The search for lost economic decades has brought us from Japan to the US and Europe in recent years. It's time to take it to India.
With its 5.3 per cent economic growth, young population and vast potential, the world's biggest democracy may not seem to be on the verge of a crisis. Look closer, though, at the political chaos and things come into focus: the odds of a lost decade are growing, with implications that would be ruinous.
Last quarter's expansion was the weakest in nine years. That can't be blamed on Europe's debt crisis, faltering US growth or China's slowdown. No, this slackening is the fault of the Prime Minister, Manmohan Singh, and the inability of India's leadership to bring about the needed reforms to an economy hamstrung by bureaucracy and entrenched interests.
Singh must get some credit for trying. He has backed efforts to allow foreign investment in supermarkets, airlines and other industries, and to reduce $US8 billion of subsidies that contribute to the widest budget deficit among major emerging economies. These efforts have stalled, thanks mostly to his self-serving critics. And these days, that means Mamata Banerjee, who has rallied opposition to Singh's plans. Among her more unhelpful achievements, she has made it harder for companies to buy land, setting back expansion plans by Tata Motors and Infosys.
If Joseph Schumpeter had an alter ego, one bent on halting the creative destruction that shucks off old stagnant industries to make way for the new, the Chief Minister of West Bengal would be it. She has emerged as the most strident opponent of the coalition government of which she's a part. Not surprisingly, investors aren't sticking around, sending Indian stocks down about 8 per cent since the start of March.
Yet as wrong as Banerjee is on economics, as retrograde as her ideas are, she's not the real problem. India's political system is, and Singh's failure to regain some semblance of control over it risks surrendering a decade of economic progress. When will India's leaders realise that growth alone isn't enough? China's authoritarian government can get away with ignoring structural flaws with impressive gross domestic product figures. For all China's troubles, investors have faith policy makers are tending to the economy. India doesn't have that luxury.
Asia's third-biggest economy needs to constantly remind and convince investors that market liberalisation is moving forward. Right now, India is failing miserably. With each passing day, Singh's inability to marshal a consensus confirms the perception officials in Delhi are weak, distracted, indecisive and overwhelmed by divergent interests.
Banerjee is merely Singh's most prominent headache. Her political star was burnished last month when the US Secretary of State, Hillary Clinton, visited Kolkata to pay obeisance to arguably India's most powerful woman.
Granted, Banerjee has her supporters. The forces of globalisation are proving to be less benevolent and benign than once advertised. And it is true that India's stability following the collapse of Lehman Brothers in 2008 was widely attributed to tight regulations and an economy that is more closed than those in East Asia. Yet the lack of reform isn't just a drag on growth it might forever tarnish the "India Shining" narrative promoted in a marketing campaign.
A broad economic overhaul seemed plausible in mid-2009 when Singh won re-election with a solid mandate. Many observers, including me, thought the former central bank governor who masterminded a set of market changes in the 1990s that propelled India's rapid growth would shake up the economy.
Three years later, India is behind schedule on reforms, imperilling the longer-term possibility that it might catch up to, or even trump, China some day. A reasonable argument can be made that based on demographics alone, youthful India with 1.2 billion people could surpass the growth rates of ageing China a decade from now. Not if India's dysfunction continues to sabotage its potential.
India needs some serious creative destruction, far beyond what Schumpeter had in mind when he championed market forces exacting the change that only unfettered competition can bring. None of it is occurring.
India even risks losing its investment-grade status. Standard & Poor's cut India's credit outlook to negative from stable in April, saying the political environment was "unfavourable".
If India were more focused on broad reforms, Banerjee's antics would be a sideshow. Singh needs to make sure that India has coherent policies and the political support to see them implemented. There's no question that capitalism can be a harsh taskmaster, and that checks and balances are needed in a nation where two-thirds of the population lives in extreme poverty.
Yet without taking some risks that might lead India to a higher growth path, the economy will lose altitude, poverty will increase and, far from shining, much will be lost.