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Country Briefing: India
public sector companies—often specific to an industry—discourage expansion, diversification,
sourcing patterns or public listing.
Prime Minister Manmohan Singh promised civil service reform when he took office in 2004, but
progress has been slow. The central government employs 3 million; the states employ another 7
million. Most civil servants are police and railway workers.
Senior bureaucrats complain about the declining quality of new recruits, as education standards
are slipping nationwide, the private sector lures away the best and brightest, politicians intervene
to hire cronies and family, and caste-based quotas erode the merit system. Absenteeism and corruption
are common.
Once hired, senior Indian Administrative Service (IAS) bureaucrats are constitutionally tenured
and cannot be fired. Instead they are subject to politically motivated transfers and suspensions
after a minimum two-year tenure period. Thus, all senior administrative positions have come to
be viewed as two-year postings, and bureaucrats, to keep their jobs or ensure a favorable transfer
after two years, have a disincentive to make major decisions or advance new policies.
All of this makes it easier for interest groups and political parties to apply pressure in opposition
to government planning and policies. In a recent example, rioting farmers in West Bengal, instigated
by a dominant Communist Party, forced Tata Group to abandon an about-to-open manufacturing
plant for its “one-lakh” ($2,500) car, the Nano, and build the car in Gujarat instead.
Financial System
India overregulates and misallocates both savings and lending. The national annual savings rate
of 22.3% is high relative to other countries, but nearly all of that savings comes from households,
which manage to set aside 28% of total disposable income. Half of household savings go
into the bank, while nearly a third ($24 billion in 2005) are directly invested in some 44 million
small family farming and business enterprises or in gold ($10.3 billion), according to a 2006
McKinsey & Company study. This substantial economic activity takes place outside India’s
banking and financial system.
Government policies, meanwhile, require banks to hold 25% of their assets in government
bonds and direct 36% of lending to agriculture, household businesses and other “priority” sectors.
The result: some 57% of bank loans are directed toward relatively inefficient state-owned
enterprises, with the remaining 43% available for the private sector. Few private businesses borrow
from banks or issue shares, but instead fund expansion through retained earnings.
Infrastructure
An ageing, overburdened infrastructure hampers India’s growth—a marked contrast with
China’s aggressive program of infrastructure construction in the last ten years. Installed capacity
of the nation’s electrical grid is about 129,000 megawatts, 10% short of the nation’s power needs
overall and 15% short during peak periods, according to the Ministry for Power. New power
projects are slowed by state and central government disputes, permitting delays, and citizen law-
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