Mar 14th 2009

Resilient India

by Shashi Tharoor

Shashi Tharoor, an acclaimed novelist and commentator, is a former Under-Secretary-General of the United Nations

NEW DELHI - With the world's most developed economies reeling under the incubus of what is already being called the Great Recession, India at the beginning of the year took stock and issued a revised estimate for GDP growth in the 2008-2009 fiscal year. Its projection came out at a healthy 7.1%.

It is striking that even amid all the doom and gloom assailing world markets, there is no fear of a recession in India. Even the pessimists are speaking only of lower positive growth.

This is quite a turnabout for an economy that for years had crept along at what was derisively called the "Hindu rate of growth" - around 3% - while much of the rest of Asia shot ahead. For more than four decades after Independence in 1947, India suffered from the economics of nationalism, which equated political independence with economic self-sufficiency and so relegated the country to bureaucratic protectionism and stagnation.

But, since 1991, India has liberalized its economy and profited from globalization. Its tech-savvy information-technology pioneers, software engineers, and call-center operators have made the country an economic success story.

India has multiplied its per capita income levels many times over since 1950, and has done so far faster in recent years than Britain or the United States did during and after the industrial revolution.

In the last 15 years, India has pulled more people out of poverty than in the previous 45 - 10 million people a year on average in the last decade. The country has visibly prospered, and, despite population growth, per capita income has grown faster than ever before. The current financial crisis is unlikely to change the basic success story.

India's financial system suffers from few of the creative and risky derivative instruments that caused such problems in the West. A tradition of conservative banking regulation and a tough-minded Governor of the Reserve Bank (India's central bank) ensured that Indian banks did not acquire the toxic debts flowing from sub-prime loans, credit-default swaps, and over-inflated housing prices that assailed Western banks.

The negative effect of the US financial setbacks on Indian stock markets, therefore, made little sense, since they bore no relation to the real value of Indian companies. Instead, the decline in Indian stocks reflected foreign investors' liquidity problems: they withdrew from holdings in India because they needed their money back home, not because it wasn't growing for them.

Of course, economies that depend on foreign investment are bound to be hurt nowadays, because those investors have less capital to invest. But there are two reasons to be confident that India will weather the storm.

First, India has considerable resources of its own to put towards growth, and has proven itself skilled at the art of channelling domestic savings into productive investments. Second, once things have begun to stabilize in the West, investors looking for a place to put their money will look anew at India, owing to the opportunities for growth and the sheer size of the market.

That said, India has relied much less on foreign direct investment than China, and has even exported FDI to OECD countries. Despite being seen as a poster child for the benefits of globalization, India is not unduly dependent on global flows of trade and capital. India relies on external trade for less than 20% of its GDP; its large and robust internal market accounts for the rest.

India's private sector is efficient and entrepreneurial, and its capital and management skills have proven able to control and manage assets in the sophisticated financial markets of the developed West. India clearly has the basic systems it needs to operate a twenty-first-century economy in an open and globalizing world.

Obviously, the terrorist attacks of late November complicate this story. The terrorists attacked India's financial nerve-center and commercial capital, a city emblematic of the country's energetic thrust into the twenty-first century. They struck at symbols of the prosperity that have made the Indian model so attractive to the globalizing world, a magnet for investors and tourists alike. Indeed, by striking hotels favored by foreign businessmen and visitors, they undermined the confidence of those whom India needs to sustain its success story. Terror may add to the time India will need to recover from the economic crisis.

But India is already bouncing back. The hotels assaulted and burned in November reopened their doors a month later. Investors are returning, and FDI inflows this fiscal year are set to exceed the $25 billion received in 2007-08. At the end of February, Indian Prime Minister Manmohan Singh assured Parliament that "India would emerge the least affected among the countries of the world from the current economic crisis."

So, for those looking for signs of recovery from the global economic downturn, India remains the place to watch. According to the World Bank's annual assessment of Global Economic Prospects, India's economy could even triple in size in the next 15 to 20 years. A few more slumdogs may become millionaires by then.


Copyright: Project Syndicate, 2009.

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