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The author is an assistant research fellow with the China Institutes of Contemporary International Relations
The pace and nature of India’s economic reforms have brought a degree of anxiety among investors， the World Bank’s Chief Economist for South Asia Martin Rama said at a press event in April. But one week later， Indian Finance Minister Palaniappan Chidambaram reiterated India’s commitment to the reforms， stating that the Indian Government will take more executive actions to guide the process in the next two to four months. He also expressed hopes that economic growth will increase from last fiscal year’s 5 percent to 6.1-6.7 percent this fiscal year.
These opposing views have aroused debate on the prospects of the economic reforms. In fact， the latest reforms， launched in September 2012 and hyped as being on the level of the 1991 reforms， have run into major political obstacles because of a lack of consensus among India’s political forces.
Major changes
India’s economy took a downturn in the latter half of 2011 as growth began to slow and its fiscal deficit and inflation rose， dragged down by the poor economic performance of Europe and the United States. The once promising Indian economy faded gradually. Many in the Western media， which had placed high hopes on the emerging economy， were forced to abandon their expectations of an “Indian miracle.”
To reverse the economy’s malaise ahead of the 2014 general election， Indian Prime Minister Manmohan Singh launched bold economic reforms. He appointed as finance minister the reformist Chidambaram， who has close relations with the Indian business circle， and together they unveiled a series of economic reform packages to open up the Indian economy， speed up infrastructure construction and rein in the fiscal deficit.
India has long pursued a moderate economic liberalization policy since its independence. Even after the 1991 economic reforms， the degree of opening up in India’s economy has remained low. For example， large foreign retailers such as Carrefour and Tesco， which are found in almost every big city in China， are still rare in India. A U.S. government report， quoted on April 13 by the Indian newspaper Business Standard， said the United States is dissatisfied with India’s practice of barring foreign investments in sectors such as insurance， banking， communications and postal services. Evidently， India’s problem with opening up its market is a prime reason why private capital at home and abroad is not being invested in India. In light of this， the Indian Government has announced it will increase the proportion of foreign capital in aviation， retail and communications industries. The highest proportion of foreign capital in the three sectors can be up to 49 percent， 51 percent and 74 percent respectively. New Delhi has also decided to allow foreign capital to invest in insurance and pension sectors， with the upper limit of foreign equity at 49 percent. In addition， the Indian Government is now negotiating with its central bank and the Bombay Stock Exchange to increase the quota on foreign investment in government and corporate bonds.
The underdeveloped infrastructure of India has long been a topic of complaint， with the 2012 summer blackout delivering another blow to the nation’s image. Singh said frankly that the crumbling infrastructure， weather-dependent agriculture and skilled labor deficiency in manufacturing are the three bottlenecks for India’s economic development. The Indian Government has come to realize that the service industry-driven economic mode cannot solve employment problems， nor can India’s economy achieve its full potential under this pattern. Moreover， it remains far behind its goal of “inclusive growth.”
In recent years， the Indian Government has given priority to infrastructure construction and manufacturing. It has planned to invest$100 million in infrastructure construction from 2012-17 and unveiled an ambitious manufacturing development scheme. However， little progress has been made thus far. Therefore， the Indian Government hopes to inject impetus to these sectors by dint of economic reforms， trying to pursue a more balanced and sustainable development mode. In December 2012， the Indian cabinet decided to set up a new Cabinet Committee on Investment headed by the prime minister. The committee will monitor and appraise the implementation of big projects， ensuring their timely approval. In the meantime， India’s Insurance Regulatory and Development Authority would consider making new invest- ment plans to funnel more insurance funds to infrastructure projects.
The Indian Government provides large subsidies for fuel and pesticides， which for years have contributed to severe deficits in an already tight fiscal situation. During the 2011-12 fiscal year， the fiscal deficit of India accounted for 5.9 percent of its GDP. The Indian Government hopes to increase income and reduce expenditure through economic reforms in order to address the deficit problem. On the one hand， the government hopes to raise funds by selling shares of state-owned enterprises， and it is reportedly considering establishing a trade fund to facilitate the sale of state-owned enterprise shares. On the other hand， as diesel subsidies account for more than half of its subsidies， the Indian Government has decided to increase the price of diesel by 14 percent， largely reducing its diesel subsidies.
Political barriers
The economic reform drive is highly welcomed by the business circle， but has aroused fierce criticism from opposition parties. After Singh’s administration launched the reform pact on the retail industry， the sixth largest party in the Indian parliament—All India Trinamool Congress—announced it would quit the ruling coalition， leaving it a parliamentary minority. The move highlighted the fact that India’s economic reforms have to overcome political fetters related to institutional factors.
The Indian political system lacks the mechanism of pooling resources to solve major problems. India is marked by coalition politics， which means the major ruling party must rely on the support of smaller parties to form a ruling coalition. Therefore， when the government seeks to promote economic reforms， it must be cautious to act because the major ruling party has to coordinate with other parties. Consensus is difficult to reach due to the excessive diversity of political forces， which has adversely affected the administrative efficiency of the Indian Government. Many economic reforms have thus perished in the political game. For example， the freeing up of the retail sector to foreign investors， which was proposed at the end of 2011， didn’t get far off the ground at the time due to strong opposition within the coalition.
India’s electoral politics has resulted in a widespread lack of political will to make longterm plans. Excessive emphasis on the shortterm goal of “winning the election” has led to a dearth of long-term economic planning. Voters tend to value their immediate interests more than long-term interests. To cater to the whims of voters， political parties often make promises while ignoring the long-term perspective， resulting in lasting structural problems.
In India， departmental interests and group interests often override national interests. Also， departmental policies often contradict each other， which results in the confusion of policies and setbacks in reforms. For instance， in the latest round of reforms， when the Ministry of Finance proposed to set up the Cabinet Committee on Investment aiming to accelerate the examination and approval of economic projects， it was objected by ministries of the environment and labor. Only after fierce wrangling was the proposal finally adopted.
Firm resolve
Just as Rome was not built in a day， neither will economic reforms in India. At present， despite the underperformance of the economic reform package and the voices of doubt at home and abroad， the reforms have taken effect. For instance， Finance Minister Chidambaram noted last year that， as of the end of September 2012， up to $1.37 billion projects had come to a halt because they were not approved in time by the Indian Government. But the latest statistics show that the Cabinet Committee on Investment has so far approved investment projects worth $14 billion in the fields of the oil industry， roads and electricity.
In addition， the Indian Government’s determination to carry out reforms should not be underestimated. Singh played a crucial role in the 1991 Indian economic reforms， which contributed to the rapid development of the Indian economy. With the help of Chidambaram， it is possible for Singh and his team to overcome the political shackles to achieve positive outcomes.
As far as China is concerned， economic and trade cooperation is the fastest growing area in Sino-Indian relations. India’s economic reforms will provide new opportunities for trade and investment cooperation between the two countries.
The pace and nature of India’s economic reforms have brought a degree of anxiety among investors， the World Bank’s Chief Economist for South Asia Martin Rama said at a press event in April. But one week later， Indian Finance Minister Palaniappan Chidambaram reiterated India’s commitment to the reforms， stating that the Indian Government will take more executive actions to guide the process in the next two to four months. He also expressed hopes that economic growth will increase from last fiscal year’s 5 percent to 6.1-6.7 percent this fiscal year.
These opposing views have aroused debate on the prospects of the economic reforms. In fact， the latest reforms， launched in September 2012 and hyped as being on the level of the 1991 reforms， have run into major political obstacles because of a lack of consensus among India’s political forces.
Major changes
India’s economy took a downturn in the latter half of 2011 as growth began to slow and its fiscal deficit and inflation rose， dragged down by the poor economic performance of Europe and the United States. The once promising Indian economy faded gradually. Many in the Western media， which had placed high hopes on the emerging economy， were forced to abandon their expectations of an “Indian miracle.”
To reverse the economy’s malaise ahead of the 2014 general election， Indian Prime Minister Manmohan Singh launched bold economic reforms. He appointed as finance minister the reformist Chidambaram， who has close relations with the Indian business circle， and together they unveiled a series of economic reform packages to open up the Indian economy， speed up infrastructure construction and rein in the fiscal deficit.
India has long pursued a moderate economic liberalization policy since its independence. Even after the 1991 economic reforms， the degree of opening up in India’s economy has remained low. For example， large foreign retailers such as Carrefour and Tesco， which are found in almost every big city in China， are still rare in India. A U.S. government report， quoted on April 13 by the Indian newspaper Business Standard， said the United States is dissatisfied with India’s practice of barring foreign investments in sectors such as insurance， banking， communications and postal services. Evidently， India’s problem with opening up its market is a prime reason why private capital at home and abroad is not being invested in India. In light of this， the Indian Government has announced it will increase the proportion of foreign capital in aviation， retail and communications industries. The highest proportion of foreign capital in the three sectors can be up to 49 percent， 51 percent and 74 percent respectively. New Delhi has also decided to allow foreign capital to invest in insurance and pension sectors， with the upper limit of foreign equity at 49 percent. In addition， the Indian Government is now negotiating with its central bank and the Bombay Stock Exchange to increase the quota on foreign investment in government and corporate bonds.
The underdeveloped infrastructure of India has long been a topic of complaint， with the 2012 summer blackout delivering another blow to the nation’s image. Singh said frankly that the crumbling infrastructure， weather-dependent agriculture and skilled labor deficiency in manufacturing are the three bottlenecks for India’s economic development. The Indian Government has come to realize that the service industry-driven economic mode cannot solve employment problems， nor can India’s economy achieve its full potential under this pattern. Moreover， it remains far behind its goal of “inclusive growth.”
In recent years， the Indian Government has given priority to infrastructure construction and manufacturing. It has planned to invest$100 million in infrastructure construction from 2012-17 and unveiled an ambitious manufacturing development scheme. However， little progress has been made thus far. Therefore， the Indian Government hopes to inject impetus to these sectors by dint of economic reforms， trying to pursue a more balanced and sustainable development mode. In December 2012， the Indian cabinet decided to set up a new Cabinet Committee on Investment headed by the prime minister. The committee will monitor and appraise the implementation of big projects， ensuring their timely approval. In the meantime， India’s Insurance Regulatory and Development Authority would consider making new invest- ment plans to funnel more insurance funds to infrastructure projects.
The Indian Government provides large subsidies for fuel and pesticides， which for years have contributed to severe deficits in an already tight fiscal situation. During the 2011-12 fiscal year， the fiscal deficit of India accounted for 5.9 percent of its GDP. The Indian Government hopes to increase income and reduce expenditure through economic reforms in order to address the deficit problem. On the one hand， the government hopes to raise funds by selling shares of state-owned enterprises， and it is reportedly considering establishing a trade fund to facilitate the sale of state-owned enterprise shares. On the other hand， as diesel subsidies account for more than half of its subsidies， the Indian Government has decided to increase the price of diesel by 14 percent， largely reducing its diesel subsidies.
Political barriers
The economic reform drive is highly welcomed by the business circle， but has aroused fierce criticism from opposition parties. After Singh’s administration launched the reform pact on the retail industry， the sixth largest party in the Indian parliament—All India Trinamool Congress—announced it would quit the ruling coalition， leaving it a parliamentary minority. The move highlighted the fact that India’s economic reforms have to overcome political fetters related to institutional factors.
The Indian political system lacks the mechanism of pooling resources to solve major problems. India is marked by coalition politics， which means the major ruling party must rely on the support of smaller parties to form a ruling coalition. Therefore， when the government seeks to promote economic reforms， it must be cautious to act because the major ruling party has to coordinate with other parties. Consensus is difficult to reach due to the excessive diversity of political forces， which has adversely affected the administrative efficiency of the Indian Government. Many economic reforms have thus perished in the political game. For example， the freeing up of the retail sector to foreign investors， which was proposed at the end of 2011， didn’t get far off the ground at the time due to strong opposition within the coalition.
India’s electoral politics has resulted in a widespread lack of political will to make longterm plans. Excessive emphasis on the shortterm goal of “winning the election” has led to a dearth of long-term economic planning. Voters tend to value their immediate interests more than long-term interests. To cater to the whims of voters， political parties often make promises while ignoring the long-term perspective， resulting in lasting structural problems.
In India， departmental interests and group interests often override national interests. Also， departmental policies often contradict each other， which results in the confusion of policies and setbacks in reforms. For instance， in the latest round of reforms， when the Ministry of Finance proposed to set up the Cabinet Committee on Investment aiming to accelerate the examination and approval of economic projects， it was objected by ministries of the environment and labor. Only after fierce wrangling was the proposal finally adopted.
Firm resolve
Just as Rome was not built in a day， neither will economic reforms in India. At present， despite the underperformance of the economic reform package and the voices of doubt at home and abroad， the reforms have taken effect. For instance， Finance Minister Chidambaram noted last year that， as of the end of September 2012， up to $1.37 billion projects had come to a halt because they were not approved in time by the Indian Government. But the latest statistics show that the Cabinet Committee on Investment has so far approved investment projects worth $14 billion in the fields of the oil industry， roads and electricity.
In addition， the Indian Government’s determination to carry out reforms should not be underestimated. Singh played a crucial role in the 1991 Indian economic reforms， which contributed to the rapid development of the Indian economy. With the help of Chidambaram， it is possible for Singh and his team to overcome the political shackles to achieve positive outcomes.
As far as China is concerned， economic and trade cooperation is the fastest growing area in Sino-Indian relations. India’s economic reforms will provide new opportunities for trade and investment cooperation between the two countries.