India stands in need of a wide-ranging new program of economic liberalization. Its growth rate may well be headed downward to its lowest level since the balance-of-payments crisis in 1991, when India ran a risk of default. At that time, Manmohan Singh, as the finance minister, brought about a degree of successful liberalization after several decades of heavy regulation of the Indian economy.
As Prime Minister of India, however, Mr. Singh has not managed to extend the liberalization of the early 1990s. In July, as the present crisis emerged, a few modest steps were taken, but the rupee has fallen by 16 per cent, though government intervention in the past few days has raised the exchange rate back up by 3.5 per cent.
The governing Congress Party, led by Sonia Gandhi, seems to be preoccupied by the next election. Under the Constitution, the present parliament cannot continue after May, 2014. Rather than freeing up the economy, the lower house of parliament (the equivalent of the House of Commons) has just passed a law adding to food subsidies – an understandable measure in a country where many small children suffer from malnutrition, but an additional heavy cost to the state, considering that fuel and fertilizer are also massively subsidized.
The government has placed restrictions on the export of capital, but has not done enough to encourage the entry of foreign capital. On the contrary, the lower house passed a new law on Thursday making it more difficult for businesses to buy land.
For the time being, India has adequate foreign reserves, but it cannot afford to wait for a new wave of reform until after the election in the middle of 2014. Slow growth disproportionately afflicts poor people, who moreover have long been a strong electoral base for the Congress Party. The Congress government should recognize that the national interest and its political interests are in harmony, and should open up the economy.