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Children play in the streets of a resettlement community for survivors of anti-Muslim violence that tore through Gujarat in 2002 on the outskirts of Ahmedabad, the state’s largest city. (IAIN MARLOW/THE GLOBE AND MAIL)
Children play in the streets of a resettlement community for survivors of anti-Muslim violence that tore through Gujarat in 2002 on the outskirts of Ahmedabad, the state’s largest city. (IAIN MARLOW/THE GLOBE AND MAIL)

Subcontinent stagnation: How India botched its economic miracle Add to ...

But for Vodafone, which now has around 160 million subscribers in India, the tax dispute was simply the most sensational and longest lasting of the firm’s many struggles – which span the breadth of India’s myriad challenges.

For a while, Vodafone and other companies saw the wireless industry paralyzed by one of India’s many recent corruption scandals. The telecommunications ministry was accused of selling wireless licences at a steep discount, costing the exchequer an estimated loss of $40-billion. The telecom minister was imprisoned for more than a year and several mid-level executives and other politicians ended up in court.

Soon after that auction, in which many companies bought licences planning to flip them at a profit, the government introduced a new rule saying companies couldn’t sell licences for three years, but would be penalized if they didn’t build a network. That ushered in an era of unsustainable price wars as some markets saw more than a dozen competitors. At one point, in a fit of economic nationalism prompted by concerns over Chinese competition, the government suggested new import quotas that emphasized the use of local telecom equipment – an industry India does not possess. Importing any individual foreign part would require government approval, and with more than 100,000 cellphone towers scattered across the country, Vodafone’s Mr. Jerome said this would have amounted to more than 5,000 requests per month from his company alone. The government soon relented.

And even though Vodafone was adding nearly three million customers a month at its peak, an obscure regulatory decision that lowered so-called “interconnection rates” had the effect of cutting per-minute revenue from each customer by 50 per cent over the course of a year. At one point, Mr. Jerome found himself discussing India’s business difficulties while golfing with CEOs from a big European sporting retailer, a U.K.-based energy firm and a high-tech company.

“It was just incredible that India was perceived as this place of growth and economic development, but none of us were making any money in India, and wouldn’t for the foreseeable future, except for the energy guy,” says Mr. Jerome, who has since left the company. “Once you’re in, there’s so many of these issues.

Economy choked

What’s happened to India’s economy, suggests Mr. Pathak of Srei Infrastructure, is like someone driving a car at 80 miles an hour and then lifting their foot off the gas pedal and coasting to a standstill.

After the National Congress Party introduced landmark economic reforms in 1991 that dismantled the so-called “Licence Raj,” the Indian economy began to soar. The BJP took power in 1998 and ruled until 2004, further liberalizing various sectors of the economy such as telecom, and launching a national highway building program, he says. They also appointed cabinet ministers that he says were capable and informed and kept growth going. But since 2004, when the Congress-led United Progressive Alliance (UPA) coalition took over, he says growth was taken for granted.

India’s red-hot GDP growth has indeed slowed dramatically. From highs of 11.4 per cent GDP growth in 2010, the rate withered to 6 per cent in 2011 and remained well below 5 per cent throughout 2013 and 2014. Things got worse as the U.S. Federal Reserve tapered its bond-buying stimulus, which sucked money out of many emerging markets, including India. The rupee fell sharply and the Reserve Bank of India raised interest rates repeatedly, chilling the climate for new investment in badly needed infrastructure – such as roads – that could boost growth. At the same time, rising costs for staples such as onions have stung poorer Indians.

Part of the economic stagnation lies with policy paralysis in the central government. Economic reforms have stalled before Parliament. The Environment Ministry has frequently refused to approve certain projects. And as various corruption scandals engulfed the government – under poor cabinet appointments that Mr. Pathak says were based on politics – bureaucrats began sitting on key files, refusing to approve projects or issue permits on the off chance these deals were corrupt and they would get arrested.

“If they don’t take a decision, then they can’t be charged,” says Arvind Panagariya, a professor at Columbia University. “And if you do, you can be. And this paralysis became widespread.”

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