India’s moment of truth

Corruption now threatens to bring down a land of opportunity

Four quarters of steady economic deceleration have caused widespread anxiety. The talk of a new Hindu rate of growth — different from the late Raj Krishna's famous 3.5 per cent per annum, but hovering around 5-6 per cent, far below the 9-10 per cent "Chindia" dream — has seriously commenced. Is the current economic gloom justified? Are we watching a short-run blip, or a new downward trend?

To some extent, India's slowdown cannot be separated from the global economic realities. The BRIC countries — Brazil, Russia, China and India — have, of late, decelerated, as has Europe. But external economic reasons can only provide a partial explanation for the state of India's economy. All is not well internally.

To understand the internal causes, let us turn to what may be called a new triad of India's political economy. India has (i) the fifth largest concentration of dollar billionaires in the world (after the US, Russia, China and Germany), (ii) the third largest middle class (after China and the US), and (iii) the single largest concentration of the poor.

Historically, India's economic structure had the massively wealthy princes at the top, whose incomes were based on inherited wealth and land; a tiny middle class; and a huge mass of the poor. The poor were always with us, but billionaire businessmen and a huge middle class were not. They constitute a historical novelty for India.

This historical novelty generates two intertwined results. It simultaneously makes India a land of opportunity and a land of corruption. Let me explain.

A 250-300 million strong middle class generates a huge market. The emergence of billionaires shows that the market so created can produce enormous wealth. Information technology billionaires were predominantly a product of exports, but most other billionaires have been internally produced. The middle classes consumed, while the entrepreneurs invested and reaped rewards. A virtuous cycle of boom seemed to be in place.

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