Friday, March 02, 2007

India Faces Dark Side of Its Boom

This is the excerpt of the article that was published in Wall Street Journal few days ago.

On a street crowded with bullock carts, B.K. Garg has a front-row seat for India's hottest economic-policy debate.

Mr. Garg's shop sells pulses in the Indian capital's old section. The prices for red beans, green peas and yellow lentil seeds have doubled on average over the past year, helping to turn worries over rising inflation into a controversial topic for India's politicians and economists.

The sparring has intensified ahead of tomorrow's national budget announcement and ahead of coming state elections. Some politicians have called for more rural aid, through increased agricultural subsidies and expanded make-work programs. But others see such moves inflating government debt, crowding out social programs and squeezing infrastructure projects that, longer term, could do more to improve living standards.
At the heart of the debate is India's new paradox: Amid fast growth, the country faces a set of rapidly emerging problems. Inflation is hurting the poor, especially in urban areas. Crumbling infrastructure is choking the flow of goods at home and from overseas. And by some key health measures, such as child malnutrition, the nation is slipping.

With India's economy growing at a 9% annual clip, perhaps only China rivals the country for market promise. But inflation, now running at 6.6% on an annualized basis, has underscored stark differences: India lacks China's new roads and ports and its broad-based manufacturing firepower to ramp up production and stabilize consumer prices.

With so many in India still living on the margins of subsistence, the smallest of price blips for onions or lentils can bite.

In a letter last week to chief ministers of Indian states, Prime Minister Manmohan Singh called the rising price for pulses, edible oils, wheat and milk "a major cause of worry." To improve supplies, he announced an export ban on pulses and milk powder, a cut in import duties on palm and sunflower oil and plans for importing more wheat. The government also set up a panel to keep tabs on daily prices of essential commodities.

For pro-reform politicians, one benefit of inflation is that it offers an opportunity to make policy changes in the name of helping the poor. Last week, India's cabinet approved a cut in a national sales tax. Finance Minister P. Chidambaram is also expected to fill in a roadmap, announced in last year's budget, leading to the elimination of overlapping state taxes that now impede the flow of goods within India. In addition, inflation has prompted reductions in India's import duties, still among the highest in Asia.

But some familiar subsidies are also expected to feature in this year's budget as politicians seek quick relief for the rural poor. One likely measure is more low-interest loans for farmers. A more controversial initiative would be the expansion of the country's rural employment-guarantee system. That program, which offers farmers 100 days of paid work a year, has become a lightning rod for critics of corruption, government debt and political sops.

"The government is used to giving out freebies," says Chetan Ahya, an economist with Morgan Stanley in Mumbai. "The whole model has to shift toward one that is anchored by investment."

Most foreign investment currently goes into liquid financial markets, and could quickly exit if the global mood shifts.

Despite India's strong economy, there are growing concerns that government spending has increased debt to dangerous levels. In a November report, the International Monetary Fund warned that government debt stood at 80% of gross domestic product, and suggested measures to shrink it, including the reduction of subsidies.

Other countries, such as Argentina, have faced crises in repaying much lower levels of debt, says Suman Bery, director general for the National Council of Applied Economic Research in New Delhi. "It is precarious," he adds.

The immediate impact of India's heavy debt load is to squeeze spending. Health and education experts contend that funding shortages -- and poor monitoring of how funds are disbursed -- have sharpened inequalities between urban and rural areas.

Meanwhile, progress in reducing child malnutrition has been "uneven," with the situation worsening in 13 states, according to the National Family Health Survey. The survey also pointed to rising levels of anemia among young children and women.

But as campaigning heats up in Uttar Pradesh and other states this year, it is inflation that has the political spotlight.

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