How India Stumbled

Can New Delhi Get Its Groove Back?

When the United Progressive Alliance, a group of center-left parties led by the Indian National Congress, came to power for a second term in 2009, it seemed that India could do no wrong. The economy had sailed through the worst of the global economic recession with GDP growing at a fast seven percent annually and accelerating (it reached 10.4 percent in 2010). Inflation was low, officials were finally starting to take India's social problems seriously, and politics in the world's largest democracy were contentious but robust. The rest of the world was even looking to the country as a serious global power. "India is not simply emerging," U.S. President Barack Obama told the Indian parliament in November 2010; "India has emerged."

Just two years later, however, India's growth is slackening, its national deficit is growing, and inflation is rising after having fallen between early 2010 and early 2012. Plans to build a more inclusive nation are in disarray. Income inequality has risen. According to the economists Laveesh Bhandari and Suryakant Yadav, the urban Gini coefficient (a measure of inequality, with zero indicating absolute equality and one indicating absolute inequality) went from 0.35 in 2005 to 0.65 today. And access to basic services, such as water, health care, and sanitation, remains woefully inadequate. Meanwhile, the country's democracy putters along, but in the absence of leadership, policymaking has ground to a halt. India seems to have gone from a near-sure thing to, as the financial analyst Ruchir Sharma put it in Breakout Nations, a 50-50 bet.

Yet the change in India's economic performance is not nearly as stark as the comparison between 2009 and 2012 suggests. The economy has been troubled all along; all the hype in 2009 disguised a number of real weaknesses. Despite some economic liberalization in the years before, a whole range of regulations still made India a stifling environment for most businesses. In addition, the Indian agricultural sector, which accounts for around 15 percent of the country's GDP and employs about 50 percent of its work force, was a constant cause for worry. Strictures such as tight labor regulations, the inconsistent application of environmental laws, and arbitrary land-acquisition practices made it difficult for producers to respond to any changes in demand. Swings in food prices, a heavy burden on India's poor and farmers, could have thrown the economy into disarray at any time.

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