits in 1991 that the government was forced to pawn 67 tons of gold to the Bank of England and the Union Bank of Switzerland, in order to shore up its dwindling foreign exchange (forex) reserves of a measly $2 billion. The distance that the country’s economy has travelled since then could be gauged by the fact that, in November 2009, with the nation’s foreign exchange reserves standing at US$285 billion , India decided to buy 200 tons of gold from the International Monetary Fund (IMF).


The financial crisis of 2008-09 did not impact India as severely as the West. In that period, the country experienced slower exports and lost some liquidity but, overall, its economy has weathered the storm and remains highly resilient. Like other emerging markets, India appears to be recovering far faster than developed nations. The country’s recovery from the global financial crisis has also been broad-based, with its three main sectors – industry, agriculture and services – all performing well. As a result, the economy is growing rapidly and levels of savings, investment and forex reserves are all high.

According to the Indian government, the country’s economy will grow by around 8.75 percent in 2010-11. In fact, some believe that it may even breach the nine percent mark. The latest figures from the IMF, however, project that the economy will expand by 8.4 percent this year. The World Bank argues that as a net importer of goods India has sustained substantial growth by utilizing domestic demand. In contrast, export-based economies, such as China’s, are far more dependent on global consumer demand, so the Bank suggests that India’s growth rate may outpace that of China this year. This would make India’s the fastest growing large economy in the world. In addition, its position might also enable it to benefit from increased capital investment and clout, as a result of slowing growth in East Asia.

No time for complacency


These upbeat assessments do not mean that all is well in the Indian economy, however. Inflation remains the government’s top priority; it is a necessary concern given the rising price of onions for example, which went up by 67 percent in the last year. With domestic demand rising and supplies unable to meet that demand, food prices have been on the rise and remain a major concern. Inflationary pressures can challenge the upward trajectory of the growth figures, especially as a surge in food prices will affect the purchasing power of consumers, thereby impacting overall consumption demand. There is a middle-class anxiety about double-digit inflation and, as a consequence, the government has been forced to re-examine the stimulus package introduced to counter the economic closedown. It has also intervened with policy initiatives to cool down growth.

The stimulus package is being re-examined as it is said to have caused an increase in fiscal deficits, measuring around 6.8 percent of GDP in 2009-10. Consequently, the Indian government has promised the parliament that the projected fiscal deficit of 5.5 percent of GDP in 2010-11 will be reduced to 4.1 percent by 2012-13. This is also to be accompanied by a reduction in the central government’s debt, as a proportion of the GDP, form the present80.5 percent to 47.6 percent by 2012-13. How this will be accomplished remains to be seen.

There is a clear realization among the upper echelons of Indian policy-making circles that a high growth rate is a vital source of funding for India’s social development programmes. It also creates employment for the country’s youth, so the challenge for India is to significantly intensify its reform initiatives. The focus needs to be on consolidating government finances and cleaning up governance in order to improve the country’s infrastructure. This remains a major bottleneck, though the Indian government is committed to investing up to $1 trillion in the sector. Providing quality education services also remains a challenge.

Corruption must not damage economic potential

As already mentioned, internal consumption is the main driver of economic growth in India. The middle class is still growing and its aspirations will continue to dictate the priorities of the economy. The present government came to power on the promise of ushering in “inclusive” growth and, as such, education and food have been the focus of public policy for the last few years. The Mahatma Gandhi National Rural Employment Guarantee Act (NREGA) has been hailed as a landmark policy initiative for poverty alleviation and the generation of productive wage employment for unskilled rural labour. But the administration of this programme has also experienced rampant diversions of funds. As part of his efforts to address such issues, the prime minister is under pressure to develop a more transparent system of procedures and safeguards in the nation’s governance processes.

In the past, the issue of corruption was known to drive national politics, and this is also the case at present. Despite all the claims that India is a rising power, it is passing through a serious crisis. The government in New Delhi is facing a credibility test as the nation has been besieged by a plethora of corruption scandals in recent months. From the Commonwealth Games to telecommunications, there have been scandals galore and the government is finding it difficult to govern amidst demands by the opposition parties to hand over the enquiry to a Joint Parliamentary Committee.

The corporate sector has also lost confidence in the government, and expresses broad dissatisfaction with the ruling Congress Party. Headed by Prime Minister Manmohan Singh, an academic politician, who still enjoys wide support, this government is nonetheless seen as one of the most corrupt in recent history and indeed Singh no longer seems to be in charge of his own government. Sonia Gandhi, the leader of the Congress Party and its real power centre, talks of the nation’s shrinking moral universe, and yet is leading a team of party functionaries who are busy pursuing a cynical brand of politics, which often targets the Singh himself. Prominent Indians have written an “open letter” to the nation’s leadership on issues regarding the growing deficit in governance and the urgent need for a proper response to it. It is the lack of transparency and accountability in the functioning of most of the country’s institutions and public services that affects ordinary citizens. There is a growing demand that the process of administrative reform and legislative revitalization should begin at the top.

Maladministration, dithering and incompetence are making India ungovernable, with a growing loss of respect for all major state institutions. India is becoming increasingly corrupt, with the political establishment, police and lower judiciary playing a large part in this decline. Corruption is also having a corrosive impact on the social fabric of Indian society by undermining the trust of ordinary Indians in their nation’s political system, institutions and leadership.

For a party that won a decisive mandate just a year and a half ago, this all pervasive decline can be difficult to decipher. Economically, the Congress Party has not allowed the government to proceed with the second generation of its reform programme. Socially, the stench of corruption is now too odious to bear. All major institutions of governance are struggling to regain their legitimacy and politically, the party in power is rapidly losing all the capital it earned during the last elections. There is no coherence in the government, with all departments working as if there are no national imperatives, only departmental interests.

Like many times in the past, the government is once again promising to address the challenge of corruption head. Few in India believe that is likely to happen. Their pessimism should be the real cause of concern for all those who believe in the potential of an economically vibrant India.

Dr Harsh V Pant teaches at King’s College London in the Department of Defense Studies and is an Associate with the King’s Center of Science and Security Studies. His research is focused on Asia-Pacific security issues. His recent books include Contemporary Debates in Indian Foreign and Security Policy (Palgrave Macmillan, 2008) and Indian Foreign Policy in a Unipolar World (Routledge, 2009). This article was published by International Relations and Security Network (ISN)

ISN Security Watch

The ISN is one of the world's leading open access information and knowledge hubs on IR and security issues, based at ETH Zürich, Switzerland.

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