Optimistic picture for India

Economist Kaushik Basu traces the path of India’s impressive growth, a report by GAURAV PANDEY

Delivering the inaugural University of New South Wales Distinguished Lecture on India, Chief Economic Advisor to the Government of India Professor Kaushik Basu said that the Indian economy is set for an extended period of robust growth.

Basu, who is also the C. Marks Professor of Economics at Cornell University in the US, indicated that the GDP growth rate for 2010-11 fiscal year will be between 8-9%. The official figures are expected soon.

A recent World Bank report predicted that by 2025, more than half of all global growth, up from one-third now, will come from emerging economies, including India and China, highlighting the increasingly powerful role Indian and Chinese markets will play in global economics. India’s case in particular has been a story of a steep change in the last two decades – an about turn from the days when it was merely “chugging along” economically.

The turnaround years

Tracing the story of India’s emergence as an economic superpower, Basu said the first real sign of economic growth that India showed was in 1975, the year the then Prime Minister Indira Gandhi declared the emergency. Although the jury is still out on whether her decision had anything to do with the economic surge, Basu pointed out that “changes taking place in political, social and cultural scenarios and the collective beliefs of societies play a major role in the economics of a nation.”  This is corroborated by the negative growth seen during another politically chaotic year 1979 – 80, the last time the India’s economy shrunk in a fiscal year.

He argued that the 1975 growth spurt was probably a result of the decision to nationalise banks in India with a directive that more branches should be opened across the country thus allowing domestic savings to be a part of the country’s economic system. “Savings and investment pattens could drive a higher growth rate, especially in case of a nascent economy.”

The next big phase in India’s growth came in 1991-1993, when the then Finance Minister Manmohan Singh introduced a slew of economic reforms after the inflow of remittance money from expatriates living in the Middle East had dried up during the first Gulf War, causing serious problems for the Indian economy.  These measures, which encouraged foreign direct investment and curbed public monopolies, had a “magical effect” on India’s growth rate and consequently in 1994, the Indian economy grew by 7%.

India’s success story, Basu highlighted, was helped a great deal by the “wise decisions” of the Nehruvian Era. The investment in higher education meant that the India churned out highly skilled reservoir of talent, especially engineers. Many of more than a million engineering graduates produced every year in India gradually found their way into the Silicon Valley in the US. This not only led to a long and fruitful partnership in the field of information technology, but also through word of mouth helped further India’s case as an outsourcing destination for American firms.

Further, the issue of outsourcing was highlighted in the 2004 Bush-Kerry presidential election campaign in the US, this and the resulting media outcry peculiarly worked as “the greatest advertisement for India as a viable back office destination.”  By then, the savings and investment rate had started to grow rapidly, which coupled with the inflow of work from the US contributed to the sharp rise in economic growth from 2005 to 2007.  It was around this time, Basu added, that international media started taking notice of India as one of the leading drivers of global growth.

Global financial crisis

Since then, Indian economy has maintained a steady upward trend, even braving the subsequent global financial crisis relatively well.

“Although India’s software exports were affected during the crisis, the socio-political decision to waive off farmers’ loans worth $ 15 billion ended up being a stimulus package – a fortuitous gain in hindsight,” he said.

This coupled with well-structured stimulus packages and providing more money in the hands of people through other government schemes helped India withstand the crisis in a much stronger way than many developed economies.

India-China-US equation

The economic and strategic partnership between India, China and the US has gone from strength to strength in recent years resulting in a “triangular connection” between the two rising Asian powers and the US.

Such an arrangement, Basu believes, is in the interest of everyone, as the idea of a tripolar world prevents the possibility of a “direct face-off” between the US and China. With India has emerged as a huge “comfort factor” for the US and to a certain extent for China, the relationship between these powers is now more cooperative than combative.

He cited the example of Malacca Straits, one of world’s largest shipping lanes carrying about 40% of the world’s trade, where Indian presence was increasing “with a nod and wink from the US” to limit China’s influence over the crucial trade route.

The road ahead

Though India is entering an era of unprecedented financial growth it needs to address urgent problems including the deepening inequality in the country, he said.  “The public distribution of food and other essential commodities is riddled with leakages.” He added that there is also a need to speed up the decision-making processes.

He also touched upon the problem of rising inflation in India. “Most of the emerging countries are witnessing high inflation. The Reserve Bank of India has been constantly revising interest rates in a bid to maintain a healthy growth to inflation ratio, however the concept of ‘flat world’ means that a country needs to take into account the changes in other economies as well.”

India, owing to its unique dynamics has managed to throw generalisations out of the window and despite its problems is set to play a dominating role in world economics, however it needs to tread carefully as these very issues can snowball into monsters which can kill the growth goose.