The Reforms of Manmohan Singh are Eroding and Threatening India’s Economic Growth with a Return to a Welfare State

Posted by PITHOCRATES - April 22nd, 2012

Week in Review

The BRICS economies are doing pretty well.  Well, better than Europe and the United States at the moment.  Which is saying something.  But it’s not all rosy.  China is struggling to get housing prices under control while at the same time not hindering economic growth.  Not easy to do.  When inflationary policy gives you both that growth and those high home prices.  And now people in India are worrying about sustaining their economic growth.  Which appears to be making a transition from free market capitalism to state capitalism.  Putting the brakes on economic growth much as it has in Europe and in the United States.  Where policies now are turning (or returning) to be more anti-business than pro-growth.  And a rise in public spending that would seem to indicate a return to a welfare state.  For which Manmohan Singh, India’s prime minister, was hammered for at a recent event (see Now finish the job posted 4/15/2012 on The Economist).

The event, in Delhi, was billed as a discussion of India’s economic reforms, hosted by a prominent and respected economics think-tank, ICRIER, along with Oxford University Press. The idea was to celebrate Mr Singh and the launch of an updated version of a book marking his momentous economic reforms of the early 1990s. These, everyone agrees, did more than anything else to usher in sustained and rapid economic growth which has helped to lift millions out of absolute poverty.

As ever, Mr Singh sat twinkly-eyed and almost entirely silent, as a series of speakers took turns to address the room. Yet rather than waste time celebrating his work of two decades ago, everyone pushed on with far more urgent business: trying to get India’s prime minister to understand that, without a second round of economic reforms, and soon, India’s economic prospects will look far grimmer in the next few years than they have recently. In turn, Mr Singh may not be remembered as the man who reformed India’s economy, but the man who only got the job half done…

Then a blunt-speaking economics professor from the University of Chicago, Raghuram G. Rajan, pointed out that things are looking bad when “domestic industry prefers to invest abroad” rather than brave the hassles and uncertainty of India today. Nor did he shy away from identifying who was at fault: “paralysis in growth-enhancing reforms” is a blunt way for an economist to speak; it means Mr Singh and his cabinet have done almost nothing to promote growth, devoting energy instead to ways to dish the proceeds of growth as welfare and other public spending…

He frets, too, that India’s middle class has no clue how high economic growth was first brought about, and instead is deeply, and increasingly, suspicious of capitalism and liberalisation. The result, as another speaker eloquently pointed out, is that there is no political constituency for reform. He saved his most explicit attacks for the budget passed last month, which came with a baffling mix of anti-business measures, especially over retrospective tax, and which is now scaring away the foreign investors that India desperately needs.

Those economic reforms replaced India’s socialism with free market capitalism.  And the subsequent burst in economic activity lifted millions out of “absolute poverty.”  Something their kind and caring socialism never could.  Yet another example of how capitalism helps those least able to help themselves.  But with robust economic activity comes great tax revenue.  And the temptation is to spend that tax revenue instead of cutting taxes further.  Because that excess tax revenue is not needed.  But politicians being politicians are weak.  And they will spend that excess tax revenue.  As Ronald Reagan learned in the Eighties.  His cut in tax rates created so much economic activity and tax revenue (nearly twice what it was before the cut in tax rates) the politicians increased their spending faster than the money came into Washington.  Which is why Ronald Reagan had great budget deficits.  It had nothing to do with the tax cuts.  For they increased tax revenue.  It was the massive increase in spending.  As it always is.

This is the danger of any democracy.  Once the people get a taste of this government largess they want more.  And will vote anyone out of office who doesn’t give them more.  Or, worse, takes some of it away.  Which leads to some problems.  As in chronic deficits.  And sovereign debt crises.  Like they currently have in Europe.  And are getting dangerously close to having in the United States.  All made worse by the fact that during the good times voters become blissfully ignorant about the economic policies that made those good times so good.  All they know is that they like getting a lot of free stuff.  And want to keep getting a lot of free stuff.  So they vote for the politician that promises to give them more free stuff.  Even when they can no longer sustain that level of public spending.

So when the people are blissfully ignorant it us up to the politicians to be responsible.  And not give in to pandering for votes.  They need to do the right thing.  To continue the good times.  By cutting taxes.  Cutting spending.  And cutting regulations.  The proven way to lift people out of poverty.   A particularly difficult task when many in the population have only known the good times.  And have no idea how quickly those good times can turn bad.  But unless the Indians want to slip back to their impoverished socialist past Mr. Singh should take stock of this wise counsel and keep the miracle going in India.  The miracle of free market capitalism.

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