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India's hopes of high growth rate dying a slow death

India's hopes of high growth rate dying a slow death

In the wake of corruption investigations, dysfunctional governance and a growing gulf between politicians and the people, the approaching assembly polls will circumscribe economic policy options.

Nanki Devi and villagers in Karchana, Uttar Pradesh, protest against land acquisition by the state government Nanki Devi and villagers in Karchana, Uttar Pradesh, protest against land acquisition by the state government
Nanki Devi's restlessness signalled something was amiss, but the explosion of rage, when it came, was startling. An old man, part of an agitating group of some 25 villagers protesting the acquisition of their land by the Uttar Pradesh government at Karchana, 30 km south-east of Allahabad, was addressing the gathering as the sun bore down on a recent Friday. The land had been transferred by the state government to Jaiprakash Power Ventures, part of the Jaypee group, widely believed to be close to the state Chief Minister Mayawati, to build a 1,980-MW thermal power plant.

hailendra Singh, Congress candidate, Saiyadraja, Uttar Pradesh
The problem for politicians today is [their own] duplicity and the government runs on perceptions: Shailendra Singh
The slightly built restless lady in a red sari and teeth stained with betel juice got up and interrupted the speaker. She introduced herself, and then just blew up. "Mayawati, a dalit's daughter is now daulat's daughter," she screamed in Hindi.

Dalits, traditionally regarded as untouchables, are typically economically backward, and Devi's consternation was at the chief minister's riches and the corruption allegations surrounding them. In Hindi, daulat means wealth.

Mayawati, who declared assets of Rs 87 crore in May 2010, is fighting charges of disproportionate assets in the Supreme Court.

SPECIAL: MGNREGS has transformed the way India's 'poor' live

The angst of Devi and Karchana's villagers go back to a July 2009 buyout of Sangam Power and Generation Company, a stateowned company initially tasked with constructing the power plant, by the Jaypee group. The Uttar Pradesh government had acquired 1,700 acres of land for Sangam in December 2007, say villagers They feel cheated that their land eventually made its way into the hands of a private company and accuse the government of being a dalal or broker for business.

Why Mayawati will repeat her success in UP

However, Suresh Jain, Managing Director, Jaiprakash Power Ventures denies any conflict. "As a policy wherever we go, we take the local people along on our path of growth, building hospitals, schools, etc," he says.

Karchana is Ground Zero in an India decelerating alarmingly as the economy gets sacrificed for politics.

PICTURES FROM GROUND ZERO: The political economy of Uttar Pradesh

This, to be sure, is not something new, but the compulsions of politics this time around get worse as legislative elections in Uttar Pradesh, India's largest state by population - and number of seats in Parliament - loom around the corner. There are four other state elections slated for 2012 and another three scheduled for the year after too.

All this leading to the biggest hustings of them all: parliamentary elections which will have to be held before May 2014. In the wake of corruption investigations, dysfunctional governance and a growing gulf between politicians and the people, the polls will circumscribe economic policy options.

Home Minister P. Chidambaram warned of such a situation in August. The outcome of stalled reforms would be a slide in the growth trajectory, bringing it down to five to six per cent, something he referred to as the "Hindu plus rate of growth".

Chidambaram's description is a variant of what economic historians call the Hindu rate of growth, a phrase used to describe India's disappointing annual average growth rate of 3.6 per cent in its three decades of socialism until 1980.

Crisil cuts India's growth forecast to 7%

The outcome of the negative developments is that economic growth over the next three years is likely to fluctuate in range of seven to 7.5 per cent, says D.K. Srivastava, director of Madras School of Economics. "It is definitely below our potential," says the economist. "One can blame policy paralysis and distorted policies for it. Until the 2014 general elections, the government will not be able to show the necessary political will."

On November 28, Citigroup made a prediction that mirrored Srivastava's expectations. A report by the bank pegged India's economic growth till March 2014 in a band of seven to 7.7 per cent, as compared to an average growth of 8.44 per cent over the last five years.

Two days later, the statistics ministry announced that gross domestic product, or GDP, for the second quarter of the fiscal year 2012, expanded at 6.9 per cent from a year ago, the lowest rate in over two years. "Our long-held expectation of a hardish landing for the Indian economy is now materialising," Mole Hau, an analyst with a Singapore unit of BNP Paribas concluded in a report.

Damu Dhurve (in pink) relaxes with family
Damu Dhurve (in pink) relaxes with family

Mahatma Gandhi National Rural Employment Guarantee Scheme, or MGNREGS, started six years ago as a safety net for the poor and has turned into a kind of income transfer scheme that currently costs about Rs 40,000 crore a year. The fundamental difference between MNREGS and its earlier versions is that the former is a legally sanctioned entitlement and the union government has to generate resources to keep this popular scheme going.

Poverty-stricken Melghat region of Maharashtra has instances of MGNREGS' transformative power. They also serve as a stark reminder of the positive spin-off of last decade's high growth. Without that growth entitlements such as MGNREGS would not have been possible.

Doma is a small hamlet situated 60 km from Chikaldhara block in the Melghat region of Maharashtra where MNREGS has changed the landscape. Jugnu Soma Ulke, 45, says: "Earlier we had no work and so I had to go outside the village in search of daily work. But, last year I got enough work under the NREGS and earned a total of Rs 40,000."

Similarly, 50-year-old Damu Dhurve says that she and her husband earned roughly around Rs 25,000 last year because of NREGS. She says, "Earlier we ate chutney and roti, today we eat dal, roti and sabzi." Over the last 15 months in Doma alone the beneficiaries have earned enough not just for their basic needs, but also to buy motorbikes, mobile phones and gold. "The entire village economy has changed because suddenly there's more money in the village," says Shubhashis Gangopadhyay, talking about the macro impact.

The transformation in Doma is not confined to just consumption, but extends in chipping away at indebtedness. Gulab Mohanlal Patote, deputy village head of Doma says villagers have stopped borrowing from money lenders following the successful implementation of the scheme.

-Anusha Subramanian

Yoginder Alagh, Former power minister
All your reform is up in the air, it has nothing to do with functional realities: Yoginder Alagh
Economists see the writing on the wall and proffer the fix. Rohini Malkani and Anushka Shah of Citigroup, for instance, have called for "determined policy making" to stem the rot. Resolute governance, however, is likely to be increasingly rare as Business Today writers who travelled in and reported from Uttar Pradesh, Punjab, Maharashtra and Karnataka found. They discovered that the eroding credibility of politicians has led to a logjam.

In other words, electorates no longer believe the politicos. In the absence of trust, tough decisions involving a delicate balance between different stakeholders are unlikely to be taken. Shailendra Singh, the 45-year-old Congress candidate for next year's assembly elections in Saiyadraja in east Uttar Pradesh, is taking an afternoon break from campaigning at Ranpur, a village with a population of about 1,200. In surrounding fields, villagers have begun harvesting the kharif or monsoon season's paddy crop.

Singh has traded the khaki he wore as a police officer for a white shirt, trousers and sports shoes. "The problem for politicians today is [their own] duplicity and government runs on perceptions," he says. The perception of the state turning a broker for big business interests even if it means short-changing the people has, he insists, led to an erosion of its credibility among the citizenry.

N. Bhaskara Rao, Chairman, Centre for Media Studies (CMS), a media research agency in New Delhi, agrees and says this is borne out by his quarterly surveys of voters. "There is despair across the country," Rao says. "Whom to trust is a dilemma for voters. Anna Hazare should thank politicians as they paved the way for him."

In villages around Saiyadraja, Singh fields questions on the central government's stance on Hazare's demands on the Lokpal public accountability legislation. At Karchana, rather than Jaypee, the rage of agitating villagers is directed at the government accusing it of not keeping promises of securing jobs at the proposed power plant.

A key reason for the decline in GDP growth has been slowing investment since 2010 caused at least partly by the Reserve Bank of India, or RBI's, policy of nudging up interest rates to beat down inflation. For the July-September period, investments contracted for the first time in three years.

The RBI policy's impact on inflation, however, has been blunted by the central government's inability to rationalise expenditure and pull back fiscal deficit, which is all but sure to exceed the 4.6 per cent of GDP target set for the current fiscal year. If the deficits of states are included, the deficit is estimated to reach 9.5 per cent - a figure that India will be hardpressed to pull back as it enters what many are calling "election mode".

Punjab, India's bread basket, is a good place to understand why rationalisation of government expenditure, in the form of subsidies are never discussed with voters even if it is counterproductive. About 225 km south-west of Chandigarh is Bhatinda, a cotton growing belt. In rural Bhatinda, the early winter air is filled with smoke from charred paddy fields. Burning fields, which is illegal, is resorted to as a cost effective and quick way of clearing the ground for the next crop.

Ranbir Singh, a farmer at Kotsmir village, is furious when asked about free electricity people such as him get. "Connections are difficult to get. People who applied for one in 1990 are getting it now," he says. To get free power, he will have to spend about Rs 2 lakh to install a tube well.

N. Bhaskara Rao, Chairman, CMS
There is despair across the country. Whom to trust is a dilemma for voters. Anna Hazare should thank politicians as they paved the way for him: N. Bhaskara
This is beyond his means and amounts to an outgo of some Rs 2,500 a month for electricity. About 10 km farther is Kotpara village comprising big land owning families each make about Rs 40 lakh a year by renting out land for farming, for which they gets power for free. It is this lopsided nature of reforms that irritates Yoginder Alagh, an agricultural economist who was union power minister between 1996 and 1998. "All your reform is up in the air, it has nothing to do with functional realities," he says.

The contentious decision of the union cabinet to allow foreign direct investment, or FDI, in multi-brand retail is an example of a half-baked reform measure that largely ignores reality.

FDI in retail: What the Opposition, traders ignored

FDI in modern retail is being presented as an antidote to rampant inflation, while little has been done to remove middlemen who have a vice-like grip over aggregated procurement of fresh farm produce such as vegetables and fruits, or even grains and pulses.

"What prevents big business houses from starting retail business? Are you saying retail business is not competitive without foreign technology? Stand up and say so," says Shubhashis Gangopadhyay, managing trustee at the not-for-profit research outfit India Development Foundation.

In early 2008, he was handpicked by then finance minister P. Chidambaram as his economic advisor.

A week after the union cabinet cleared FDI in retail, the political climate for reforms has just become more challenging, while India's fat layer of intermediaries remains entrenched and unchallenged. What makes the waters even more turbid is the likelihood of shortened careers of politicians.

"The consequence of all this is there will be a much quicker turnover of politicians and governments for the next 10 years," says CMS's Rao. "This is different from anti-incumbency, which was about not delivering. This is about a broader, larger failure of the political pillar."

The farsighted among politicians have begun to respond in symbolic ways. D.V. Sadananda Gowda, Karnataka's chief minister, has installed cameras in his office at the state secretariat in Bangalore and his home-office, and live footage can be accessed at

Kerala's chief minister Oomen Chandy was the first one to do so (www.keralacm. Gowda, who became chief minister after his predecessor B.S. Yeddyurappa left in ignominy in July, has gone a step further and begun to avoid using the helicopter for travel within the state. "There are many types of reforms. Administrative, developmental, increasing transparency in government functioning, introducing technology to improve governance are some," says Gowda.

Cross-country evidence backs him. Still, such measures may be piecemeal. Lack of good governance is today proving the biggest roadblock to moving people from farms to factories, without which more than half of India will continue living off an activity that contributes just 15 per cent of GDP. Worse, millions of farmers with fragmented holdings - RBI data shows marginal holdings, defined as up to 2.47 acres, make for nearly two-thirds of all operational holdings in the country - seldom benefit from farm subsidies.

This plays out at Rohaki, a village of about 1,500 people about 50 km east of Varanasi. From its periphery, paddy fields stretch for as far as the eye can see. Miles of paddy do not symbolise prosperity here, though. Shailendra Singh, a farmer in his mid-20s who shares his name with the Saiyadraja politician, has seen many of his friends leave for cities in search of jobs. The migration is not surprising as he remorsefully says that only well-networked farmers will get to sell the coming winter's wheat harvest at the government-set minimum support price. The rest sell it at a lower price to traders.

"Today, farming is not a paying proposition," says Gangopadhyay, Three years after he left the government, the pony-tailed economist who describes himself as a market fundamentalist, says even if farmers want to quit farming, lack of trust is an inhibiting factor. He has a two-step approach to reforms here. "You need to sequence change in farm sector. First, honour your promises made to farmers. Then stop giving sops," he says.

But, there is no quick fix and the likes of Gangopadhyay expect the second decade of what some call India's century to roll by before changes happen. "By 2020, we'll work ourselves out. Small individual things are happening and when they come together, they will have a big impact," he says. The current spate of protests and public interest litigations are signs of the change, he believes. These will eventually catalyse greater accountability and transparency in the system that, in turn, will enhance the quality of governance - the factor that RBI governor D. Subbarao recently identified as the common thread across successful countries over the last 60 years.

Part of this groundswell is playing out in Saiyadraja already. Singh, the policeman-turned-politician there, points to Deepesh, 23, who is part of his campaign. According to Singh, Deepesh recently came up to him and asked if Sonia Gandhi and Rahul Gandhi had secret Swiss bank accounts. The appalled Congress candidate from Saiyadraja asked Deepesh who had made the allegation. "Facebook," was the answer. Deepesh says several young people in villages have Facebook accounts and access them through mobile phones.

Singh smiles when he says, "Tomorrow's successful politician will be one who can guarantee service delivery." Even if takes some doing.

Additional reporting by K.R. Balasubramanyam