YOU would think that a country that is clocking the second-fastest economic growth among 192 countries would be in celebratory mode at the year-end, since average growth over five years has been as high as 8.5 per cent – far more than anyone would have forecast in December 2002. All the dreams of rapid growth have finally been realised, the system is coming together as never before, the world’s businessmen cannot get enough of India, the job market is hot and any youngster with an education is full of confidence about the future, and the stock market has continued climbing to new peaks, creating undreamt of wealth for large numbers of people. Yet, as people look back on the old year gone by and approach the new year, many problems – both old and new – press urgently for attention, leaving the country with mixed feelings. The news is good, but much of it is not good either.

There is the growing worry about what the western financial crisis will mean in 2008. There is the evidence of increasing inequality within the system as those at the lower rungs fail to get their share of the benefits of record growth, reflected in part in the growing Maoist challenge. The government is paralysed when it comes to badly needed economic reforms, and there is now overwhelming evidence of its incapacity to deliver the basics (like good public health and public education).

Then there are the problems created by success. Among these last must be counted our increasingly unliveable cities in which traffic snarls, smog and poor urban infrastructure (a lack of both water and power) combine to create what for many is a living hell. Indeed, the level of power shortages has never been so high in the country, but the prospect of many new coal-fired boilers immediately raises the question of sustainable lifestyles and sensible models of growth, which were on many people’s minds as the Bali conference in December focused on the threats posed by climate change. More urgently, in terms of immediate macro-economic management, an excess of dollars has pushed up the rupee-dollar rate and priced exporters out of world markets, leading in turn – if the commerce ministry is to be believed – to the loss of as many as two million jobs in employment-intensive sectors like textiles and leather goods.

Against this backdrop of problems, the rapid growth in membership of the billionaires club – with numbers outdoing even Japan – was a positive embarrassment because of the continuing spate of suicides by farmers, and the pitched battles being fought over land as the dispossessed tried to stop state governments from handing over vast tracts of land for industry. More noteworthy in terms of economic significance was the rise of Indian manufacturing (the hottest sector in the economy during 2007 was capital goods), which eclipsed software in terms of revenue as well as profit growth; indeed, the IT giants faded on the stock market and saw companies like Larsen & Toubro, ABB and Punj Lloyd command much more handsome price-earning multiples. But here too, success is tinged with the knowledge that the country has simply failed to take advantage of the throwing open of world trade in textiles, with both China and Bangladesh (among many others) making much better use of the opportunity.

 

Also contributing to the muted mood must be the evidence of crony capitalism at work: the under-pricing of scarce spectrum has meant that the government has gifted something like Rs 25,000 crore to the telecom companies; the last-minute cancellation of the Eurocopter deal shows how defence deals continue to be murky; and the manner in which the special economic zones have been created shows that gigantic land grab has been the game of the year. Not for nothing does India score so poorly when it comes to perceptions of corruption, as measured by Transparency International.

These are inchoate thoughts. Yet, one should not belittle what has been achieved. The economy has doubled in size since 1999, and trebled since the launch of economic reforms. The consumer base has expanded enormously – five to six million new telephone connections every month would have been unimaginable five years ago. There is phenomenal growth in home ownership, as well as rapid increases in salaries (at least in the organised sector), and all the evidence of sustained consumer spending. The projections on demographic changes and income stratification suggest that many more people will enter the consumerist bracket in the coming years, implying that consumer spending will continue to balloon, more than trebling in the space of a decade. Many product and service markets therefore will grow at annual rates of 15 per cent and more (the phone market, for instance, is projected to grow from 200 million to 500 million in barely two or three years).

 

There is also palpable evidence of significant new investment to improve the country’s physical infrastructure. The highway programme has made sufficient progress for truckers to report a significant increase in speed of movement, two new airports will be commissioned in 2008 (in Hyderabad and Bangalore), and the two metropolitan centres will see interim upgradation of their airports this year, before wholesale transformation is achieved by 2010. The railways have achieved significant productivity gains on their existing asset base and are now readying for massive new investment, using the cash being spewed out by a more profitable system. The urban renewal programme is showing signs of early-bird results (like metro networks, and land redevelopment). Only power remains a major bottleneck, though even here the sharp increase in private investment proposals signals hope that things will change.

Solid evidence of change comes also in the tax revenue numbers. Direct tax revenues in particular are growing by 40 per cent for the second year in a row, after three years of about 25 per cent annual growth. Revenue from income tax and corporation tax, therefore, has more or less quadrupled in the last five years of rapid growth – vindicating the broad thrust of tax reform. This has helped bring about substantial reduction in the fiscal deficit even as it has made it possible for the government to spend massively on its anti-poverty programmes and on improving the physical infrastructure. More good work has now been agreed upon as all state finance ministers have committed themselves to radically reforming indirect taxes and introducing the integrated goods and services tax by 2010.

 

The corporate sector has never had it so good. Profits have continued to grow at 25 per cent and more per annum, and profits-to-sales ratios are now running in the region of 12-14 per cent, among the highest in the world despite intense competition in most markets – pointing to increased efficiencies, scale economies, and international competitiveness. The stock market reflects this, with the price-earning multiple for the 30 Sensex stocks going up from 17 in 2005 to 22 in 2006 and now 25 in 2007. Confidence about taking on the challenge of other markets has also grown; among marquee brands, after the Corus takeover, there is the bid for Rover and Jaguar, and the promise of more to come.

The world recognises the transformation in what was seen till recently as a perennially under-performing system. Though only two per cent of the world economy, India now contributes five per cent of the world’s growth – more than any country other than the US and China. The growing global interest in the ‘India story’ finds evidence in the huge upswings in capital inflows, and India now scores about the highest in the FDI rankings done by AT Kearney.

And yet, the defining images of 2007 are not of a corporate chieftain bringing down the hammer at the New York Stock Exchange, or of Vijay Mallya flaunting diamonds in his spectacles, necklace, rings and watch while posing on his yacht; or the launch of a new Bentley costing four crore rupees. These signs of corporate triumph and a gilded age in an unlikely country faded in the presence of pictures from places like Nandigram in West Bengal and Jagatsinghpur district in Orissa (where the Korean giant Posco’s 12 million tonne steel plant is to be located). The West Bengal administration had no access to the villages of Nandigram for the best part of 2007; and it was only in December that Orissa government officials were able to enter parts of the Posco project area for the first time in more than two years – though the numbers sought to be displaced were very much smaller in the Posco case.

 

Both episodes, like many other flashpoints including those at Singur in West Bengal and the Tata Steel project in Orissa, point to the untenability of the old development model where the government could take over land at will, break all promises to resettle those dispossed, and hand over vast tracts to companies that often did not need so much land in the first place – with either the government or the companies making a huge unearned profit on the price of the land, achieved in most cases by the simple expendient of a change in land use. As large-scale extraction industries seek to set up operations in India to make use of its abundant reserves of iron ore and bauxite (to take but two examples), and as mining leases start being given out to private parties, the dispossession issue has come to a boil – echoing the sustained opposition to large dams that has made it virtually impossible to plan for any more such dams.

The government has responded to this and the land grab in the garb of the SEZs by formulating new policies that mark significant changes from the past. The new policy stipulates, for instance, that the bulk of the land will have to be bought first by the company that wants to set up a project – implying voluntary sale by the existing owners of the land, rather than forced acquisition by the government using the principle of eminent domain. The government will step in only after the bulk of the required land has been bought, so that contiguous stretches of land can be made available – but with a price formula that is a vast improvement on the old rules. There is evidence of at least some companies adapting quickly to the new situation, of successfully undertaking direct purchase of land, and of offering sweeteners like jobs for each family that is displaced, even shares in the new ventures being created.

 

But land remained at the heart of another issue involving tribals and one of the biggest landlords in the country – the forest department. A Bill, passed by Parliament to give traditional forest-dwellers the right to what they had enjoyed but which had been taken away by the forest department in past decades, proved controversial because of fear that this would encourage another kind of land grab and pose a danger to the country’s already low forest cover and its disappearing wildlife; it remained in limbo because of lobbying by environmental groups. The danger of misuse increased because of amendments to what had been originally proposed, amendments pushed through by the Left which removed some of the safeguards against land grab. But it seemed by the year-end that the Bill would be signed into law, and that in this area at least, marginal populations would get some benefit from the state, even if at an undefined cost.

What these cases boiled down to was not the familiar issue of inequality, which most people can live with so long as there is general upward mobility and a reduction in the numbers of those below the poverty line, and so long as the system promises to keep most people gainfully employed (and it is noteworthy that the chairman of the prime minister’s economic advisory council has forecast full employment in another couple of years of rapid growth). What these conflicts showed was that the successful elements in the economy were now seeking to impose themselves on others – usually through the capture of the state by the wealthy and the powerful.

 

In that sense, a stubborn populism (don’t raise petro-product prices even if oil has hit $100 per barrel) contrasts strangely with this rapacity with regard to land, even as the subsidies given to the poor and even the middle class are nothing compared to the handouts conferred on business. This has combined with the old incapacity to undertake even the most rational reform and ready succumbing to even the most bogus controversies – such as that with regard to the advent of organised retailing.

Most studies acknowledge that organised retailing will squeeze middlemen’s margins, thus benefiting both producer and consumer and thereby maximising welfare. It is also beyond dispute that if agriculture is to see significant improvements in productivity (essential for farm incomes to grow), farmers have to be assured of a market. Organised retail gives that assurance, in part because the development of cold chains and supply chains, and volume buying (and therefore of volume production), will facilitate the export of agricultural produce.

But all of this pales in the presence of the state’s failures on the health and education fronts – though the new five-year plan promises a sharp increase in education outlays (in relation to GDP). It is possible that throwing more money at the problem will yield some solutions (if nothing else, the physical infrastructure of schools might improve, and the spread of the mid-day meal scheme should improve attendance). But without proper incentives and disincentives for teachers, it is hard to see the end result being much better than it is today, when even the most basic test of literacy finds about a third of the people unable to read and write; when it comes to functional literacy, the picture is of course much worse.

As for health care, even in the boom towns of Gurgaon and Noida which straddle the capital, the only new hospitals visible are being built by Fortis, Max and the like. There is no sign of new public hospitals as an option for patients, nor is there evidence that public health programmes are improving; surveys show that immunisation has made no progress at all in terms of coverage. The figures for different countries already show that the balance between public and private expenditure on health care is one of the most skewed in India; it promises to get even more unbalanced in the future.

 

The tragedy is that the one area where private engagement is available and would make a difference – higher and professional education – is reined in by government policy even as employers in sector after sector complain about a shortage of qualified people, sending salaries shooting up to unreal levels. In purchasing power parity terms, the successful manager and professional in India today is better off than his counterpart in the West.

If the big issues facing the country – broadening and deepening of economic reform aimed at the proper functioning and regulation of the key markets for labour, capital and land, effective delivery of public services, fairness in the state’s dealings with rich and poor, and a cost-effective and sustainable social security programme, all of it within an environmentally sustainable development model – are to be addressed, what is needed desperately is reform of the government and political systems. At the moment this remains a distant hope. Identity-driven and vote bank-based politics (caste, community, trade union, et al), marked by the desire for power in order to misuse it, and populism as a way of bribing voters, have to give way to a consciousness of national imperatives, the lurking threat of a better-performing China, and the need for putting every government programme and policy to the test of maximum bang for minimum buck, and whether some other agency can deliver more value for the same outlay.

 

What is striking is the degree of cynicism prevalent about the same system that stabilises at nine per cent annual growth. The hope must be that as income increases reach down to lower deciles of the population, bringing more people into the ambit of the middle class, the raising of expectations will lead to the demand for a quality of public service that is missing today. This could also facilitate a change in the view of government, from ‘mai baap’ to being another provider of services. If this change were to come about, politicians would become answerable in a way that they are not today because it is enough to be seen as representing your caste or community.

It is the seeming intractability of some of these problems, and the ways in which they have manifested themselves in recent months, which may explain a general mood that is not as celebratory as one might have expected in a rapidly growing economy.