India’s Economy Is Tanking, but Not for the Reason You Think
WHY YOU SHOULD CARE
A country that pulled more than 250 million people out of poverty in a decade is struggling to build on those gains.
Raghuram Rajan, the then outgoing governor of the Reserve Bank of India, in September 2016 took satisfaction from the fact that India was “on a more sustainable growth path.”
The remark turned out to be premature. Less than two years later, ominous signs of weaknesses started to emerge. Gross domestic product growth, which has been sliding continuously over six quarters, was 4.5 percent in the last quarter — compared with the 7 percent that the government had predicted. And the slide may not be over yet.
If engineers inspecting a bridge find serious structural weaknesses, they can only conclude that the bridge is unsafe. They cannot predict when the bridge will come down. Similarly, economists cannot predict the timing of the next slump. They can at best be faulted for not being cognizant enough of the risks to the sustainability of growth.
In India, the culprit isn’t contagion from the global economic slowdown. It’s corruption that has left the economy weakened and excessively vulnerable to global currents. And that’s bad for the world.
The euphoria about India’s prospects following the economic reforms of 1991 is understandable. Growth, which had averaged just about 3.5 percent in the pre-reform period, raced to about 7 percent on average, and with less volatility. According to the United Nations, some 271 million Indians were lifted out of poverty between 2006 and 2017. Some projections said India could be the world’s second-largest economy by 2050.
Weakly governed countries tend to invest less in health and education. Thus, when growth takes place, only the elites can take advantage.
But while it is possible for highly corrupt countries to register impressive rates of growth for a few years, widespread and entrenched corruption will thwart the sustainability of growth, research by the International Monetary Fund (IMF) and other international organizations shows. India ranks 78 in Transparency International’s Corruption Perceptions Index — below Malaysia and Morocco, Burkina Faso and Belarus.
First, corruption reduces the rate of growth. Poverty in India could have been reduced at a faster pace were it not for corruption. The World Economic Forum estimates that corruption costs the world at least 5 percent of its GDP.
Second, weakly governed countries tend to invest less in health and education. Thus, when growth takes place, only the elites can take advantage of the expanded opportunities whereas the vast majority cannot qualify for well-paid jobs in the organized sector. In India, the top 10 percent account for 56 percent of all wealth.
Third, widespread corruption promotes a culture that tolerates tax evasion. The IMF finds that even among developed countries, strongly governed ones collect about 4.5 percent of GDP more than relatively more corrupt ones. That’s a lot of money the government could have used productively.
Fourth, corruption reduces the effectiveness of government services through bribery and poor compliance with government regulations. India’s D-rated government effectiveness has led to a lack of public trust in officials and government services. This promotes tax evasion because taxpayers don’t feel that they are getting their money’s worth.
Fifth, researchers at the IMF found that child and infant mortality rates in countries with endemic corruption are higher compared with those in countries where corruption is low. School dropout rates are five times as high partly due to less effective government spending. The poor quality of public school education in India is consistent with these findings.
Finally, highly corrupt countries tend to be more polluted than countries that are strongly governed. India is a perfect example of the nexus between rampant corruption and serious environmental degradation.
Partha Dasgupta, professor emeritus of economics at Cambridge University, believes that the fault lies in formulating economic policies that do not treat fresh water, clean air and land as resources that could be depleted in the production process. Given that no country has an inexhaustible supply of these resources, there is a dire need for appropriate regulation, monitoring for compliance and user fees to pay for cleanup and renewal.
Countries like South Korea, Singapore and Taiwan, which made significantly larger investments in health and education, were not only successful in ensuring more equitable outcomes and opportunities when growth occurred but have also avoided environmental degradation from limiting growth in the long run.
Vito Tanzi, a fiscal expert and former director of the IMF’s fiscal affairs department, in an article on corruption around the world, found that successful efforts against corruption typically begin with examples set by a country’s leadership. Top political leaders should not only provide the right example of honest living but also support stern legal action against corruption from any quarter regardless of political affiliations. If, on the other hand, corrupt acts by friends, relatives or political associates are condoned, then it would not be realistic to expect public officials or indeed the country at large to behave honestly.
We can expect the world economy to enter a protracted period of low growth, low demand and low inflation, its driving gear stuck in neutral. While well-heeled investors and pension funds around the world have earned handsome returns in the soaring stock markets and other riskier assets, these are dark waters.
The dead weights of corruption, inequality and environmental degradation would make it more difficult for India to deal with the crisis and impose a heavy cost in terms of lost output, income and jobs, along with an increasing risk of economic and political instability. These structural weaknesses need to be addressed on an urgent basis. And it needs to start at the top.
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