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S P E C I A L R E P O R T

I N D I ASeptember 29th 2012

INDIACOV.indd 1 17/09/2012 13:43

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PICK YOUR WAY through the narrow alleys of a south Delhi slum to thedark, low-ceilinged home of a fortune-teller with a green parrot. For abundle of rupees he sets the bird to work, picking from a selection ofcards. The man glances at one and lets his conjectures �y.

India will soon be the world’s greatest power. An assassinationlooms. He sees an elderly leader’s death and a dynastic marriage. Therewill be political turmoil in the next two years, but strength will follow.Sporting triumphs lie ahead and riches will fall upon Indians.

It is a razzle-dazzle predic-tion for a sixth of the world’s pop-ulation. Yet his analysis of India’sprospects may not be so far o�the mark. And its underlying opti-mism re�ects the attitude ofmany ordinary Indians, whohave much to feel pleased about.

In many ways India seemsset on a promising path. After adecade of rapid economicgrowth, data from last year’s na-tional census look good: fast-ris-ing literacy; more girls in schools;the relentless spread of mobilephones. The economy is worthalmost $2 trillion, making it theworld’s tenth-biggest. The coun-try is more stable than ever (asidefrom a brief spell of trouble in As-sam this summer). It is young, bigand fast-growing. By themid-2020s it will be more popu-lous than China. Income per per-son is up; rural poverty down; po-lio has just been eradicated;

paved roads are becoming more widespread; and so on.The soothsayer is surely right, too, about the impending political

drama. A general election is due by mid-2014 at the latest. The prime min-ister, Manmohan Singh, turned 80 on September 26th, and some mem-bers of his cabinet too are getting on. A political succession is inevitablein a country where the median age is barely 25.

The challenge is to manage this change, and keep the gains coming,even as the economy goes through a tougher patch. Annual growth isdown to about 5%, from a peak of 10%. Professional fortune-tellers�poli-ticians, bureaucrats, industrialists, economists and analysts�generallycome up with a dimmer prognosis than the Delhi soothsayer. Anand Ma-hindra, the boss of Mahindra Group, a leading manufacturing and tech-nology �rm, reckons this is the worst conjunction of political and eco-nomic problems he has seen in his adult life: �I can’t remember any yearworse than this.�

External problems hurt, including weak global growth and high oilprices (India imports 80% of its oil, then subsidises a lot of it for consum-ers). But the greatest pains are self in�icted: locals and foreigners discour-aged from investing; a �scal de�cit that could provoke a �nancial crisis; acurrent-account gap that is hard to �nance; a slumping rupee. India faces

Aim higher

India’s prospects have dimmed as politicians shrink from big

reforms. They must become bolder, says Adam Roberts

A C K N O W L E D G M E N T S

CONTENT S

In addition to those mentioned in

the text, the author would like to

thank the following for their help in

preparing this report: Bharat

Agrawal, Syed Akbaruddin, Montek

Singh Ahluwalia, Gautam Bamba-

wale, Partho Banerjee, Himanshu

Bhatt, Nick Bisley, B.I. Dalal, Sanjit

Das, Sanjiv Goenka, Lalitha Kamath,

Akash Kapur, Ajay Mathur, Pratap

Bhanu Mehta, Shivshankar Menon,

T.K.A. Nair, Anant Nath, Dinesh

Navadiya, Nandan Nilekani, T.N.

Ninan, Pankaj Pachauri, Paresh

Patel, Basharat Peer, Aditi Phadnis,

Jairam Ramesh, Sarang Shidore,

M.A. Siddique, Sid Singh, Suhel

Seth, Navdeep Suri, Manish Tewari ,

Mark and Gilly Tully, Maya Valecha

and Anupam Yog

A list of sources is at

Economist.com/specialreports

An audio interview with

the author is at

Economist.com/audiovideo/

specialreports

SPECIAL REPORT

INDIA

The Economist September 29th 2012 1

3 Politics

Power shifts

4 Gujarat’s chief minister

The candidate

6 The economy

Express or stopping?

7 Manufacturing

On a hiding to something

8 Education

A billion brains

10 Cities

Concrete jungles

12 India abroad

No frills

13 The tragedy of the

commons

An uphill walk

Missing map? Sadly, India censors maps that show the current effective border, insisting instead that only its full territorial claims be shown.It is more intolerant on this issue than either China or Pakistan. Indian readers will therefore probably be deprived of the map on the second page of this special report. Unlike their government, we think our Indian readers can face political reality. Those who want to see an accurate depiction of the various territorial claims can do so usingour interactive map atEconomist.com/asianborders

A transcript of an interview with

Narendra Modi is available at

Economist.com/node/21563185

2 The Economist September 29th 2012

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old may be gone, but too muchof the commanding heights ofthe economy are still run�orrather, held back�by o�cials.

Politicians, rightly, got theblame for the dramatic powercuts of this summer, when600m people in the north ofIndia su�ered blackouts fortwo sweltering days. But thedeeper problem is organisa-tional: a wretched public coalmonopoly gets too little of itsproduct distributed by thestate-run railways to (mostly)state-run power stations.

Babus have been a pro-blem since Mughal days, butthings have got worse. �Bu-reaucracy now works to rule.No civil servant is remotely in-terested in pushing somethingalong. There are three years-worth of pipeline projectsstuck,� lamented a senior plan-ning o�cial earlier this year.

Like politicians, babus

are worried by corruptionscandals that also �nger bu-reaucrats. A welcome newfreedom-of-information actmeans dodgy deals no longerstay hidden. The public is soangry that even honest deci-sions are sometimes con-strued as favouring special in-terests, so babus consider it

safest to do nothing. Tenders for road construction, bids for landto set up factories, applications to supply goods to local govern-ment�all are now stuck in bulging in-trays.

Is there a way out? The country’s �rst batch of liberalisingreforms, in 1991, was precipitated by a balance-of-payments cri-sis. Perhaps another economic emergency would force a secondround of big reforms.

India’s economy is in a bit of trouble. Growth is down. For-eign direct investment, which last year hit a record $47 billion,has dropped by 67% so far this year, and domestic private �rmsare refusing to invest. Services and consumer spending are stillbuoyant, but industrial production contracted this summer.

In�ation may at last be dipping, which could allow the in-dependent central bank to start cutting interest rates. But it, andinvestors, will be reassured only if they see politicians deliver se-rious reforms. The IMF has said that the �scal de�cit could rise toabout 9% of GDP this year. Most important, that means slashingsubsidies by more than a token amount. Beyond that, a host ofmeasures is waiting to be passed or implemented. A land-reformbill could make it easier for industry to set up factories. More re-laxed labour laws could help get them sta�ed. Welfare spendingcould switch from a widely abused system of food rations tocash transfers into individuals’ bank accounts.

Inviting more foreigners to invest in India would help sen-timent and plug the current-account hole. Outsiders may now beallowed to set up supermarkets in some Indian states and buyinto domestic airlines. But continued caps and restrictions onforeign capital look increasingly wrong-headed.

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Interactive: Compare contrasting GDP andpopulation levels across India’s states at:Economist.com/indiastates12

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*Union territories†March 2011

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INDIA

awkward years, probably beyond 2014. The core of the internal problem is often summed up as �go-

vernance�. That means, �rst, politicians (netas) who do not rule.Mr Singh did announce some limited economic reforms thismonth, which provoked considerable political upheaval. Butgenerally his government has failed to carry out profound re-form, passed no signi�cant legislation and is mired in sleaze.

Netas and babus

The ruling United Progressive Alliance (UPA) coalition,dominated by Congress, has been stalled. Faced with slowingforeign investment and a revenue squeeze, Pranab Mukherjee,until recently the �nance minister, bizarrely attacked foreign in-vestors, such as Vodafone, and retrospectively tried to rewritetax rules. That spread uncertainty. Fortunately in July he wasbooted upstairs to become president.

His successor, Palaniappan Chidambaram, briskly sets outa tempting menu of his intended economic reforms to boost con-�dence and raise investment and growth. Yet with a do-littleprime minister and a dithering dynastic party leader, SoniaGandhi, he looks short of political means. Congress’s coalitionallies (together with obstructionist opposition parties) have re-peatedly blocked reform. This parliament is on course to sit forless time than any other in India’s independent history. Netas be-yond Congress share the blame for paralysis.

Now add unhelpful babus, bureaucrats working in an ossi-�ed system bequeathed by Britain. Their dead hand explainsmuch of what does not happen day-to-day. The �licence raj� of

SPECIAL REPORT

The Economist September 29th 2012 3

SPECIAL REPORT

INDIA

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One other important reform would simplify trade insideIndia. Known as the Goods and Services Tax (GST), it would re-place a tangle of state levies with a single, national one. Rajiv Ku-mar, head of the biggest business lobby, FICCI, describes it as In-dia �signing a free-trade deal with itself�. It is an obvious way toboost trade and growth and lure investors to a bigger single mar-ket. Yet state governments and the opposition are blocking it, dis-trusting the centre to dish out revenues fairly.

The chances that all, or even most, such big reforms willhappen soon are nil. But optimists think that if at least one or twoof them do, the country’s mood could improve. �These threemonths are crucial for India’s economy,� says Prithviraj Chavan,Maharashtra’s chief minister and an advocate of reform.

The time for adding to the current, limited reforms is short.The next budget, in the spring, is bound to be populist as it will bethe last before the general election. One property billionairewith good contacts in government says that �if it’s not done bythe end of October, it ain’t happening.�

But building a constituency for bigger reforms�anythingbeyond letting foreign supermarkets in�will be �endishly di�-cult. On September 18th Congress’s main coalition ally, MamataBanerjee, the populist chief minister of West Bengal, in a tiradebefore television cameras said that her party would quit the na-tional government and no longer back it in parliament unless thelimited reforms announced a few days earlier were rolled back.

In recent years she had repreatedly blocked reform e�ortsby Mr Singh. Some close to her had thought she might be boughto� on this occasion, perhaps with more public funds going to herstate. Instead a strike was called for September 20th and streetprotests erupted. As this section of The Economist went to press,the outcome was still unclear.

Given a rush of state elections over the next year, ahead ofthe general one, it is hard to see the party implementing the bigreforms that it has failed to push since 2009. Most assume thatMr Singh’s government, perhaps with new allies, can hang onuntil 2014. But Congress will feel growing pressure to dish outpublic funds directly to its voters.

Still, say the optimists, India does not have long to wait foran election. If Congress were pushed out it might be replaced bya pro-growth �gure from the national opposition, such as Guja-rat’s surly strongman, Narendra Modi. Mr Modi says he has a�mission� to serve his country. He wants to promote industryand would surely get the babus working again. The central bankwould probably trust him to rein in public spending.

Alternatively, even a minority government after 2014 mighthave the stomach for more reform than the current one. Indiahas had a few of these in the 1990s, and some say that prime min-isters who know their tenures will be short try to get more donethan the timorous and long-serving.

The case for gloom

Yet sceptics see a more alarming possibility: that India’spoliticians are not really interested in reform. The liberalisationof 1991was pushed by outsiders and was relatively easy to imple-ment. But even the limited reforms anounced this month, lettingmore foreigners into the retail business and slightly cutting dieselsubsidies, caused a political storm, and bigger changes would befar more awkward.

Politicians show no wish to be bolder, having learned fromthe defeat of the most recent reforming government led by theBharatiya Janata Party (BJP) in the general election of 2004. Vot-ers gave that party no credit for helping create conditions for eco-nomic growth, the reform of public pensions and the like.

A dispirited senior member of government in Delhi fretsthat an old broad consensus in favour of reform has broken. Mr

Singh’s warning in August that slower growth threatens nationalsecurity sounded like a vain cry to his fellow politicians.

Worsening the scepticism is widespread dismay over cronycapitalism. Growth in the past decade, along with high commod-ity and land prices, has too obviously enriched a destructiveband of robber-baron politicians.

Public anger with the corrupt and the super-rich has risen,merging with doubts about market reforms. Mr Singh likes to saythat ordinary voters more than politicians grasp the bene�ts ofreforms, and tried to make the case for them this month. But thegloomsters may be half right: India’s politicians are not, by in-stinct, reformers. They act when pushed.

Ramachandra Guha, a noted historian, points out that In-dia’s cheerleaders as well as its pessimists tend to overstate theircase. This special report will try to steer a path between the two.More than usual now rests on who holds political power, as thenext article will explain. 7

MAKING POLITICAL PREDICTIONS in India is risky. Theruling party in Delhi often su�ers so many setbacks that it is

hard to believe voters will support it again. So it was with Con-gress in 2009, yet to general surprise it was re-elected with a big-ger mandate than before. Explanations varied: urban votersliked rapid growth; rural ones were impressed by new welfaremeasures; allies �ourished in the south and Congress roared inbig Andhra Pradesh; perhaps people distrusted the oppositionBJP’s candidates, such as Narendra Modi (see box, next page).

Almost any explanation, and its opposite, could be right.Politics in India is big and messy: hundreds of millions of voters,from vastly di�erent backgrounds, are bound to hold widely di-vergent views. Concerns at local and state level often trump na-tional ones, and national a�airs can appear as an amalgam of as-sorted local rivalries.

The next general election is in 2014, unless Congress isforced out sooner. The party’s electoral prospects look poor. MrSingh, once a model of rectitude, is tarnished by presiding overthe most corrupt government in India’s independent history.And although he had a hard-won reputation for good economicmanagement, his new e�orts to reform are unlikely to win muchsupport from the public.

As usual, the ruling party has been thumped in big states.Andhra Pradesh provided more Congress MPs in 2009 than anyother state, but now a local leader’s desertion has shattered theparty there. Congress has also done badly in massive Uttar Pra-desh (UP), earning only a poor fourth place in the state electionthere this year.

Rahul Gandhi�the son, grandson and great-grandson ofprime ministers�was by now supposed to be reviving the party,or preparing to assume high o�ce. But having led a dreadfulcampaign for Congress in UP, he seems to have lost his nerve. Noone really knows what he stands for or whether he can lead. No-body ever gets to interview either him or his mother, Sonia, theparty president. But that looks like a defensive strategy, and

Politics

Power shifts

Weaker national parties, stronger regions, new voter

habits and corruption are changing India’s politics

4 The Economist September 29th 2012

INDIA

SPECIAL REPORT

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RESPLENDENT IN A pink shirt, with a neatlytrimmed white beard, Narendra Modi chuck-les when asked if he is a dictator. Suggestionsthat he cannot compromise, lead within ateam or su�er criticism are �absolutelybaseless�, says Gujarat’s chief minister.

No politician stirs as much anger, orgrudging admiration, as the burly Mr Modi.He leaves little doubt about his wish to be-come prime minister, talking of his �mission�to serve: �I am interested in doing somethingfor my country.� Polls show him to be themost popular �gure to lead the country,outshining Congress’s indecisive RahulGandhi. The rank and �le of his BharatiyaJanata Party (BJP) love him.

He faces two main challenges. The �rstis Muslims and other minorities. Many dis-trust and despise him for what happened in2002, shortly after he took over as chiefminister, when over 1,000 people, mostlyMuslims, were killed in riots. He appeared toturn a blind eye, letting mobs vent their rageafter Hindu pilgrims died in a train �re.

Courts have found him guilty of noth-ing. The state has been calm since and Guja-ratis seem mainly to want to forget the riots.Elsewhere many are sure he is a monster: �Amass murderer who should be in jail,� says apolitical observer in Delhi. He fared poorly asa campaigner in the 2009 national election.

Now Mr Modi is trying to reshape hisimage. Pressed about the riots, he says hislocal popularity proves them to be politicallyirrelevant: �This question has no use�I have

faced ten elections of various kinds in mystate. The people always supported me.�

The second challenge is distrust insidehis own party and among national coalitionpartners. In June a close ally of the BJP,Nitish Kumar, the chief minister of Bihar, saidonly a �secular� candidate could lead India, adirect swipe at Mr Modi, a Hindu nationalist.Unfazed, Mr Modi agrees and calls himselfsecular too. �This is an article of faith, justiceto all, appeasement to none.� The Hindunationalist movement, the RSS, which re-mains in�uential in the opposition grouping,

opposes its one-time protégé, preferring theBJP’s party president, Nitin Gadkari.

Other BJP leaders are wary of Mr Modi.When he talks of seeing himself as destinedto triumph, his eyes burn with determina-tion. His fellow politicians do not know howto handle such a con�dent loner, says Swa-pan Dasgupta, an observer of the party.

If the party wants to campaign on theeconomy and e�cient government, Mr Modiis its likeliest candidate. Gujarat’s industrialsuccess, luring manufacturers from the restof India, is matched by a strong agriculturalrecord. The hope is that Gujarat’s leaderwould replicate such gains elsewhere. In-vestors �ock to Gujarat, Mr Modi says, for itswell-built roads, the quick allocation of land,the plentiful supplies of gas, electricity ande�cient bureaucratic support. Corruptionhas not been eradicated, but it is less debil-itating than in many other places.

As for the bene�ts to ordinary Guja-ratis, Mr Modi cites more girls at school andfewer drop-outs from education. Infant-mortality rates are down and prosperity isup. Yet many other states, notably in India’ssouth, do much better on social indicators.

Mr Modi’s time could come if the BJP gota big victory in 2014, say over 170 seats. Itwould then be in a good position to imposeits choice of prime minister on its coalitionpartners. If not, he could turn out to beIndia’s Barry Goldwater, says Mr Dasgupta:reshaping the country’s right wing but seenas too divisive to lead.

The candidate

Narendra Modi wants to be India’s next prime minister

Modi wants to get ahead

meanwhile no other young leaders can rise. Sachin Pilot, a junior minister and loyal friend of the Gand-

his, says that analysis is unfair. Mr Gandhi’s restraint in reachingfor power is admirable, he says, and no rising stars are being heldback. Other observers are more sceptical. �Rahul Gandhi intrin-sically doesn’t want it. A level of detachment is built into his per-sonality,� says a Congress leader.

The Gandhi dynasty still holds together Congress (whichlacks much ideology beyond broad secularism) and helps to set-tle leadership spats. But it matters less and less to voters. Region-al dynasties, with power and money to spread around theirstates, are in the ascendant. Without their own state as a �ef, theGandhis look unrooted. A newspaper editor in Delhi thinks In-dia is getting ready �to make the Gandhi family irrelevant�.

The crumb of hope for Congress is that the national alter-natives are weak. Arun Jaitley, head of the BJP in parliament’s up-per house, says the party has a �galaxy of leaders� for 2014. Butthey are really a collection of regional leaders, and the BJP is un-sure of its ideology, having toned down its earlier, odious, formof Hindu nationalism but also muddied its old pro-marketstance. It gets little support in India’s south, east or north-east.

The party tries hard to be seen as �ghting corruption, yetprojecting itself as clean is tricky. It has had its share of scams andcrookedness, notably in the southern state of Karnataka, and itlacks ideas for making things better. It opportunistically backedAnna Hazare, an anti-graft campaigner, when he became popu-lar, but not his plans for a powerful anti-graft ombudsman.

Smaller national parties do not look promising. Ramachan-dra Guha, the historian, thinks a national two-party system as inAmerica would raise standards. The lesson from India’s states,too, is that a regular alternation of parties in power tends to de-liver the best results. This happens in Kerala and Tamil Nadu inthe south and Himachal Pradesh and Punjab in the north. Asparties compete to o�er better public services and other socialgoods, things like literacy, the position of women and infant-mortality rates improve.

Think local

Regional parties �ll the gap. Usually built around a charis-matic individual who becomes a state’s chief minister, they mat-ter, wielding near-presidential power over a territory that oftenhas a country-sized population. These states control roughly half

The Economist September 29th 2012 5

2 of all India’s public spending. The mostprosperous ones, which rely least on Del-hi for discretionary funds, throw up thestrongest leaders, who often in�uencewhat happens in Delhi too.

The mightiest satraps pay the leastattention to national parties. They in-clude three women: Mamata Banerjee inWest Bengal, Jayaram Jayalalitha in TamilNadu and Mayawati, a Dalit (the lowestcaste) who ruled UP until earlier this year.The others are Nitish Kumar in Bihar, Ak-hilesh Yadav and family in UP, Mr Modiin Gujarat and Sharad Pawar, an ally ofCongress in Maharashtra and nationally.They run some of India’s wealthiest statesand preside over more than 600m people.They are unlikely to unite as a coherentthird force of politics, but have great vetopower over national matters.

Yet some voters are beginning to drift away from the rigididentity politics of old. Nationally, Congress still gathers in theMuslim and the more secular Hindu votes and the BJP the morefervent Hindus, and caste still counts: Mayawati relies on Dalitvotes and the Yadav family on middle-ranking castes and Mus-lims in UP. Leaders, in turn, reward favoured groups, sometimesreferred to as �vote banks�, with government jobs, educationquotas and other handouts.

What is new is the arrival of a group of �oating middle-class voters who swing between parties depending on how theyperform, not on promises of rewards for their particular group.Mostly young, urban, literate, mobile and privately employed,they are increasingly well-informed thanks to cable news, socialmedia and mobile phones.

For now they are in a minority, but they will increase as cit-ies expand and schooling improves. Around 100m voters in 2014will be �rst-timers. �Young India wants good policy. It wants agood job, education,� says a high-pro�le Congress �gure inMumbai. Another government leader calls the middle class anew �caste�. He reckons it is the single most cheering thing in In-dian politics.

These voters may be starting to decide results. For evidence,look at Mr Kumar’s triumphant re-election in Bihar in late 2010.Caste was still a factor, but voters overwhelmingly rewardedhim for delivering better roads, schools and hospitals, improvinglaw and order and lifting the economy. Mr Modi keeps being re-elected in Gujarat mostly because he runs the place e�ciently.

The chief minister of Chhattisgarh, Raman Singh, says thatvoters re-elect him because their incomes are rising and publicservices are getting better. He identi�es, especially, the moretransparent and e�cient delivery of food rations to the poor,thanks to computerisation and the spread of ID cards.

If holding leaders accountable for their performance be-comes a national habit, it will be in part because of an explosionin television watching. Rajdeep Sardesai, a leading news pre-senter and editor since the 1990s, says India now has 365 round-the-clock satellite channels, as well as many city-based and ca-ble ones. Television helps shape reactions to national issues suchas corruption. Mr Hazare’s dramatic street campaign and publicfasts were made for TV and earned non-stop live cable-news cov-erage. Mr Sardesai thinks TV lets voters �vent anger against thesystem� and judge leaders from close by, but worries that it mightlead to �public hatred of politics�.

Such hatred would be understandable because much of In-dian politics is rotten. A series of outrageous scams (see table 1)

has left voters resentful at the huge losses of revenue involved,especially as a tiny minority grew rich beyond the dreams of av-arice. The billionaires too often �ourish thanks to political con-nections and access to natural resources, land and public goodssuch as telecoms spectrum. Growing inequality spreads dismay.

India may be passing through an American-style robber-baron phase, driven by a commodity boom and a shift from aclosed to an open economy. Gloomier commentators see an out-right Russian-style kleptocracy. �We are creating an oligarchy,�sighs a commentator in Delhi. A leading Congress �gure rails that�there are no audits of political parties. There is such a deep nex-us of property and political funding. Many political leaders aresustained only because they have huge war chests.�

In UP one politician was recently �lmed telling o�cials itwas acceptable to steal, and several ministers were sacked earlierthis year for pocketing $1.2 billion from a scheme supposed tohelp sick villagers. A political party is said to clear business pro-jects in exchange for 30% equity in them. One satrap is believedto have become the biggest property developer in India.

The costs are real. A power minister in one state reportedlytried to close functioning power stations so he could take a cutwhen pricier electricity was imported instead. India’s new air-ports, irrigation schemes and toll roads are typically overpricedand often late because they are built by �rms with political ties.

Politicians want the lifestyle enjoyed by the country’s bil-lionaires, but parties also raise huge quantities of cash to winelections. Voting in India is generally clean and honest, but thecampaigning is expensive and dirty. And everything is big. A typ-ical MP in the Lok Sabha, the lower house of the national parlia-ment, has to woo around 1m voters.

Even state assemblymen have massive constituencies.Money is needed for the usual stu�: posters, rallies, trips to vil-lages, local organisers and the like. In India many voters in tightraces also expect pre-election goodies, so politicians regularlydish out cash, TVs, food mixers, saris, rice, whisky and even, inPunjab this year, heroin. O�cial limits on party spending areuniversally �outed. Even the limited hope of letting private do-nors and parties maintain their close relations but making themtransparent, as in America, seems forlorn at the moment.

More likely, politics will become cleaner if and when In-dia’s economy shifts away from a system in which politicians al-locate public goods. More wealth created by entrepreneurs, in-novators and manufacturers might loosen political ties. But suchchanges will take time. 7

1Cleaning up?

Source: The Economist*Maximum estimated by the Comptroller and Auditor

General and others, as lost revenues or as stolen goods

Selected Indian scams

NotionalName Date Description loss*

“2G” 2008 Dodgy sale of mobile-phone licences $39bn

“Coalgate” 2004-09 Shady allocation of coal blocks $34bn

“Adarsh” 2010 Mumbai home for war widows taken by the powerful $ millions

“CWG” 2010 Crooked contracts for Delhi Commonwealth games $ millions

Karnataka 2006-10 Illegal mineral pillage $3.6bn

What is new is the arrival of �oating middle-class voterswho swing between parties depending on how theyperform, not on promises of rewards for their group

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6 The Economist September 29th 2012

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INDIA’S TRAINS MOVE slowly. That gives passengers plen-ty of time to observe their fellow riders. They are travelling

far to visit a hospital, take up a job, enroll at college. Odishan cof-fee pickers in Karnataka, Assamese students in Kerala and Biharidiamond polishers in Gujarat all move as freely around theircountry as Americans hop from state to state. That mobilityshould give India an advantage over countries like China that pe-nalise farmers when they leave their land.

Indians are also increasingly well connected. On one4,200km train ride, through 615 stations, your correspondentnever once lost his mobile-phone signal. A decade ago fewwould have cared, since only 9% had a phone of any kind. Now,according to census data from last year, 63% of householdershave a phone, usually a mobile. Ericsson, a maker of phonehandsets, said this month that three-quarters of Indians nowhave access to a mobile.

The endless rows of concrete houses with trailing wiresseen from the windows tell a story too. The same census showedthat of India’s 247m households, two-thirds have electricity andnearly half TV. A similar number own bicycles, though only 5%,so far, have a car.

According to a new report by PricewaterhouseCoopers, in2010 some 470m Indians had incomes between $1,000 and$4,000 a year. The consultancy reckons that this �gure will rise to570m within a decade, creating a market worth $1trillion. The bigIndian �rms that are doing best�such as Mahindra and Mahin-

dra, a carmaker, Hero MotoCorp, which makes motorbikes, orHindustan Unilever, which produces small consumer goods�are those targeting such buyers.

Yet the rosy forecasts were drawn up when the economywas roaring ahead and it seemed that another decade or two ofsimilarly high growth would deliver a big mid-income economy.Now that prospect is in question. The next few years are likely tosee much slower expansion.

Doubters had long been saying that India’s potential rate ofgrowth was bound to be lower than, say, China’s. They agreedthat India could achieve much more than the 3% stopper-traingrowth rate that was the norm before reforms in 1991. But theygave warning that it could not keep up an express-train speed ofclose to 10% because its economic engine quickly overheats. Re-cent years have brought high in�ation, especially in food prices.Roads, ports and railways are overwhelmed, blackouts are com-mon and labour has become as expensive as in China, eventhough the Chinese, on average, are three times richer.

The Transport Corporation of India, a logistics �rm, report-ed in May that every one of 17 important road routes wasclogged. To drive the 1,380km from Delhi to Mumbai, for exam-ple, takes an average of nearly three days, an average of just 21km

The economy

Express or stopping?

India’s growth rate, supercharged for a decade, is

falling back to older, lower levels

How the BRICs stack up

Sources: IMF; Economist Intelligence Unit

Selected economic indicators, 2011, %

2

Indicator Brazil Russia India China

GDP growth 2.7 4.3 7.2 9.2

Inflation 6.6 8.4 8.6 5.4

Unemployment 6.0 6.5 9.8 4.0

Investment/GDP 20.6 23.2 34.4 48.3

Savings/GDP 18.4 28.6 31.6 51.0

Current-account balance/GDP -2.1 5.5 -2.8 2.8

Budget balance/GDP -2.6 1.6 -8.7 -1.2

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an hour. The �rm says the delays are getting worse: the road net-work is growing by 4% a year but tra�c by 11%.

The railways are no better. Raising passenger fares is politi-cally impossible. When Dinesh Trivedi, then the railways minis-ter, tried it in March, for the �rst time in nine years, his partyleader forced him out. To subsidise the fares, freight charges keepbeing raised, pushing many goods o� the tracks and into over-loaded lorries on crowded roads.

Seen in that light, the slowdown in economic growth toabout 5% was almost welcome. �We should not try to get back tothe highest growth path. India hurts when it is growing at 8.5%,�argues Cyrus Guzder, a Parsi businessman in Mumbai. His par-ticular worry is energy. India has a voracious appetite for energyand minerals, he suggests, but cannot dig, import or shift enoughcoal to keep the lights on even though there are new power sta-tions, and in theory quite a lot of capacity.

Nor have India’s politicians shownmuch appetite for reforms to improvematters. One obvious remedy would beto deregulate the distribution of coal, ar-gues N.K. Singh, an MP from Bihar andeconomic adviser to the BJP-led govern-ment of 1998-2004. The governmentcould even break up or sell o� Coal India,a massive and badly run state monopoly.

Congress did free petrol prices in2010, and over the years the rupee hasbeen allowed to �oat more freely, but re-forms tend to be introduced only little bylittle. Some scarce goods are now sold byauction, but only after years of scams.Single-brand retailers, such as IKEA, havebeen allowed in, and multi-brand oneslook set to follow. But sustained rapidgrowth would require a slew of big sec-ond-round reforms, to include things likeland acquisition, labour laws and tax.

Politicians naturally prefer to spend.Congress is fond of entitlement schemessuch as NREGA, which promises 100 daysof paid work a year for every rural house-hold. That, along with other new welfaremeasures, is helping some of India’spoorest people, lifting rural incomes andboosting consumer markets, but proba-bly also raising labour costs.

Surjit Bhalla, a Delhi-based econo-mist, points out that spending on welfareto relieve poverty now represents 2.5% ofGDP. That is not a huge share, but it is ris-ing fast: during Mr Singh’s �rst govern-ment it was just 1.6%. Mr Bhalla worriesthat this sort of spending does less to helpthe poor than, say, the creation of produc-tive jobs.

Fiscal policy is generally pro�igate.Diesel prices went up this month, but thefuel remains massively subsidised, alongwith kerosene, fertiliser and food.

All this suggests that potentialgrowth is nowhere near double digits butclose to what India has today, especiallygiven a weak global economy.

Businessmen, particularly those en-joying buoyant consumer demand, are

still cheerful. Sevantilal Shah, the boss of Venus Jewel, a big dia-mond polisher and producer in Surat, says domestic sales are�ourishing. Anand Mahindra, of the Mahindra Group, says hecan’t imagine anything but an improvement on a dreadful year:�I remember that old watch ad, ‘takes a licking, keeps on ticking’,that’s what I hope we’ll say of India soon.�

Economists are more cautious. At a meeting in April Ragh-uram Rajan, an academic and former chief economist at the IMF

who has just taken over as the government’s chief economic ad-viser, inveighed against the �paralysis in growth-enhancing re-forms� and an �unholy� alliance of some businessmen and poli-ticians that blocks change. He said India had to raise fuel pricesrapidly, to be �kinder� to investors in order to attract capital, and�to become paranoid again� about generating growth. At thetime Mr Rajan had not yet been appointed to his new job, but the

The Economist September 29th 2012 7

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ON THE FACE of it, Hidesign is a manufactur-ing failure. Its leather bags are stitched andglued by ranks of well-educated women inblue saris on a shady factory �oor. Most ofthem have been working there for ten or 15years. Each of them takes an average of 13hours to make a bag which a Chinese workercould produce in three. Yet their wages arerising by 13-14% a year.

Dilip Kapur, who founded the businessand still runs it, admits over a vegetarianlunch in his garden that he tried and failedto speed them up. Simpler designs and morerepetition got the time down to nine hours,but since labour costs make up only a smallshare of the total he was saving little and hisworkers got grumpy. Worst, he says, �we lostthe core strength, a product that spoke ofuniqueness. I lost the ability to brand.�

Instead he decided to raise quality.Sta� are now rewarded for e�ciency in usingleather (the costliest input) and run aninternal market to sell o�cuts. They calculatetheir own productivity and follow complicat-ed spec sheets for a wide variety of designs.His workers’ skills, says Mr Kapur, serve athriving manufacturing niche.

He employs 3,000 people and expectsthis to rise to 5,000 soon. Already he is thelargest private employer in Puducherry(formerly Pondicherry), one of India’swealthiest corners. Despite slower economicgrowth, consumers love his products. Do-mestic sales rose by nearly one-third lastyear. Twelve years ago the company relied onsales to foreign distributors, mostly British,American and Australian, for 94% of itsincome. Today 70% of its revenues comefrom 70-odd branded shops at home.

Growth is �shattering, India is explo-sive,� says Mr Kapur. He expects 200-300

stores in India within �ve years and also hasbooming markets in Malaysia, Sri Lanka,Russia and South Africa. He is amazed byhow many customers in forgotten corners ofIndia want $100 bags.

He sees manufacturing as essential tohis brand, but the skilled workers he needsare getting hard to �nd. Many of the daugh-ters of his present sta� are studying for jobsin banking or IT. Finding capable shop man-agers, graphic designers and marketingpeople is harder still, he says: �We havemountains of untrained labour but hardlyanyone trained who can work independent-ly.� Even so, the �rm is doing remarkablywell. India could do with many more like it.

On a hiding to something

A �ourishing Indian leather business

Mr Kapur’s bags of success

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CLIP ON A harness, lift your legs and hurtle down a wire to-wards the sharp corners of a 15th-century Rajasthani fort.

As you whizz, you might have a few niggling doubts. Was the zip-wire serviced by someone who knew what he was doing? Is thesafety adviser any good? Who is trained in �rst aid?

Fortunately the sta� in Neemrana, a tourist spot some130km south-west of Delhi, are on the ball. Raj Kumar, the leadinstructor of Flying Fox, has an impressive (if not entirely rele-vant) quali�cation as a Master of Philosophy in ancient Indianhistory. �I had planned to do my PhD, but this opportunity camealong,� he says. The out�t’s British owner-manager, JonathanWalter, explains that getting and keeping reliable workers is hisgreatest headache. The problem is not so much the onerous la-bour laws but �nding skilled people. To deal with foreigners hissta� need good English; for Indian customers they need socialskills to cajole the reluctant into the walk up the hill.

There is plenty of anecdotal evidence that skilled workersare becoming scarce. The man in charge of building a university,also in Neemrana, says he had extreme di�culty recruiting theten types of masons he needed to work on his campus. A manag-

Education

A billion brains

A better education system calls for more than money

Your country needs you

prime minister was at his side�and clapped. In private, most se-nior o�cials say something similar.

Sadly Mr Rajan, like his a�able and clever predecessor,Kaushik Basu, lacks political clout. Mr Basu remains an optimiston the economy, contrasting it with the late 1980s when the coun-try felt like a warmer outpost of Soviet thinking. He is particular-ly pleased that India has persistently high national savings andinvestment which in his view can be sustained, despite some re-cent slippage. So he reckons that the country will return to a highgrowth rate, near 9%, once the current uncertainty and urgent �s-cal problems are dealt with. He puts faith in the expandingyoung, urban and literate population and in new technology. Asfor the rotten bits of the economy, the state-run �rms, thankfullythey account for only 14% of GDP (against about a third in China).

A hole in the middle

Yet optimists need to address another problem: the struc-ture of employment, which is very di�erent from that in mostEast and South-East Asians economies. Agriculture still employsroughly half of all working Indians, many of whom are muchless productive than they might be. And the service sector al-ready makes up 59% of GDP (see chart 3) and is still growing rap-idly. In particular, IT and outsourcing companies such as TCS

and HCL are performing well, despite global worries. The missing middle is industry and manufacturing, of the

sort that thrives in China and drives exports. More factoriescould provide more jobs for the 13m people that join India’sworkforce every year, many still poorly educated. Manufactur-ing makes up just 15% of the economy, much the same as in the1960s. More than other sectors, it su�ers from India’s entrenchedbureaucracy and wretched infrastructure. Indian labour costsare high and laws are restrictive. As Chinese wages rise, coun-tries such as Bangladesh are well placed to pick up business, butIndia is not. When �rms persuade unions to allow contract la-bour to increase �exibility, workers can end up getting paid dif-ferent rates for the same job. At a Maruti factory near Delhi thissummer, that led to clashes which left an HR manager dead.

Manufacturers also complain about the high cost of creditin India. This may ease a bit as in�ation subsides, allowing inter-est rates to come down. A weaker rupee will make the countrymore attractive as a base for exporters. And its own boomingmarkets o�er a growing incentive for manufacturers to over-come their problems. India’s carmakers, by and large, have donewell (though Tata’s Nano, a cheap small car, is not yet the tri-umph it was billed as). But there seems no prospect of a big leapin Indian manufacturing in the near future. And if services are tokeep expanding, the country needs huge quantities of skilled la-bour that will not be easy to come by. 7

3Something missing

Source: CEIC

GDP by sector, %

Fiscal years ending March

0

20

40

60

80

100

1951 55 60 65 70 75 80 85 90 95 2000 05 12

Agriculture

Industry

Services

The Economist September 29th 2012 9

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er overseeing hotel construction near Del-hi’s airport says good plumbers, carpen-ters and electricians are like gold-dust.

A survey by the Royal Institution ofChartered Surveyors estimates that in2010 India had just over 500,000 civil en-gineers when it needed nearly 4m, and45,000 architects when it needed366,000. It predicts that by 2020 the cum-ulative shortfall of core professionals in-volved in the building trade could be inthe tens of millions.

The shortages extend far beyond theconstruction industry. The editor of a newmagazine, The Caravan, says �ndingskilled sta� is next to impossible becauselocal education is �extremely bad�. Amanufacturer moans that even if you �nd capable sta�, theyquickly �it o� to the next job.

Even some low-skilled labour is in short supply. An agent inChandigarh for an engineering company says that sales of trac-tors, rice transplanters and harvesters are booming in Punjab be-cause fewer casual labourers are migrating from Bihar. Evenpoorer farmers now buy machines to share.

Generally, though, the shortage is of people who are liter-ate, trained and ready to work. The basics are improving. The na-tional literacy rate is up from 52% in 1991 to 74%, according to thecensus. But gains beyond that are coming far too slowly.

There is no lack of interest in education, or willingness topay. Small towns display garish murals or �uttering notices ad-

vertising �English medium� schools, com-puter-training colleges, tutors and man-agement schools. In newspaper marriageads, prospective grooms and brides oftenmention their quali�cations before theirage, looks or caste.

By one estimate, 40% of Indian stu-dents now make some use of private edu-cation�either private school or top-ping-up by tutors. A survey in 2011 byCredit Suisse suggested Indians typicallyspend 7.5% of their income on education,more than Chinese, Russians or Brazil-ians. Education is seen as a quick route toprosperity. A senior government econo-mist worries that parents �almost spendtoo much�.

On a morning in a poor quarter of east Delhi, Khajuri Khas,that eagerness is evident. In one small school, Ebyon, 200 chil-dren sit rapt before young women teachers in a series of small,ill-lit rooms each morning. Then they move to a nearby stateschool for the afternoon, enjoying a free midday meal, booksand some other help.

Parents like Ebyon because it is cheap (80-150 rupees amonth) and well run. The headmistress, K.H. Alice, is bright andbrisk. A migrant from Manipur, like many of her students, she in-volves parents, even illiterate ones. The rude and troublesome,�paan spitters�, are turned away. And she keeps records: casestudies of why some students �ourish and others do not.Schools and Teachers Innovating for Results (STIR), an NGO, isnow gathering such examples of good teaching habits to shareelsewhere. Spreading good ideas could do more to transformschools than simply scattering money around, argues thegroup’s founder, Sharath Jeevan.

Some 500,000 of India’s 1.4m schools, with around 300mstudents, are private. They gather in lots of funds from anxiousparents. But the public sector gets plenty of money too. A mid-day-meal scheme set up here and there decades ago to get poorchildren into school each day is now running nationwide, at acost of about 120 billion rupees a year. Better nutrition shouldmean more concentration and better results.

Some 97% of school-age children enroll, though over halfdrop out before completing secondary school. The quality ofteaching is variable; sometimes teachers do not even turn up forlessons. There is plenty of rote learning, discrimination againstlow-caste children, grade in�ation and sometimes �ogging.Some teachers accept bribes from students in return for exampasses. One private school in east Delhi has CCTV cameras in ev-ery class which allow the headmaster to monitor his teachers.

To improve matters, training is crucial. N.K. Singh, the MP

from Bihar, thinks the country needs to recruit 4m new teachersand to retrain 8m. The government seems to have recognised theproblem, setting aside about $11 billion for education this year(three-quarters for schools, the rest for universities), an 18% riseon last year.

A new law, the Right to Education act, is designed to liftschool results by setting minimum standards for school build-ings, playing �elds, student-teacher ratios and the like. Thatcould raise quality, but may mean more bureaucracy, too. It alsorequires every private school to reserve 25% of its places for poorlocals. Critics say fees for the rest will rise or standards will fall.But the best schools are getting on with it.

To make India more competitive, though, the biggest gainsin education must come after school: in vocational and highereducation. Quantity is not the issue. The OECD predicts that by

4A vital test

Source: World Bank

Gross school enrolment rates, 2010 or latest, %

0 20 40 60 80 100 120

Brazil

OECD

Russia

China

India

Secondary Tertiary

In 2010India hadjust over500,000civilengineerswhen itneedednearly 4m,and 45,000architectswhen itneeded366,000

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the end of this decade India will churn out more graduates thanany other country bar China, giving it 24m graduates aged be-tween 25 and 34, some 12% of the world’s total.

India’s o�cial count of higher-education institutions, bothprivate and public, is nearly 26,500, the world’s biggest countrytotal. The number of students currently enrolled is 15m, or nearly14% of the age group. The government is pushing to increase en-rolment to 30% of the age group by the end of this decade. Ernst&Young, a professional-services �rm, says this would involve arise in the number of students to 40m, at a cost of around $200billion. But funds are likely to be forthcoming.

However, the quality is often wretched. �A lot of privateeducation is useless,� sighs a noted economist. Many manage-ment colleges do little teaching but lure applicants with prom-ises of getting them jobs when they have graduated. Too manypeople end up with worthless quali�cations.

Found wanting

Education in engineering, for example, supposedly a greatIndian strength, is not what it might be. The country producesover 500,000 engineering graduates a year. Aspiring Minds, aGurgaon-based company that assesses students’ employability,surveyed 55,000 of them last year and found that not even 3%were ready to be taken on by IT �rms without extra training. Andeven identifying people for further training might not be easy.According to the survey only 17% of the graduates had basicskills. Some 92% of the graduates were de�cient in programmingor algorithms, 78% struggled in English and 56% lacked analyticalskills. �There is a long way to go before engineering graduates inIndia become employable,� the survey concluded.

That sounds glum�until you realise that it also means Indiaproduces around 100,000 engineering graduates a year whocould soon be working in its IT �rms and beyond. Some pocketsof higher education work well, notably the publicly run insti-tutes of technology and of management, on the back of whichthe country’s IT sector �ourishes.

Some private groups, such as the NIIT, a computer-educa-tion company, also produce reasonable graduates. The next pushis to expand their work into other sectors, such as �nance, bank-ing and insurance, says Rajendra Pawar, the NIIT’s founder. Hesays his group has trained over 30m people in technology. Overthe next decade he wants to educate 7m more for industries suchas hospitality, health care, the retail trade and banking.

Public funds are also being deployed to lift skills. The gov-ernment is pouring money into a National Skill DevelopmentFund, allotting 10 billion rupees to it for this year alone. The fundis meant to help train 62m workers in courses of varying lengthsover the next decade. So far, however, it has struggled to �ndenough credible partners to spend its money well.

Meanwhile private money is �ooding into tertiary educa-tion. Several tycoons, rather than leaving their entire fortunes totheir children, have endowed universities such as the OP JindalUniversity (named after a steel family), the Azim Premji Univer-sity (after the founder of Wipro) and the Shiv Nadar University(after the founder of HCL). They are paying higher salaries forgood faculty, luring Indian academics from foreign universitiesand encouraging research as well as teaching.

Mr Pawar’s group is now building a university to promoteresearch that will be immediately useful to business. The leafycampus in Neemrana is rising up beside a maze of Japanese fac-tories. Part of a planned �knowledge corridor� of new universi-ties in Rajasthan, it o�ers teaching as well as research into bio-fuels, biotechnology, wireless networking and more. Soon thecampus will also provide space for start-up �rms. It may not beSan Francisco yet, but it is a step in the right direction. 7

SAVDA GHEVRA IS a township of narrow, poorly builtbrick houses with beaten tin doors, west of Delhi. Flies

swirl over open sewers. In the absence of piped water, 55 tankersbring in supplies daily. Only a minority of homes, �pukka� ones,have toilets. A few trees have been planted, but overall the feel islittle better than that of a shanty town.

In theory, Savda Ghevra represents progress�of a minimal,unsatisfactory sort. The area was set aside for some of the esti-mated 500,000 slum-dwellers displaced when Delhi hosted the2010 Commonwealth games: �sh-sellers from beside the stink-ing Yamuna river, tailors, rickshaw-wallahs and hawkers whosaw their shacks �attened. Some were taken to Savda Ghevra,given plots and told to build.

Now they have homes and electricity, but many familieshave been split: the father sleeping somewhere back in Delhi, therest of the family in the new home. Some have sold their plots, il-legally, to dodgy property traders. A corner house is for sale at ascarcely believable 2.7m rupees.

India’s cities, by and large, are charmless and badly put to-gether. That is one reason why the country remains mostly rural(see chart 5). Two-thirds of the population, some 833m, are livingin 640,000 villages. Politicians such as A.P.J. Abdul Kalam, a for-mer Indian president, or Narendra Modi, Gujarat’s chief minister(who talks of �rurban� life), want people to stay out of cities, andwould like the internet, electricity, schools and jobs to go to ruralareas instead.

Since rural voters collectively have clout, much publicspending �ows to the sticks. Farmers get subsidised diesel to runpumps. The NREGA scheme creates low-paid make-work jobs.The government also pays in�ated prices for most wheat andrice, then sells much of it back to villagers as cheap rations. Thatdiscourages migration, and in many states it also encourages cor-ruption. An o�cial estimates that 44% of state-managed foodvanishes as �leakage�.

Some states, such as Kerala and Tamil Nadu, have goodpublic services and social indicators despite slow urbanisation,but resisting it also comes at a price. Village life is often hard for

Cities

Concrete jungles

A mainly rural country is ill-prepared for its coming

urban boom

5The slow road to the city

Sources: World Bank; UN Population Division

India’s population, bn

0

0.3

0.6

0.9

1.2

1.5

1.8

1960 65 70 75 80 85 90 95 2000 05 10 15 20 25 30 35 40 45 50

Rural

Urban

F O R E C A S T

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Already 53 cities have at least 1m inhabit-ants. Some are seeing improvements, butmany are grim and badly run.

Gorakhpur is a sprawling city nearthe Nepalese border in eastern Uttar Pra-desh, notorious for thuggish religious pol-itics, gangsters and smugglers. It has670,000 inhabitants, poor public healthand a broken and clogged road system. Acricket �eld on the city’s edge is so thicklystrewn with rubbish you can hardly seethe ground beneath. Cows munch onplastic bags in the streets.

India is ill-equipped to make suchplaces attractive drivers of growth andbetter living. �I see no improvement inthinking about cities,� says a senior �gurein construction and retailing. Much land isprivately held, but markets are opaqueand development too often depends oncronies with political connections.

Mumbai is especially bad. �Propertyin the city has run riot,� says Mr Guzder,the Parsi businessman. Towers shoot up,especially around the Sea Link, a bridge

connecting the southern part of the city to the north. �But wehave no urban infrastructure, no widening of roads, no provi-sion of police.� Prithviraj Chavan, the chief minister of Maha-rashtra, blames the city’s woes on a �deep nexus of property andpolitical funding�.

Municipalities also need planning skills. Mr Guzder saysthe entire Mumbai metropolitan region is overseen by a singletown planner (�and she is retiring soon�). Mr Revi estimates thatby 2031 India will be short of 100,000 professionals�planners,engineers and the like�to manage cities. He heads a new univer-sity that will train people to �ll the gap.

Some rich folk are trying to get round the problem by start-ing a city from scratch. Called Lavasa, it is now being built on25,000 acres of hilly private land by a reservoir near Pune in Ma-harashtra. It looks pleasant enough: a town to walk in, good in-frastructure, a sanctuary for 300,000 inhabitants. But it is miredin controversy and hardly o�ers an urban model for one-sixth ofthe planet’s population.

What it takes

A far more encouraging example can be found farther upthe coast. Surat, a city in Gujarat of 4.5m people, is a �ourishingtrading hub that not long ago was a wretched dump like Gorakh-pur. In 1994, after a reported (but never con�rmed) outbreak ofpneumonic plague, it became famous for squalor, gridlock,slums and rotten management. Since then it has been trans-formed. E�ective managers cleaned up. Rubbish was collectedand transport improved, streets were swept and public servicesdelivered. Miraculously, the improvements were sustained.Some 96% of residents pay their municipal taxes on time. ManojKumar Das, who now runs the city, says that over the past de-cade the growth in Surat’s population averaged 5% a year, amongthe fastest of any city in the world. According to his planners, by

people of low caste, women and members of religious or otherminorities. Villages are usually the places with the worst schoolsand health care and the least productive work.

Putting o� urbanisation can also mean postponing pros-perity. When farmers leave the land to work in factories, call cen-tres or almost anywhere else, their incomes and consumption al-most always go up, lifting assorted development indicators. InChina just over half the population is now urban.

Aromar Revi, director of the Indian Institute for HumanSettlements (IIHS), says that India’s 100 biggest cities, with 16% ofits total population, contribute 43% of its national income. Evenslum-dwellers are often productivemanufacturers and traders. Yet many ur-ban spaces, like Savda Ghevra, have a leg-acy of poor planning and management.

Gurgaon, a business district nearDelhi, has plenty of glass towers but fallsshort on sewerage and power suppliesand is only slowly acquiring public transport. Gridlocked Mum-bai can appear to be falling to bits, especially in heavy rains.

The number of town-dwellers, currently 377m, is growingby around 5m a year. Historically most urban growth has beendue to natural increase, not migration. That is changing as coun-try-dwellers see opportunities. So in future India’s urban popu-lation will rise much faster, doubling by mid-century.

Some urban centres will become megacities. According toone vision, India’s entire western seaboard could turn into a sin-gle conurbation, stretching from Ahmedabad in Gujarat in thenorth, past Mumbai and south to Thiruvananthapuram in Kera-la. Inland, Delhi and its environs could be a hub for 60m-70mpeople, provided there is enough water. Within two decades In-dia will probably have six cities considerably bigger than NewYork, each with at least 10m people: Ahmedabad, Bangalore, Del-hi, Mumbai, Hyderabad and Chennai.

Delhi gets plenty of public money, and even Japanese do-nor funds, which have helped pay for a newish metro. Severalother cities, including Bangalore and Ahmedabad, are also get-ting metros. Any big metropolis can tap a central fund, the Jawa-harlal Nehru National Urban Renewal Mission, for new infra-structure. But there is plenty of growth in smaller places too.

India’s 100 biggest cities, with 16% of its total pop-ulation, contribute 43% of its national income. Evenslum-dwellers are often productive

Gurgaon looks good, but do the drains work?

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DOWNTOWN YANGON, MYANMAR’S once-shutteredmain city, is home to a large Indian diaspora. Many turned

out to hear a speech from India’s prime minister during his �rstvisit in May. �Keep a place in your hearts for India,� ManmohanSingh implored a gathering of businesspeople.

Nothing Mr Singh does is electrifying. The same day heturned a historic meeting with Aung San Suu Kyi, the democracyactivist, into a stilted and awkward a�air. His talk of a cross-bor-der bus service, and mutual trade worth $5 billion by 2015, setfew hearts racing. A group of resident Bengalis in a hardwareshop, buying materials for a goat cage, shrugged when theyheard that Mr Singh was in town.

That he got to Myanmar at all was an achievement, even ifhe came long after nimbler leaders from Britain, Bangladesh,South Korea and elsewhere. The machine that guides Indiaabroad is slow and cautious. �We run a no-frills policy,� con-cedes a senior o�cial. �We’re not trying to cut a grand �gureabroad, it’s a realist approach.�

Put less kindly, India is still punching well below its weight

in foreign a�airs. Shashi Tharoor, a Congressman from Keralaand one-time under-secretary-general at the United Nations,thinks India is trying to do more but is devoting far too few re-sources to achieving its foreign-policy goals.

The country’s economy is more closely enmeshed with therest of the world than ever. Foreign trade is now equivalent to43% of GDP, against just 16% two decades ago. By last year India’stwo-way trade was worth a total of $794 billion. In March SIPRI,a Swedish think-tank, ranked the country as the largest single im-porter of weapons, with a 10% share of the world’s total. Long arecipient of aid, the country is fast becoming a donor, dishing outaid and soft loans worth billions of dollars every year. It also hasa growing appetite for energy, mineral, commercial and other in-terests in Africa, Central Asia and elsewhere. And it is an enthusi-astic joiner of international groups.

On a shoestring

All this speaks of rising ambitions, even if most foreign-af-fairs experts wisely eschew any talk of an incipient superpower.But the means are limited. Mr Tharoor notes that the foreign ser-vice has only about 800 diplomats, less than a �fth of China’sand roughly the same as tiny Singapore’s (see chart 6).

Overstretch is evident: a single o�cial in Delhi has to liaisewith 19 Latin American ambassadors, says Mr Tharoor. There arefew people to handle di�cult cross-regional topics such as waterresources or climate change, and few linguists �uent in tongueshelpful beyond Asia. Dynamic Indian �rms establish them-selves in new markets without government help, but they grum-ble that rivals, notably state-owned Chinese ones, enjoy cheapcredit and diplomatic backing.

�India’s state is a 65-year-old who has fat in all the wrongplaces,� concludes C. Raja Mohan, a foreign-a�airs expert. It hastoo few border guards, customs o�cials, diplomats and soldiers,but far too many pen-pushers in the coal and steel ministries.After decades of facing inwards, Indian universities, think-tanksand commentators are only just beginning to show an interest inforeign matters beyond Pakistan, so as yet there is only a smallcorps of experts outside government to help advise policymak-ers. Pointlessly strict secrecy rules lock up o�cial foreign-a�airsdocuments for good.

Some even wonder how much of a grip the national gov-ernment in Delhi is able to keep on foreign policy. Regional sa-traps who bully Mr Singh on domestic issues have also causedsudden foreign-policy reversals. Last year Mamata Banerjee,West Bengal’s chief minister, scuppered an Indian water-sharingdeal struck with Bangladesh. In spring this year a Tamil ally ofMr Singh’s government helpedto get India to vote against SriLanka at the UN over warcrimes, reversing its policy.

Even so, India’s star is ris-ing abroad. Sensibly, its goalsare limited: to ensure that itsforeign relations serve its bigtransformation at home. Thatgoes down better with its for-eign partners than its sermonis-ing of old. Its three main con-cerns today are America, Chinaand its immediate region.

Relations with Americahave thrived ever since a civilnuclear deal agreed withGeorge W. Bush seven yearsago. Cultural ties via India’s

India abroad

No frills

The country’s foreign policy is frugal, sober and

generally sensible

6Diplomacy lite

Source: Shashi Tharoor

Size of diplomatic corpsLatest, ’000

0 2 4 6 8UnitedStatesGermany

France

Britain

Japan

China

Brazil

India

Singapore

Population perdiplomat, ’000

20 16

12

10

10

23

321

162

1,341

6

2031 it could have 9.3m people, overtaking London. It helps that the local economy is thriving, with diamond

polishing, textiles and petrol products doing particularly well.The boss of a diamond �rm says his home town has been re-shaped and feels great. Investors like its reliable power, tra�cthat �ows and the can-do culture of Surtis. Even the grimier endof town is uplifting. On a sweltering monsoon day the lack ofsmell, �ies, dust or noise at the municipal dump is strangelythrilling. It is e�ciently run by private contractors, a model thatother cities could copy tomorrow. Even the rubbish is being putto work: soon about 1,200 tonnes will be burned daily in Ger-man-built incinerators.

The city’s sewage works are similarly impressive: e�cient,computerised and run largely on electricity from a biomassplant �red by methane. Over 90% of households are said to beconnected to sewerage. The municipal engineer says the entirecity has clean piped drinking water. Slums are being cleared andparks being created by the river. Next on the list is a rapid bustransport system, more �yovers and a Bollywood theme parkmodelled on Disneyland. There are posh car showrooms, and re-tailers like Jimmy Choo, Burberry, Armani and Gucci are due toopen soon.

What made Surat work? An assortment of businessmen,the boss of a jewellers’ association, the local chamber of com-merce and a prominent city journalist all give the same answer:governance. When residents felt able to trust o�cials and theirplans, they happily contributed to the city’s success. This year�rms planted 200,000 trees to help make the place greener.

Mr Das says given the right motivation and belief in o�-cials, others cities are capable of similar improvements. For in-stance, many people in Patna, Bihar’s capital and his home town,are now connected to the grid. When he was a boy, he had tostudy by lantern light. 7

The Economist September 29th 2012 13

SPECIAL REPORT

INDIA

2

1

HIKING IN KASHMIR, in the Himalayan foothills, is a joy.Ravishing views of glacial lakes, snowy peaks and im-

mense green valleys make it easy to see why Kashmiris, other In-dians and Pakistanis have long vied to control this pristine terri-tory. Unlike much of India, it o�ers the luxury of open, sparselyinhabited space. The air is still, cool and clean. Butter�ies seekout alpine �owers. An occasional bird of prey swoops by.

But over a few weeks each summer, thousands of Indiansoldiers ascend zigzagging paths into a series of valleys near the�line of control� dividing India and Pakistan. They daub rockswith instructions��Slow and steady�, �Respect nature��and thenames of their battalions. Marksmen in nests of sandbags lookout for militants. Red communications wires snake up cli�sidesand around waterfalls. On every ridge soldiers are on guard. Atstops along a 32km path that at the peak reaches a height of4,500m, workers set up kitchens producing noodles, fried food,sugary tea and stodgy sweets. Goat-herders and villagers workas porters and guides, raising temporary tent cities.

Then the annual invasion begins. Well over 600,000 Hin-du pilgrims follow a yatra, a tough walk over several days to acave containing a phallus-shaped piece of ice, or lingam. TheAmarnath cave is revered as one of the most sacred sites in India.Barefooted and bedraggled yatris o�er a picture of conviviality.Cheery city boys and middle-aged men with pot bellies raceahead, then slump, happily exhausted. This year 93 yatris dieden route, most of them ill-prepared for the high altitude, exhaus-tion and exposure to bad weather. In the past there have some-times been terrorist attacks, or threats have been so serious thatthe pilgrimage has been called o�.

The yatris’ devotion is remarkable, but they feel no com-

The tragedy of the commons

An uphill walk

As Indians get richer and better educated, they need

to become more public-spirited

diaspora in America help, as do stronger trade links. The twocountries also share the experience of running big, expensive, re-ligious, materialistic and messy democracies in which centralgovernments are constrained by powerful states.

America is now one of India’s biggest weapons suppliers.Mr Mohan points to defence orders worth $10 billion for C130

and C17 aircraft, missiles and more, and says another $10 billionis lined up. Last year America failed to sell India a big consign-ment of �ghter jets, but that caused only a temporary ripple of bi-lateral irritation. Close co-operation in counterterrorism, marineexercises and anti-piracy e�orts continues.

The two powers’ interests are converging. India, temporar-ily on the UN security council, has voted three times with Ameri-ca against Iran over that country’s nuclear programme (though ithas been cagey over Syria). The two collaborate in Afghanistan,where India is a big civilian donor. Crucially, America is increas-ingly adopting India’s stance against extremist groups based onPakistani territory. Awkward issues of old, such as who shouldrun Kashmir, no longer get aired.

India wants America to preserve its ties to Pakistan, sinceno one else, certainly not China, would help moderate Pakistanibehaviour. But American ties with India will get more impor-tant, though there will be no formal treaty. And India will in-creasingly engage with the West.

One big reason is its second concern: China’s rise. The twoAsian powers are developing closer ties, notably in trade. Butthey also vie with each other. A China expert in India’s foreignministry says that bilateral trade, worth just $2.9 billion in 2000,should pass $100 billion in 2015. But he explains with equal en-thusiasm that India has made rapid gains in domestic militarymobility. A decade ago it took two months to move several armydivisions to defensive positions on a disputed border in thenorth-east; now, thanks to better roads, it takes just two weeks.

In Myanmar, and elsewhere in the region, the two Asiangiants compete for in�uence and energy supplies. At the sametime India is wary of China’s ability to make trouble, for exam-ple over Tibet and the Dalai Lama (who lives in India). And dis-putes continue along the still un�xed India-China border, the siteof a humiliating frontier war 50 years ago that India lost.

India wants a stronger military deterrent. In April it test-�red a home-built long-range nuclear-capable missile, theAgni-V, which in theory could strike China’s big cities. And it isputting more soldiers and aircraft at permanent forward basesalong the border.

Farther east, too, India is forging links with democraciesand those already close to America. Ties with Australia will im-prove as it looks poised to announce that it will sell uranium forIndia’s domestic nuclear plants. India has become modestly ac-tive in oil exploration in the South China Sea. And it is a big recip-ient of aid and investment from Japan.

Just in case

Last, and long overdue, India is doing more to improve rela-tions in its region. Mr Singh says he is ready to visit his own birth-place in Pakistani Punjab if only Pakistan would do more to stopterrorists who attack India, or at least to agree to India’s requestsfor more open trade. India is also trying to boost trade by build-ing better border infrastructure and loosening non-tari� barri-ers. This month the countries’ foreign ministers at last signed adeal easing their bilateral visa regime.

Though still poorly resourced, India’s foreign a�airs seembetter run than they have been for a long time. Gone are the dayswhen Indian leaders abroad somehow managed to appear arro-gant, moralising and ine�ectual all at the same time. India’s poli-cy may lack frills, but at least it has a clear purpose. 7

quickly than, say, China hasdone. But instilling respect forcommon goods seems particu-larly hard. The reasons may in-clude culture (a history of divid-ing people by caste), religion (forthe faithful, the here and now isunimportant) and a sense of fa-talism; or, more directly, thepressures of an overwhelm-ingly huge population.

Small failures of consider-ation for others are ubiquitous:drivers who race through redlights, often causing crashes;crowds that barge on and o�trains, elbows �ying. And de-spite the indignant rage aboutcorruption, paying or acceptingbribes is considered normal,and so is tax avoidance.

Given how common suchfailures are, it may be di�cult toget anyone to worry about aparticular example, such as en-vironmental despoliation. Thatpeople generally respond withgood humour is a tremendousasset for the country. But with itoften comes an attitude that it isup to others to tackle the pro-blems. �People have a tendency to want the government to �xthings. This is true everywhere, but we carry it to a �ne art. Wehave no sense of individual responsibility,� notes Mr Pachauri.Altruism is thin on the ground. For example, Indians rank amongthe world’s least generous organ donors; and outrageouslywealthy tycoons are only slowly discovering philanthropy.

Yet that may change, too. For all that Indians are accused offatalism, they are also increasingly ready to turf out politicianswho have disappointed them. There have been street protestsagainst corruption and innovative ideas for �ghting it, such asproviding websites where people can post details of bribes theyhave paid.

When a crisis erupts�be it environmental, terrorist, eco-nomic, political�both leaders and ordinary people in Indiadraw on values such as tolerance and openness that do theircountry credit. A favourite word in India these days is jugaad,meaning a spirit of innovating and making do. The next �veyears are likely to be messy, and the high expectations of recent

years may need to be toned down. But eventually India has to move beyond jugaad. Robust

success will come only when standards rise, with better qualityin everything from homes and cities to schooling and sportingachievements (pitifully low, apart from cricket). That requiresfunctioning institutions, more responsible individuals and lead-ers who dare to take decisions. Ordinary Indians will graduallystart to contribute. More of them will refuse bribes, pay their tax-es, create wealth as entrepreneurs and take better care of the en-vironment. It will be a messy transition, but a welcome one. 7

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SPECIAL REPORT

14 The Economist September 29th 2012

2

INDIA

punction about leaving some ugly marks on the landscape. Theapproach to the ice cave crosses a glacier-turned-rubbish-dump,strewn with plastic, paper, tins, drinks cartons and mounds ofwaste half buried in the ice. Local men hired to gather litter alongthe way simply hurl their bags into the glacial stream below.Near the ice cave the valley is so crowded with shacks, stalls, po-nies and yatris that it has the despoiled air of a refugee camp,with paths of mud and excrement. The valley is �lled with acridsmoke from damp, smouldering piles of part-burned rubbish.Helicopters buzz above, whisking the wealthy and un�t to thesacred spot.

No longer special

Years of insecurity and underdevelopment in Kashmirironically served as a sort of nature conservancy scheme, leav-ing the place in good physical shape, melting glaciers aside. Butnow that military action has receded, each summer brings abumper crop of tourists. Both last year and this, Kashmir got over1m visitors. The once serene lake in Srinagar, the capital, is crowd-ed with youngsters on jetskis. The mountain roads are cloggedwith straining, overloaded lorries. The valley is seeing a con-struction boom.

Kashmir is slowly becoming more like the rest of India:wealthier, more peaceful but also gradually more despoiled. Inmuch of the country the consequences of that process look dev-astating. A report in 1997 by a Delhi-based think-tank, The Energyand Resources Institute (TERI), gave stern warning that 50 yearsof rapid population growth had led to dire environmental pros-pects. Forest stocks were down. Air pollution plagued 90% of vil-lagers (who breathed smoke while cooking) and around a thirdof urban dwellers. Soil degradation had cut farm output way be-low potential. Other woes included water shortages, pollutantsin rivers and a dramatic fall in groundwater levels.

Fifteen years on, matters are worse. Rajendra Pachauri,who heads TERI (as well as the Intergovernmental Panel on Cli-mate Change), says he is �certainly more concerned� than hewas at the time. Forests are a bit better pro-tected and public transport in some citieshas improved. Delhi’s air got cleaner for adecade after buses and autorickshawsswitched to liquid gas in 1999. But the win-ter smog that bedevilled the city in the1990s is now back. Along with Beijing it isone of the most polluted cities on earth.

The river Ganges is considered sa-cred by Hindus, many of whom bathe init. Yet tanneries, paper mills and other in-dustrial users dump waste and chemicalsin it, farmers allow pesticides and fertilis-ers to slosh in and the human waste fromburgeoning cities goes in largely untreat-ed. Groups such as WWF run projectswith local governments to tackle the dam-age, but such e�orts are too rare.

Fast-growing economies with fewrules often run into problems of this sort. But in India, especiallyin the north, few people seem to have much of a sense of sharedownership of public spaces or obligation to the natural worldaround them. It is depressingly common to litter, extend privateproperty by encroaching on public land and �out safety and en-vironmental rules if you can get away with it. �It is a tragedy ofthe commons,� laments Mr Pachauri. �Everyone feels it is some-body else’s job.�

With luck, this will change as Indians become richer andbetter educated. A �ourishing democracy may respond more

It is depressingly common to litter and �outenvironmental rules if you can get away with it