GHEI: India’s need for reform

Free-market reformers face an uphill battle to encourage entrepreneurs

The global economic slowdown is touching the world’s best-performing economies. Instead of finding itself at the top of the growth leaderboard, the United States has become an anchor, weighing down more successful trading partners such as India. New Delhi is doing its best to deal with these newfound economic woes.

While President Obama and most of the European Union could only dream of the 5 percent annual growth India is seeing, that figure is down sharply from the 9 percent rate India enjoyed between 2005 and 2011. Unlike their American and European counterparts, Indian leaders are responding by distancing themselves from policies that have failed. Indian Prime Minister Manmohan Singh, an economist by training, and Finance Minister P. Chidambaran, who earned his MBA degree from Harvard, are calling for a renewal of the market-based reforms that drove the nation’s past economic growth.

The latest plan will transform the vast network of in-kind subsidies, from food to fertilizers, that is rife with corruption and waste. The subsidies are supposed to act as a safety net for the poor, but changing the subsidies to a cash system will reduce the price distortions the subsidies cause in the markets, lowering the fiscal burden on taxpayers. Pilot projects have shown savings of 40 percent or more, and the new setup reduces administration costs and cuts waste significantly. So far, India has implemented 17 new regulations meant to make it easier to do business.

Much more needs to be done, as India is still one of the most difficult places in the world to do business. The International Finance Corp. ranked it 132 out of the 185 countries in its “Doing Business 2013” report, released Tuesday. India’s overall standing was unchanged from last year, but it did worse by other measurements. Its rank for ease of starting a business dropped to an abysmal 173. New businesses are at the heart of a dynamic and innovative economy, and making it harder to start enterprises is counterproductive to growth.

India has long been notorious for excessive paperwork requirements and an arcane permitting process, so it came in at No. 182 for its bureaucracy. Would-be entrepreneurs faced with a maze of forms often shrug and give up. India also fails miserably in a key aspect of its legal system. While it is fairly effective at protecting investors, it comes in at No. 184 in enforcing contracts, which is key to a system based on voluntary exchange. Power-supply reliability, a critical input for so many industries, is getting worse, with India dropping from 99 to 105 in the latest ranking.

Other problems not covered in the report need to be addressed. Interest rates in India remain high, increasing the cost of borrowing to invest. Inflationary pressures remain, limiting the scope of monetary policy.

India is a long way from being business-friendly Singapore, but having a government willing to tackle politically difficult reforms is a good sign. If only the United States and Europe could say the same.

Nita Ghei is a contributing Opinion writer for The Washington Times.

 

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