A Chance to Fly
Monday, February 23, 2015
Emerging markets used to be a beacon of hope in the world economy, but now they are more often a source of gloom. China’s economy is slowing. Brazil is mired in stagflation. Russia is in recession, battered by Western sanctions and the slump in the oil price; South Africa is plagued by inefficiency and corruption. Amid the disappointment one big emerging market stands out: India.
If India could only take wing it would become the global economy’s high-flyer—but to do so it must shed the legacy of counter-productive policy. That task falls to Arun Jaitley, the finance minister, who on February 28th will present the first full budget of a government elected with a mandate to slash red tape and boost growth. In July 1991 a landmark budget opened the economy to trade, foreign capital and competition. India today needs something equally momentous.
India possesses untold promise. Its people are entrepreneurial and roughly half of the 1.25 billion population is under 25 years old. It is poor, so has lots of scope for catch-up growth: GDP per person (at purchasing-power parity) was $5,500 in 2013, compared with $11,900 in China and $15,000 in Brazil. The economy has been balkanised by local taxes levied at state borders, but cross-party support for a national goods-and-services tax could create a true common market. The potential is there; the question has always been whether it can be unleashed.
Optimists point out that GDP grew by 7.5% year on year in the fourth quarter of 2014, outpacing even China. But a single number that plenty think fishy is the least of the reasons to get excited. Far more important is that the economy seems to be on an increasingly stable footing (seearticle). Inflation has fallen by half after floating above 10% for years. The current-account deficit has shrunk; the rupee is firm; the stockmarket has boomed; and the slump in commodity prices is a blessing for a country that imports four-fifths of its oil. When the IMF cut its forecasts for the world economy, it largely spared India.
The real reason for hope is the prospect of more reforms. Last May Narendra Modi’s Bharatiya Janata Party won a huge election victory on a promise of a better-run economy. His government spent its early months putting a rocket up a sluggish civil service and on other useful groundwork. But the true test of its reformist credentials will be Mr Jaitley’s budget.
The easy part will be to lock in India’s good fortune, with fiscal and monetary discipline. In addition India’s public-sector banks need capital and, since the state cannot put up the money, the minister must persuade potential shareholders that they will be run at arm’s length from politicians.